Q1 2026 Market Update

Happy New Year 2026!  This past year brought a lot of changes to the economy as we experienced a large shift from one administration to another.  These changes touched almost every aspect of public policy, and the effects on financial markets were felt early in the new administration.  This primarily focused on the rollout of a new tariff regime from Washington, which has caused turbulence in the affected industries, particularly in the early days of the policy rollout.  Markets seem to have eventually digested this information along with proposed delays and rollbacks of tariff policies to rebound and continue on a general positive trajectory.  Outside of tariffs, we saw massive deregulation across a wide swath of industries, a major tax bill was passed, and AI investment continued at a voracious clip.  Through it all, we ended the year with our third year in a row of double digit gains on the major equity indexes:

Source: Morningstar, 1/12/26.

Bonds also scored a good year as we generally saw interest rates come down across 2025.  After a multi-month pause, the Fed restarted its rate cutting action.  Inflation concerns initially held the Fed back, but once they gained more confidence in the effects of tariff policy on inflation, they began to lower rates in the second half of the year. 

Going forward, we believe the Fed will be a big part of the picture; in particular, whether they should continue lowering rates and by how much.  A new Fed chairman will be appointed come May, which, along with other appointments, will change the makeup of the Fed.  We’ll be keeping a close eye on their statements and forward guidance for clues as to how they will navigate the upcoming year.  Regardless of the end state, in our view, the Fed should overall be a tailwind to the economy as they continue to lower rates, even if at a modest pace.  

Another potential tailwind to the economy this year will be the effects of the One, Big, Beautiful Bill Act (OBBBA).  Much of this bill extended the previous schedule of rates and deductions that were set to expire at the end of 2025.  However, there was also an expansion of tax savings included in the bill, notably for tips, overtime, senior deduction, and higher SALT deduction limit.  These changes were retroactive to January of 2025, so many people are likely to get a positive surprise when they file their taxes this year (since they likely did not update their withholdings at the beginning of 2025).  With real income growth being small these past few years, this could help provide a boost to households which helps them to maintain their spending.  

There are, however, still areas of concern.  We’ve seen a general slowdown in the hiring picture, there continues to be trade uncertainty (and potentially more to come with Supreme Court rulings expected on tariffs), consumer spending growth has cooled a bit, and equity valuations are currently at the higher end of their historical averages.  Geopolitical tensions also continue to run high with major activity on just about every continent and with every major global power involved.  With luck, these tensions will be contained and subside, but this is a real and unpredictable risk to the global economy.  

After three solid years of equity market performance, this is a great time to hit refresh and scrutinize your portfolio.  Are you overweight in certain areas due to overperformance?  Has the macro landscape changed relative to your assumptions?  Which companies will escape the AI revolution intact?  Valuations are relatively high across the board, and selectiveness in your investment choices will be paramount going forward.  Although the Sage of Omaha may be officially retired now, we still believe it is prudent to adhere to one of his most famous lines: “Be fearful when others are greedy, and greedy when others are fearful”.

• Federal Reserve Policy. The Fed lowered its key interest rate benchmark 25 bps to 3.50-3.75% in December. The Fed has signaled quite a bit of discomfort with their choices, and is currently split on whether it should continue lowering rates or pausing. This concern arises from the fact that inflation is still stubbornly above their 2% target, while at the same time job growth has cooled noticeably.  Much will depend on whether the Fed leans towards addressing jobs or inflation.  Our guess is that the Fed chooses to focus on jobs and continues to ease financial conditions.
• Economic Growth – GDP. Q3 GDP growth came in at +4.3% on initial reading. The current GDPNow forecast (which is notoriously volatile) currently projects 5.1% growth for Q4.  If that number holds that would put full year 2025 growth above 3%, far exceeding economist forecasts for the year, especially when factoring in tariff policy.  The economy appears to be growing at a very healthy clip, and does not suggest a recession is in the offing.
• Labor Markets. Job growth has slowed further in 2025, in particular over the summer and into the second half of the year. Clearly the labor market is struggling to continue job growth, but economists have also started to reexamine the number of jobs they believe economy can healthily produce.  The interplay of AI and jobs going forward will continue to garner a large amount of attention.
• Inflation. Inflation readings were thrown off a bit with the government shutdown in October. It’s a little early to tell, but recent data suggests inflation may have restarted a downward trend after rising in the summer.  Most recent CPI reading was +2.7% year-over-year in November. 
• Consumer Sentiment & Spending. Consumer sentiment has been low for the bulk of 2025. We believe a lot of this has to do with inflation and the way people do not feel they are able to meaningfully improve their standard of living.  In a lot of cases, they may be spending more, but not getting much more for that spending due to costs going up.  That said, even with inflation, consumers continued to increase their spending throughout the year.
• Housing & Real Estate. Rates have slowly, slowly, come down. Expect to continue to see modest improvement in the housing picture as rates continue to decrease, even if modestly.  With many people locked into their homes with low interest rate mortgages, housing activity has continue to be depressed.  It’s hard to see anything changing this except for either rates coming down, or more time causing people to make moving decisions for reasons other than financials. 
• Business Investment & Manufacturing. The manufacturing sector continues to be in contraction according to the ISM manufacturing survey. AI is all the rage, and business investment on this front is huge.  Data centers, chips, energy.  Mind-boggling deals are being announced, and the race is on. 
• Regulatory Environment. The deregulatory environment continued, and is likely to continue for the foreseeable future. This was done across the board, but financial and energy sectors received a lot of attention.  Notable updates include the rollback of CAFÉ standards for automobiles, 22 CRA resolutions passed in 2025 rolling back prior regulations, ~300k reduction in the federal workforce (largest ever in single year).
• Global Economy.  While geopolitical tensions remain high, the global economy is poised for another good year of growth.  This past year finally brought a resurgence in international equity markets relative to US markets.  Trade will be going through another volatile year as the Trump administration continues to implement its trade policies.