January 2026 Market Outlook
Executive Summary
In 2025, markets outperformed expectations despite widespread fears of recession and inflation driven by new tariffs. The S&P 500 returned nearly 18% as the economy grew faster than forecast, inflation eased, and the Federal Reserve cut rates. While the labor market softened and wage growth slowed, consumer spending remained strong.
A key shift occurred as non-US and small-cap stocks outperformed US large caps, breaking the dominance of major tech firms. Looking to 2026, CCR Wealth Management stresses the importance of diversification, as broader participation across global sectors and industries is expected to continue.
Outlook
Greetings and Happy New Year from CCR Wealth Management!
2025 was an interesting year, full of surprises, contradictions, failed consensus forecasts, and dichotomies. Happily, that seemed just the ticket to, in most cases, produce investor returns well ahead of financial planning assumptions. The old axiom, “wall street climbs a wall of worry” strikes again.
Perhaps the biggest surprise was the new administration’s early focus on trade. While campaigning on deregulation, tax cuts, and tariffs, few expected the initial focus to be on the latter, and the market swooned mightily when “liberation day” unveiled a litany of steep (and in some cases seemingly arbitrary) import taxes across a wide range of products, basic materials, and countries, both friendly and otherwise. Last January, we included a few quotes from Nassim Nicholas Taleb as a warning to beware of narratives when we make investment decisions. As if on cue, the narrative machine kicked into high gear beginning in March and lasting through much of the summer. The focus, of course, was on the “devastating” impact these policies would have on the economy and the market. Recession predictions (or odds thereof) spiked, with JP Morgan citing a recession probability of 60% in 2025, and Goldman Sachs, the IMF, the Fed, and many “renowned” institutions similarly ringing the alarm bells. Prices would spike, the Dollar would rally as interest rates rose, and the Fed would need to hike rates. In April, Oppenheimer Asset Management lowered its S&P 500 target by 16%, from 7,100 to 5,950 (the S&P closed at 6,845 for the year). Keep in mind, 5950 on the S&P would have been a gain of about 1% (plus dividends). Instead, the return was 17.88%. Good thing we don’t get caught up in narratives!
We remain puzzled by how many institutions take this administration’s statements at face value. Many underestimated the offsets to tariffs—negotiations, delays, corporate strategies (front-loading, shifting supply chains), and the BBB (tax cuts, deregulation)—while ignoring the chaotic tactics of 2016-2020. The Fed cut rates three times in 2025 in the second half of the year instead of raising them. CPI inflation eased in 2025 to 2.7% from 3% in January, but it remains above the Fed’s 2% target. Still, no tariff-driven price spikes happened. Treasury yields fell on both the front end and the 10-year, supporting asset prices. The US Dollar Index dropped 9.40%.
The decline in the Dollar Index (relative to a basket of trading-partner currencies) while the stock market advanced almost 18% is a curiosity and is one of the dichotomies of 2025. The US saw strong foreign investor inflows in 2025 from Sovereign Wealth Funds and Foreign Direct Investment, attracted by interest in AI-related companies and data centers. Normally, this would strengthen the dollar as foreign currencies are sold to buy dollars for the investments. This time, it appears foreign investors hedged their currency risk. Still, a weak dollar over a period of time often cranks up the narrative machine—especially if it can be tied to polarizing politics.
Taking a decades-long look at the US Dollar Index, we can observe that:
- Currencies are mean-reverting in value.
- The Dollar remains quite strong relative to where it has been most of the last 50 years.
Investors should be wary of the scribblers beating the “Dollar is Crashing” trope. It will happen (the scribbling, not the crash). But it should also be noted that a weak dollar carries with it benefits to investors, as products of American exporters become cheaper for foreign buyers. Additionally, American investors in foreign assets benefit from receiving more dollars for converted earnings, one tailwind that investors in non-US assets have enjoyed over the last year. A weak dollar also increases demand for commodities, which generally trade in dollars, like gold, silver, copper, aluminum, and many agricultural products. All these commodities have seen consistent new highs as 2025 progressed.
Surprise and dichotomy certainly characterized economics last year. We don’t know Q4 GDP estimates (first release) as of this writing, but we do know that while the dour consensus we showcased earlier did not come to fruition, institutions rapidly adjusted their assumptions. The whopper came when Q3 GDP was reported (arriving late due to the government shutdown). July through September, real GDP came in at 4.30%, far above the 3.2%-3.3% economic forecasts. So much for economists, and so much for forecasts!
