Newsletter

We noted last week that February tends to be a weaker month for returns. So far, it has certainly lived up to its name. This past week opened with investors selling technology, and particularly software stocks, to buy value sectors. Energy, financials, and industrials continued to attract flows as investors leaned into cash flow, dividends, and near-term earnings certainty. However, as I noted on X this past week, while those sectors may have better earnings "certainty," the earnings growth rates don't justify the recent valuation expansions. As shown, the valuations for industrials, staples, energy, and materials are "cheap" compared to the market but very expensive relative to their own history.

Markets stumbled into February, a historically weak month. February tends to deliver modest returns, with average performance trailing the stronger gains typically seen in January and March.

Markets ended the week mixed as investors processed the Federal Reserve’s latest policy decision, rising geopolitical tensions, and the early results of the S&P 500 earnings season. The Fed held the federal funds rate steady at 3.50–3.75 percent, as expected. Chair Jerome Powell maintained a neutral stance, noting that inflation is moving toward the target, but the labor market remains tight enough to avoid immediate policy shifts. There was no indication of a near-term rate cut, but Powell left the door open for adjustments later in the year if inflation continues to ease and economic activity slows.

This week's markets were driven by headline risk, economic uncertainty, and the early innings of earnings season. With the markets closed last Monday for the Martin Luther King holiday, U.S. equities sold off sharply on Tuesday. President Trump’s tariff threats against key European allies, tied to a controversial push for Greenland, triggered that selloff across global equity markets. The S&P 500 dropped more than 2%, while the Dow and Nasdaq logged their worst single‑day percentage losses in three months, stoking fears of renewed trade conflicts just as markets were trying to stabilize after year‑end weakness. European equities slid sharply, with major indices such as Germany’s DAX and France’s CAC 40 falling over 1% amid the tariff shock.

U.S. equity markets delivered mixed performance last week. Major indices generally held near record levels even as volatility increased and macro and policy risks surfaced. Notably, breadth has expanded as the rotation from technology to other sectors continued. Such was particularly notable in materials, industrials, and transportation. We noted on January 8th that a rotation into defensive areas was likely. Since then, staples and energy have significantly outperformed.

The S&P 500 ended the first week of 2026 with a gain of roughly 1.1%, marking a positive start to the year. Notably, the index rose in four of the first five trading sessions, driven by strength in energy and financials, as well as a rotation into cyclical sectors. That rotation is something we discussed over the last several weeks, and we are now seeing value outperform growth as market breadth improves.

Let's start this week by wishing you a blessed, happy, and prosperous New Year. We are looking forward to spending another year working together to build better portfolio outcomes. With that said, let's dig into what happened in 2025.

U.S. equity markets began the holiday‑shortened trading week on a firm footing. Broad gains in major indexes and the start of the Santa Claus rally marked this week. Following modest volatility in trading earlier in December, sentiment improved significantly as investors bet on year-end flows. As shown, the CNN Fear-Greed Index has moved materially higher from its readings earlier in the month.

The short answer appears to be"yes." However, it seems to be narrower, later, and more fragile than the headline mythology suggests. Importantly, the official "Santa Claus rally” window has not even started yet, as it is statistically measured as the last five trading days of the year plus the first two of January. Historically, that seven-session stretch has produced an average gain of about 1.3% and finishes positive “nearly 80% of the time,” according to data analysis from the long-running Stock Trader’s Almanac.