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Executive Summary

• Policy and Geopolitical News: Political pressure on the Federal Reserve, tariff rhetoric, and shifting geopolitical signals created sector-level volatility without disrupting the broader equity uptrend.
• Earnings Season Signals: Early fourth-quarter earnings results reinforced underlying corporate strength but revealed heightened valuation sensitivity and growing dispersion across sectors.
• Economic Data and Monetary Policy: Recent economic data and Fed communications reinforced expectations for continued, gradual rate cuts in 2026, supporting market broadening beyond mega-cap leadership.
• Chart of the Week: A look at Treasury maturities in 2026.

Policy and Geopolitical News Tests Confidence

Markets entered the week at record levels and were immediately challenged by a wave of political and geopolitical headlines that tested investor confidence. The most market-sensitive development was confirmation that Federal Reserve Chair Jerome Powell is the subject of a Department of Justice probe related to his congressional testimony on renovations to the Fed’s headquarters.

While the issue itself does not alter monetary policy mechanics, it revived concerns around the perception of central bank independence. The initial reaction was a modest pullback, particularly after a strong prior week, but the market’s swift intraday recovery underscored how conditioned investors have become to political noise. With the Federal Reserve already well into an easing cycle, credibility concerns did not translate into a meaningful repricing of policy expectations.

Policy rhetoric also weighed heavily on the financial sector. President Trump’s renewed call for a one-year cap on credit card interest rates at 10% sparked sharp declines in credit card issuers and select banks. The reaction reflected fears of margin compression and reduced consumer lending, even though investors broadly view such a proposal as difficult to implement in practice. The episode served as a new consideration for investors that regulatory risk may be a factor for financials, especially at a time when the sector entered earnings season with elevated expectations and strong year-to-date gains.

Geopolitics continued to influence energy and industrial stocks. Oil prices swung sharply throughout the week as headlines alternated between potential military escalation with Iran and signs of de-escalation. Energy equities tracked these moves closely, while defense and aerospace stocks benefited from persistent geopolitical uncertainty and expectations for sustained government spending.

Meanwhile, tariff-related commentary re-emerged as a market variable, particularly within semiconductors. Commerce Secretary Howard Lutnick suggested 100% tariffs for chipmakers without U.S. production added to afternoon profit-taking in mega-cap technology on Thursday, though they did little to undermine the longer-term thesis tied to domestic manufacturing and AI infrastructure investment.

Investment Implications

Political and geopolitical headlines are likely to remain a recurring source of short-term volatility. However, the market’s ability to absorb these shocks suggests investors should avoid reactive positioning. Maintaining diversified exposure across cyclicals, defensives, and structurally advantaged industries can help portfolios participate in upside while mitigating headline-driven drawdowns.

Earnings Season in Focus

Fourth-quarter earnings season moved into focus this week and delivered a broadly constructive, though uneven, message. According to FactSet, roughly 7% of S&P 500 companies have reported results so far, with 79% exceeding earnings estimates.

While this beat rate is slightly above historical averages, the magnitude of earnings surprises has been more modest, leaving aggregate earnings growth flat relative to recent weeks. The result has been selective market reactions rather than broad-based upside follow-through.

The financial sector was at the center of earnings-related volatility. JPMorgan’s mixed report early in the week set a cautious tone, particularly given that the sector entered earnings season priced for strong execution.

Subsequent reports from Goldman Sachs, Morgan Stanley, BlackRock, Bank of America, and Citigroup revealed solid underlying trends, including strong wealth management inflows, resilient trading revenue, and improving credit quality as loan loss provisions declined. However, even modest revenue misses or conservative guidance were enough to pressure share prices, underscoring how sensitive investors are to valuation risk at current market levels given recent weekly gains.

Outside of financials, technology and semiconductors provided a more supportive earnings backdrop. Taiwan Semiconductor Manufacturing’s strong outlook and elevated capital spending plans validated ongoing demand from hyperscalers and AI-related customers. This reinforced confidence that the AI investment cycle remains demand-driven rather than speculative.