The perspective here: hundreds of billions of dollars more than forecast were produced by our economy amid a generally bleak mood among economists. Perhaps this is why economics has been referred to as “the dismal science”. As mentioned, we do not yet have Q4 GDP numbers as of this writing, but the following chart from the Philadelphia Fed speaks volumes about the revisions that have been made for full-year GDP estimates.
One last dichotomy before we look ahead to the new year.
We have sounded cautionary notes in our recent Outlooks on the state of the labor market. Indeed, labor “high frequency data” seems to continue to suggest a slowdown (not a collapse) in the labor market. The unemployment rate ended at 4.4% in 2025, up 0.3% from a year ago. As Neil Dutta (Renaissance Macro Research) points out recently:
On the negative side of the ledger, two things stood out in the [Dec. 2025 BLS release] Household Survey. First, part-time for economic reasons remains elevated; the three-month average stands at 3.1 percent of the labor force. Second, long-term unemployment continues to swell. Over one-fourth of the unemployed have been this way for six months. That’s highly unusual in the context of an expansion.
The main risk going forward is unemployment. Consumers continue to report difficulties with job finding. This tends to lead to what happens with unemployment. Unemployment has increased 0.3ppt in each of the last three years. I have a difficult time seeing why this is not the case in 2026.
The bold/underline emphasis is his.
So, an expanding economy with slowing labor market growth is one dichotomy. Another is the decline in real and nominal wages, as tracked by the Atlanta Fed’s Wage Growth Tracker index. Marry this index to many of the consumer sentiment surveys released last year, and you can see how wages declining (faster than the rate of inflation falling) has left a feeling of economic gloom for many.
The dichotomy lies in what consumers tell pollsters in these economic surveys…versus what they’re actually doing. The driving factor in the Q3 GDP upside surprise was retail spending. So, consumers continue to consume, despite their self-reported gloom.
This is obviously good news in an economy powered by over two-thirds of consumption.
As we look ahead to the 2026 investment landscape, we are heartened by some developments in 2025 that we believe will be persistent this year. We think a consistent theme in most of our Outlooks last year highlighted the benefits of diversification. And by this we appealed to greed, not fear! It seems diversification has gotten a bad rap in recent years, no doubt given an 18–20-month period where broad US equity indexes were both the leaders (by far) of global equity performance, and yet were powered by a vanishingly small number of stocks. It could be said that a feedback loop, of sorts, developed where the new cohort of trillion-dollar AI (or related) companies, which dominated and drove the cap-weighted indices, attracted more money to those indices, most of which was invested back into the AI cohorts (rinse and repeat). Every other corner of the market, from healthcare to financials, non-US and small caps, languished comparatively.
2025 saw a crack in this cycle. For one thing, non-US equities (whether measured by developed or developing markets) meaningfully outperformed US large-cap stocks last year. We have even seen small caps (Russell 2000 index) recently outperform the S&P 500 on a
trailing 12-month basis. To our recollection, we think the last time this dynamic happened was the pandemic era (March ’20-March ’21), when the Fed drove rates to zero and flooded the marketplace with stimulus. It is encouraging to see this sign of life without that stimulus.
As for non-US equities, a convergence of macroeconomic influences powered these markets, including a weak US dollar, strong earnings growth (AI-related) in Asia, increased defense and infrastructure spending commitments in Europe, and the simple fact that non-US stocks are significantly cheaper than US stocks, and have presented themselves as an attractive alternative. Notably, our Outlook a year ago explained that we had reduced our non-US equity position in our Strategic Models. By April, we reversed this decision (adjusting to new information as it becomes available!)
Under the surface, there is a “chicken or egg” paradox. Did non-US stocks outperform? Or did US stocks—namely the Mag-7 (and related) cohort underperform? Information technology was still the best-performing sector in the S&P 500 last year, but scratch the surface, and it turns out only three of the Mag-7 stocks fall into that sector. Chip stocks dominated, and yet it seems some welcome skepticism (in our view) crept into markets toward the end of last summer. Constant announcements of massive spending plans on chips and data centers, “circular” deal-making in Silicon Valley, and the newer development of debt as a funding mechanism for the build-out of what, at least some, are willing to admit is no “sure thing” (that would be the immediate return on investment into AI). Given the promising growth dynamics around the world, coupled with significantly cheaper stock prices, we think the change in leadership was inevitable. That doesn’t make us “non-believers” in US tech or AI. It’s just a symptom of being a believer in diversification.
