TLDR:
U.S. equities entered 2026 near record highs, supported by resilient earnings, moderating but uneven inflation, and a gradual Federal Reserve easing cycle that increasingly resembles past “soft-landing” environments—periods when policy loosens without tipping the economy into recession.
Market participation broadened meaningfully late in 2025, even as leadership remained anchored in large-cap growth and AI-linked technology. Investors continued to hold elevated allocations to cash and high-quality bonds, reflecting both attractive yields and a desire for resilience amid policy uncertainty. Fixed income has largely reclaimed its role as portfolio ballast as equity–bond correlations moved closer to long-run norms following the 2022–2023 inflation shock.
Market Overview
Early 2026 equity performance reflected consolidation following a strong 2025, with major U.S. benchmarks hovering near highs while remaining sensitive to macro data, policy signals, and earnings guidance. Although index-level gains were still heavily influenced by large, profitable technology and communication-services firms tied to AI, cloud, and semiconductor infrastructure, underlying market breadth improved notably, suggesting a healthier and more diversified advance than in prior years.
Outside the U.S., developed markets continued to face headwinds from slower growth, tighter fiscal constraints, and geopolitical uncertainty. In contrast, selected emerging markets benefited from stronger medium-term growth prospects, favorable demographics, and ongoing integration with global capital markets, reinforcing their role as a potential source of diversification rather than a uniform risk trade.
Federal Reserve & Policy
By January, the Federal Reserve was firmly in a measured easing phase following rate cuts in 2024 and 2025, emphasizing that additional moves would depend on continued disinflation progress and a controlled cooling in labor-market conditions. Policymakers have been careful to avoid signaling premature victory over inflation, particularly as service prices and wage dynamics remain key areas of focus.
This caution reflects both historical experience and current conditions. When easing cycles occur outside deep recessions, they have often supported asset prices and economic activity—provided inflation credibility remains intact. At the same time, ongoing fiscal expansion and strong growth have introduced tension between monetary restraint and broader policy objectives, increasing market sensitivity to Fed communication and reinforcing the importance of policy credibility for long-term stability.
A rare and obvious clash has emerged between the Federal Reserve and the administration. In early January, the Department of Justice opened a criminal investigation into Fed Chair Jerome Powell, focused on his congressional testimony and a Fed headquarters renovation—a move Powell publicly described as retaliation for resisting political pressure to cut interest rates sharply. Powell framed this not as a legal technicality but as a fight over whether monetary policy will remain set by economic conditions rather than political preferences.
This episode has widened a broader debate over central bank independence. A recent YouGov poll showed Americans are divided: roughly a third approve of the investigation, while a similar share disapproves, and another segment remains undecided. Importantly, more respondents trusted Powell than the president to set interest rates.
That division matters because perceptions of politicization can influence inflation expectations, risk pricing, and confidence in long-term policy frameworks. Markets typically price central bank credibility as though it’s immutable. When credibility is publicly questioned, even if no charges ensue, it can widen risk premia and introduce higher volatility in rates, currencies, and safe-haven assets.
Economic Landscape
Incoming data at the start of 2026 point to an economy that has slowed from its post-pandemic surge but continues to expand, broadly consistent with “soft-landing-type” scenarios. Growth remains supported by consumer spending and business investment, even as labor markets gradually cool. Such outcomes historically require moderation rather than collapse—cooling demand without a sharp rise in unemployment or a breakdown in investment.
Globally, growth remains uneven. Several advanced economies face demographic and fiscal constraints, while a subset of emerging markets continues to exhibit stronger potential growth. This divergence reinforces a more fragmented global cycle, where dispersion across regions and asset classes matters more than synchronized global expansion.
Asset Class Snapshot
Equities continued to be underpinned by earnings, with AI-related, automation-focused, and infrastructure-linked businesses at the forefront. This aligns with the view that AI represents a broad productivity and capital-spending cycle rather than a narrow technology trade, with benefits extending across sectors such as industrials, energy infrastructure, healthcare, and financial services over time.
In fixed income, government and high-quality corporate bonds offered historically attractive yields and resumed their role as partial hedges within diversified portfolios. As inflation pressures eased and correlations normalized, duration once again provided meaningful diversification benefits. Alternatives – including gold, private credit, and select macro or market-neutral strategies—remained important tools for managing inflation risk, policy uncertainty, and equity volatility.
Market Themes To Watch
Several themes stand out as 2026 begins.
First, earnings durability and dispersion within AI-related business models will be critical. While AI investment remains a powerful long-term driver, returns are likely to vary widely depending on execution, capital intensity, and valuation discipline.
Second, the evolution of inflation and equity–bond correlations will shape portfolio construction. Correlations remain regime-dependent, reinforcing the need for diversification beyond traditional stock-bond assumptions.
Third, emerging markets continue to offer potential diversification and higher trend growth, but outcomes will remain highly country-specific, favoring selective exposure.
Finally, the broader macro path under a gradual easing cycle—shaped by the interaction of inflation, fiscal policy, and credit conditions—will determine whether the environment remains relatively constructive or transitions toward higher volatility.
– Zenith Wealth Partners
Sources:
- https://bouchey.com/2026/in-the-news/january-market-insights
- https://www.bis.org/publ/qtrpdf/r_qt2312v.htm
- https://www.nber.org/system/files/working_papers/w33998/w33998.pdf
- https://www.brookings.edu/?p=1687743&post_type=article&preview_id=1687743
- https://www.nber.org/system/files/working_papers/w7763/w7763.pdf
All written content is for information purposes only. Opinions expressed herein are solely those of Zenith, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.