Weekly Investment Update (01/16/2026)

In our recently published Quarterly Investment Perspective, “Strength Amid Distractions: Earnings Growth and Economic Stability to Drive Markets in 2026,” we discuss our base case for 2026 as being constructive on the overall economy and for equities, and that underlying trends point to a broadening out of market returns across sectors and market caps.

Part of the optimism is predicated on the combination of fiscal and monetary accommodation in the United States. The market is anticipating two interest rate cuts from the Federal Reserve this year, and economic data released this week seemingly do little to change the rate outlook or the expected timing, despite increased political pressure on the Fed and Chair Jerome Powell, as discussed below. U.S. bond yields are up slightly year-to-date but remain in a tight range.

Fourth-quarter 2025 earnings seasons kicked off for U.S. companies this week, with large banks such as J.P. Morgan, Wells Fargo, and Bank of America reporting. While the 4Q numbers are important, the market will be focused more on commentary on the companies’ outlooks for 2026 as current market valuations are based on a robust earnings outlook.

Geopolitics remained front-and-center in terms of news flow, as the Trump administration used a tougher verbal stance on acquiring Greenland and separately threatened military action in Iran amid ongoing social unrest. The initial market reaction to the latter was a spike in oil prices, though prices subsequently receded, ending the week unchanged as the U.S. president’s tone softened. We discuss recent geopolitical developments and their market implications in greater detail in our latest Market Update.

More Data, More Pressure, but Little Change to Fed Outlook

What is happening: A batch of inflation and jobs data was digested by markets this week, providing additional reference points for the Federal Reserve and investors on the direction and timing of monetary policy for 2026.

On the inflation front, markets received shutdown-delayed wholesale price data for October and November, along with regularly scheduled consumer price data for December. Producer prices (PPI) were notably tame, with a 0.1% reading in October and a flat reading in November, the latter coming in below expectations. However, an upward revision to September lifted year-over-year PPI to 3.0% versus 2.7% expected.

December CPI was similarly uneventful, with headline inflation rising 0.3% month-over-month, in line with estimates, and core inflation increasing 0.2% month-over-month, slightly below expectations. For full-year 2025, headline CPI came in at 2.7% and core CPI at 2.6%, compared with expectations of 2.7% for both figures.

Weekly jobs data were modestly better than anticipated, with both initial jobless claims and continuing claims coming in below expectations. The four-week moving average of initial claims fell to 205,000, the lowest level since January 2024.

Separately, headlines emerged around the Department of Justice serving subpoenas to the Federal Reserve related to Chair Powell’s prior testimony regarding the Fed’s building renovation project. Powell responded publicly, defending both his testimony and the independence of the central bank.

Why it matters: The inflation and employment data absorbed this week seemingly do little to alter the direction and timing of interest rate cuts. While the FOMC is projecting one rate cut for 2026, the market is pricing in a high probability of two rate cuts, and this prediction was unchanged following this week’s readings. A “hold” on rates at the upcoming January meeting is still anticipated, with the first rate cut not expected until June.

The interest rate cuts late last year were seen as the Fed not wanting to get too far behind the underlying trends of disinflation and a softening labor market. Inflation remains above target but continues to moderate, and the current data are likely to be inclusive of peak tariff impacts. Absent a meaningful inflation surprise, the Fed will continue to shift its focus toward the labor market, and this week’s information does little to change the picture from where it was previously. If anything, it points to stabilization and resilience.

Central bank independence remains a cornerstone of market stability. The Federal Reserve’s credibility regarding inflation and employment management is paramount in anchoring inflation expectations and long-term yields and in reinforcing the dollar’s role as the world’s reserve currency. Any credible challenge to that independence risks unsettling markets and pushing longer-dated yields higher, which is counter to the current administration’s desire for lower lending rates.

While Powell’s term as chair expires in May, his seat on the Board of Governors extends through January 2028. Historically, chairs step down from the board when their leadership term ends, but the ongoing investigation could complicate that precedent. The current situation may increase the likelihood of a linger-for-longer outcome with Powell staying on the board until his term expires. For now, Powell’s firm response appears to have kept broader market concerns in check, and data remain more of a driving force than politics.

Banks Report Mixed Fourth-Quarter Earnings With Robust Forward Guidance 

What is happening: The fourth-quarter earnings season for U.S. companies started this week, led by the major banks. Consensus now calls for 8.8% year-over-year earnings growth for S&P 500 companies, an increase from the 7.2% growth expected at the end of September. This marks the second consecutive quarter in which analysts have revised earnings estimates higher heading into reporting season, a notable divergence from the typical pattern. Over the past 20 years (80 quarters), earnings estimates have declined by an average of 4.3% in the lead-up to reporting, suggesting that economic momentum today may be outpacing expectations.

JPMorgan Chase reported a 2.6% rise in comparable year-over-year net income, with weakness in investment banking revenues being offset by strength in trading and asset management. Bank of America’s net income rose 12% from a year ago while Wells Fargo saw a 6% rise. All three banks reported their highest full-year net income in four years, though results fell short of expectations. However, management teams across the banking sector remain broadly optimistic on the macro-outlook for 2026, pointing to stable credit conditions and confidence in the resilience of the broader economy. Uncertainty around a potential 10% credit card interest rate cap, which requires Congressional approval, weighed on the share prices of the banks. 

Why it matters: Earnings season arrives as investors are reassessing the outlook for profits and policy in 2026. With equity indexes near record highs, market valuations are increasingly predicated on a continued earnings recovery. Strong Q4 results, particularly if accompanied by confident forward guidance, would help validate the rise in markets and anchor expectations for the 14.2% expected earnings growth for 2026. Conversely, any signs of margin compression, softening demand, or cautious outlooks could challenge the current bullish narrative and prompt a market re-rating, especially in richly valued growth sectors. In this context, Q4 earnings are not just a backward-looking scorecard but a forward-looking barometer of how durable the current expansion is and how corporate management teams are looking to position for the year ahead. We believe a nationwide 10% cap on credit card interest rates is unlikely to go into effect in its current proposed form given the many legislative, legal, and political hurdles. A very low cap could also have unintended consequences such as causing lower-credit-score consumers to lose access to credit cards. However, we will continue to monitor this development as there remains the possibility of a negotiated higher cap that could still have some negative impact on financial sector earnings.

In recent years, technology has driven the majority of corporate earnings growth. But as the economy, in Bessmer’s view, has now passed the worst of the tariff-related uncertainty, sectors such as industrials, materials, and other cyclical names are beginning to show signs of earnings acceleration. This shift provides a broader base of support for the next leg of the market's expansion.