One last observation of 2025, which we think could have some staying power: the broadening out of market participation among industries. Technically, there are 11 sectors in the S&P 500, as defined by GICS (Global Investment Classification Standards). But underneath this classification, there are many industries, and many more sub-industries. Within the Info Tech sector, there is a large divergence between the major industries of semiconductors and software.
But there also exists a significant divergence between many non-tech industries and the Information Technology GICS sector.
Metals and mining, defense stocks, pharma, and biotech companies are all challenging for the leadership role in this market. We say, “let the games continue”! Our optimism that this trend persists is grounded in the fact that they are macro-driven (the dollar, valuations, interest rates), and it is difficult to see that macro picture changing dramatically anytime soon.
CCR Wealth Management manages a number of differentiated model portfolios and strategies. We welcome regular discussions with all our clients to review your portfolio characteristics, diversification metrics, and market expectations. Please do not hesitate to reach out to your financial advisor if you have any questions.
Disclosures:
The views are those of CCR Wealth Management LLC and should not be construed as specific investment advice. Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Investors cannot directly invest in indices. Past performance does not guarantee future results. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
Registered Representative: Securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker/dealer and Registered Investment Adviser. CCR Wealth Management and Cetera are affiliated. Cetera is under separate ownership from any other named entity.
The ICE U.S. Dollar Index (DXY) is a benchmark that measures the value of the U.S. dollar relative to a basket of six major world currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. It is calculated and maintained by ICE Data Indices, LLC and reflects the performance of the U.S. dollar against this weighted currency basket.
The S&P GSCI Aluminum Index is a sub-index of the S&P GSCI commodity index that measures the performance of aluminum futures contracts. It reflects the returns of a rolling position in aluminum futures traded on regulated exchanges.
The S&P GSCI Copper Index tracks the performance of copper futures contracts included in the S&P GSCI. It represents a benchmark for copper commodity exposure through exchange-traded futures.
The S&P GSCI Gold Index, a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark tracking the COMEX gold future.
The S&P GSCI Silver Index measures the performance of silver futures contracts within the S&P GSCI framework. It provides a benchmark for silver commodity exposure based on regulated futures markets.
The Atlanta Fed’s Wage Growth Tracker is a measure of the median year-over-year percent change in hourly wages for individuals. It is based on data from the Current Population Survey and is designed to track wage growth trends in the U.S. labor market.
The MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 24 Emerging Markets (EM) countries*. With 1,965 constituents, the index covers approximately 85% of the global equity opportunity set outside the US.
MSCI EAFE Index is designed to measure the equity market performance of developed markets (Europe, Australasia, Far East) excluding the U.S. and Canada. The Index is market-capitalization weighted.
MSCI Emerging Markets index is designed to measure equity market performance in global emerging markets. It is a float adjusted market capitalization index.
The Russell 2000 Index is a stock-market index measuring the performance of 2000 small-capitalization stocks. It represents the 2000 smallest companies in the Russell 3000 Index, which in turn represents the 3000 largest companies in the U.S. Thus, the Russell 2000 is a barometer of small-cap stocks. Though small, the companies represented by the Russell 2000 are not the smallest of the small as they are not penny stocks. The Russell 2000 is weighted by the market capitalization of the stocks.
Dow Jones U.S. Semiconductors Index Total Return represents the performance of U.S. companies in the semiconductor sector, including dividends reinvested. It is part of the Dow Jones U.S. Industry Indices family.
Dow Jones U.S. Software Total Stock Market Index measures the performance of U.S. companies classified in the software industry. It includes all eligible stocks in this sector within the Dow Jones Total Stock Market Index.
The S&P 1500 Information Technology Sector Total Return Index tracks the performance of companies in the information technology sector within the S&P Composite 1500, including reinvested dividends.
Dow Jones U.S. Industrial Metals & Mining Total Stock Market Index measures the performance of U.S. companies involved in industrial metals and mining activities. It is part of the Dow Jones Total Stock Market Index series.
Dow Jones US Pharmaceuticals & Biotechnology Total Stock Market Index is a market-capitalization-weighted index designed to measure the performance of all U.S. equity securities in the pharmaceuticals and biotechnology sectors.
Dow Jones U.S. Select Pharmaceuticals Index tracks the performance of U.S. companies primarily engaged in the manufacture and distribution of pharmaceuticals.
Dow Jones U.S. Defense Total Stock Market Index measures the performance of U.S. companies classified in the defense industry within the Dow Jones Total Stock Market Index.
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