Weekly Investment Update (01/23/2026)

Equity markets recovered from weakness early in the week as geopolitical risks eased and economic data pointed to a resilient backdrop. We discuss this week’s geopolitical developments in more detail below, highlighting the importance of looking beyond short-term noise and focusing on the long-term drivers of equity markets.

On the economic data front, a strong slate of releases this week bolstered confidence in the near-term outlook. Initial jobless claims continue to indicate subdued layoffs, coming in at 200,000 for the week ending January 17 and pushing the four-week moving average to its lowest level in two years. Similarly, third-quarter GDP growth was modestly revised upward to 4.4% annualized, with consumer spending holding steady. Finally, PCE inflation for October and November was in line with expectations, together reflecting broadly stable economic conditions.

Looking ahead, resilient economic data have tempered expectations for Federal Reserve rate cuts this year, with the first cut now fully priced in for July. While rate cuts supported risk sentiment last year, resilient growth and strong corporate fundamentals are set to be key market drivers this year, helping to support a relatively constructive backdrop.

Fundamentals Remain Strong Amid Short-Term Market Volatility

What is happening: This week’s turbulent political news cycle led to sharp swings in equity markets. On Saturday, President Trump announced that a 10% tariff would be imposed on eight European countries beginning February 1, rising to 25% in June if a deal was not reached related to the U.S. acquisition of Greenland. By Wednesday, the situation had largely de-escalated, with President Trump withdrawing tariff threats after announcing that the U.S. had agreed on a framework with Denmark and NATO Secretary General Mark Rutte for a future deal. While the full extent of the agreement remains unclear, it outlines cooperation in defense and critical mineral development while maintaining the sovereignty of Greenland and Denmark.

Risk assets mirrored the news flow, broadly declining early in the week before staging a quick recovery by the end of the week. On Tuesday, the S&P 500 declined 2.06%, its worst intraday performance in three months. However, following the shift in tone from President Trump, the S&P 500 rallied 1.16% on Wednesday and extended gains through Thursday, moving back within 1% of its all-time high.

Why it matters: While headlines can drive short-term market volatility, it is important to separate the noise and focus on underlying fundamentals. Markets react swiftly to uncertainty, but such moves do not always reflect a meaningful change in economic or corporate conditions. Over time, asset prices are ultimately driven by fundamentals, underscoring the importance of maintaining a disciplined, long-term perspective during periods of elevated headline risk.

As we highlighted in our year-ahead outlook, we remain constructive on both equities and the U.S. economy. A key factor underpinning this view is the continued strength of corporate fundamentals, with S&P 500 year-over-year earnings growth for 2026 now projected at 14.6%, up from 11.5% in 2025. Earnings growth is also expected to broaden. While the information technology sector should remain a key driver, all 11 S&P 500 sectors are projected to post positive earnings growth this year. We remain cognizant of the potential for headline-driven volatility, but strengthening and broadening earnings growth underpins our positive outlook, and those fundamentals remain unchanged.

The Economic Trade-Offs of Credit Card Interest Rate Caps

What is happening: During a World Economic Forum speech in Davos, President Trump reiterated his proposal for a one-year 10% cap on credit card interest rates. The proposal is part of the president’s overall plan to improve affordability for American consumers and support home ownership.

Major banks and industry leaders have voiced their opposition, warning that such a cap could compress one of the most profitable segments of their business and reduce overall credit availability.

In the near term, the likelihood of a nationwide 10% credit card interest rate cap taking effect appears low. The president does not have the legal authority to unilaterally impose such a cap. Congressional legislation would be required for the proposal to become law, and two similar bills introduced in 2025 have made little progress toward passage so far.

Why it matters: While a 10% credit card interest rate cap is unlikely to become law in its current form, revised proposals featuring higher caps could emerge and have a better chance of being implemented. This is a development we will continue to monitor closely given its potential impact on the financial sector and broader economy.

If enacted as proposed, a 10% interest rate cap would represent a substantial reduction relative to current credit card annual percentage rates (APRs), which typically range from 20% to 30%. From a bank profitability perspective, a binding 10% cap would likely have a negative impact on issuers. Cutting allowable rates close to levels more typical of secured loans would compress earnings as higher unsecured rates help compensate for default risk. While large, diversified banks may remain profitable overall, earnings within their credit card business segments would likely decline materially. Smaller banks and more concentrated card lenders, such as American Express, would face even greater pressure.

From a consumer spending perspective, the economic impact is more complex than simply lowering interest payments and boosting consumer spending. Banks could respond by tightening underwriting standards, reducing credit limits, or cancelling cards for higher-risk borrowers. Executives from large banks, such as Bank of America and JPMorgan, have already argued that sharply lower rates would force issuers to significantly curtail lending to less-creditworthy customers.

Moreover, a 10% cap could ultimately reduce aggregate spending, as credit rationing effects would likely outweigh any boost from lower interest costs. Empirically, credit card spending is relatively inelastic to APRs but highly elastic to approval rates and credit limits. Fewer approvals and more account closures would mean reduced spending, particularly for lower-income consumers, who  have lower credit scores on average. Higher-income consumers are generally less affected by credit card interest rates as many pay off their balances in full every month. According to a Federal Reserve survey of consumer finances, only a quarter of consumers in the top income decile carry credit card debt, compared to more than half for consumers in lower-income tiers. As a result, an interest rate cap could meaningfully reduce spending among lower-income consumers without a sufficient offset from increased spending by higher-income households.