At PalomarWealth, it is important to us that you are well informed about what’s happening in the markets. Here are a few of the key topics of conversation that we feel deserve the most attention this month. If you have any questions or would like to continue the conversation, let us know, and we appreciate the opportunity.
U.S. equity markets kicked off 2026 on a strong note, with both the S&P 500 and Dow Jones Industrial Average reaching multiple record highs during the first two weeks of the year. A notable market rotation emerged, with the S&P 500's equal-weighted counterpart rising more than the cap-weighted index as traders looked beyond technology shares to other sectors, including materials, industrials, and financials. Small-cap stocks have been a standout this year, with the Russell 2000 outperforming the S&P 500 for ten consecutive sessions, the longest such streak since 1990. Early fourth-quarter earnings added to the positive momentum, though mixed reactions in financials suggest investors are weighing guidance and earnings quality, not just headline beats. Despite stretched valuations (the S&P 500 is trading at about 26 times earnings), investor sentiment held up on expectations of continued earnings growth and potential Fed rate cuts later this year.
Economic data continues to paint a mixed picture. The labor market ended 2025 on a soft note, with the December employment report showing nonfarm payrolls rose just 50,000, well below forecasts, while the unemployment rate edged down to 4.4%1. Full-year job growth for 2025 totaled 584,000, the weakest annual gain outside of a recession since 20031. On the inflation front, the December Consumer Price Index rose 0.3% month-over-month and 2.7% year-over-year, in line with expectations2. Housing costs remained the largest contributor to inflation, though used-vehicle prices declined, helping temper the core reading. Consumer sentiment rose in early January but remains historically subdued as households continue to adjust to elevated prices3.
Geopolitical developments also moved markets: Middle East tensions and U.S.–Venezuela frictions fueled safe-haven demand, helping gold and silver hit new records, while oil prices retreated on signals of potential de-escalation with Iran. As earnings season progresses, investors will be looking for confirmation that corporate profits can support current valuations amid policy and macro uncertainty.
The bottom line: The opening weeks of 2026 demonstrated the resilience of U.S. equity markets, which reached fresh records despite an uneven economic backdrop. While the labor market has clearly cooled, with 2025 marking the weakest year for job creation in over a decade, the improving inflation picture and solid corporate earnings provide reasons for cautious optimism. Investors will be watching closely for clarity on Fed policy, with rates expected to remain unchanged at the late January meeting.
Sources:
- Bureau of Labor Statistics, https://www.bls.gov/news.release/empsit.nr0.htm
- Bureau of Labor Statistics, https://www.bls.gov/news.release/cpi.nr0.htm
- University of Michigan, https://www.sca.isr.umich.edu/
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The S&P 500® Index, or the Standard & Poor's 500® Index, is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies.
The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance.
The Dow Jones Industrial Average, Dow Jones, or simply the Dow, is a stock market index of 30 prominent companies listed on stock exchanges in the United States.
The Russell 2000® Index measures the performance of the 2,000 smaller companies that are included in the Russell 3000® Index, which itself is made up of nearly all U.S. stocks. The Russell 2000® is widely regarded as a bellwether of the U.S. economy because of its focus on smaller companies that focus on the U.S. market.
The Bureau of Labor Statistics (BLS) is an agency of the United States Department of Labor. It is the principal fact-finding agency in the broad field of labor economics and statistics and serves as part of the U.S. Federal Statistical System. BLS collects, calculates, analyzes, and publishes data essential to the public, employers, researchers, and government organizations.
Nonfarm payrolls measure the total number of paid workers in the U.S., excluding farm employees, government employees, private household workers, and employees of nonprofit organizations.
JOLTS stands for the Job Openings and Labor Turnover Survey, a monthly report from the U.S. Bureau of Labor Statistics (BLS) that provides crucial insights into labor market dynamics like job vacancies, hirings, and separations (quits, layoffs, discharges).
The unemployment rate represents the number of unemployed people as a percentage of the labor force (the labor force is the sum of the employed and unemployed).
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
The University of Michigan's Consumer Sentiment Index is a monthly survey-based economic indicator that measures consumer confidence in the United States. It is compiled by the University of Michigan's Surveys of Consumers and reflects consumers' views on their current financial situation, economic expectations, and purchasing conditions.
The Price-to-Earnings (P/E) ratio is a financial metric that compares a company’s stock price to its earnings per share (EPS), indicating how much investors are willing to pay for each dollar of profit. It is commonly used to assess whether a stock is undervalued, fairly valued, or overvalued relative to its earnings potential.