Semiconductor equipment makers and select chip designers benefited, even as profit-taking limited near-term gains after a strong start to the year. In contrast, energy and health care saw downward estimate revisions, contributing to sector underperformance despite generally favorable macro conditions.

At the index level, blended earnings growth for the fourth quarter stands near 8% according to FactSet, marking what would be the 10th consecutive quarter of year-over-year earnings growth if sustained.

Looking ahead, analysts continue to project double-digit earnings growth for both the first half of 2026 and the full year. With the forward 12-month P/E ratio sitting above long-term averages, the market has made clear that earnings quality and forward guidance matter more than headline beats.

Investment Implications

Earnings dispersion favors an active, selective approach. Companies with durable margins, strong balance sheets, and clear visibility into 2026 growth are better positioned than those reliant on multiple expansion.

Investors should emphasize quality and consistency, particularly in sectors where expectations are already elevated. The broad consensus I’ve seen from investment strategists like Tom Lee of Fundstrat and Rick Reider from Black Rock is that earnings will broaden out as will performance in 2026.

Economic Data and Monetary Policy

Economic data released this week reinforced expectations for continued, gradual monetary easing in 2026 rather than a restrictive policy stance. Inflation data remained broadly consistent with a disinflationary trend. December CPI met expectations, while core CPI came in slightly cooler than forecast, preventing an acceleration in year-over-year inflation. Producer price data showed some upward movement on a year-over-year basis, but not enough to challenge the broader view that inflation pressures are easing incrementally.

The Federal Reserve has already lowered rates three times (totaling 75 basis points) since September 2025, and markets continue to expect one to two additional quarter-point cuts this year. Recent data did little to alter that trajectory.

Retail sales rebounded strongly in November, jobless claims remained historically low, and regional manufacturing surveys improved meaningfully. Industrial production and capacity utilization also surprised to the upside, suggesting the economy closed 2025 with solid momentum despite earlier disruptions from the government shutdown.

The Fed’s Beige Book echoed this steady-growth narrative, citing modest expansion, stable employment, and increased price sensitivity among consumers. While Fed officials emphasized data dependence and flexibility, there was no indication of a shift away from the current easing path. Treasury auctions were met with strong demand, helping keep financial conditions supportive even as rate cuts are expected to unfold gradually rather than aggressively.

This macro backdrop has played a key role in broadening market leadership. With policy moving in a more accommodative direction, investors have increasingly rotated toward small- and mid-cap stocks, cyclicals, and equal-weight exposures. The widening performance gap between equal-weighted and market-cap-weighted indices highlights a market that is increasingly confident in underlying economic durability.

Investment Implications

A gradual easing cycle combined with steady economic growth supports diversified equity exposure. Investors may find increasing opportunity in small- and mid-cap stocks, cyclicals, and equal-weight strategies that benefit from improving market breadth rather than reliance on rate cuts alone.

Chart of the Week

This week, Chris Puplava, Financial Sense Wealth Management’s Chief Investment Officer, shared with the investment team and advisors some concerns over U.S. debt maturities and refinancing needs. It amounts to several trillion dollars coming due in the first half of the year and then tapers off. It’s clear why Trump wants rates lower so the budget deficit can be reduced on lower interest payments.

Here’s a chart from Bloomberg showing Treasury expiration by month and refinancing needs. As long as the auctions are orderly and demand doesn’t drop off, the markets should carry on, but clearly this is a first-half-of-2026 problem -- and one to watch in the weeks and months ahead.
 

(Click on image to enlarge)

Source: Bloomberg

Conclusion

The market is transitioning into a more mature phase of the cycle, characterized by confirmed rate cuts, steady economic growth, and expanding leadership beneath the surface. While valuations demand discipline and political or geopolitical headlines will continue to generate short-term volatility, the underlying fundamentals remain constructive.

For investors, 2026 increasingly looks less like a binary macro bet and more like an environment that rewards diversification, selectivity, and a focus on durable earnings growth rather than broad multiple expansion.

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