Markets in Focus - January 2026

Market review: A year wrapped up in a bow

Global equities ended 2025 on solid footing, the S&P 500^® rose 0.1% in December and 17.9% for the year. Peak tariff pressures, softer‑than‑expected inflation and three Federal Reserve (Fed) interest rate cuts provided support to risk assets as the year progressed. The underlying disinflation trend appears poised to extend into 2026 and includes weakening of the heavily weighted shelter component of inflation (Figure 1). Other indicators point to fading wage pressure from job switching and softening energy prices that moderate the cost of production.

Outside the U.S., international equities also finished higher, supported by U.S. dollar softness and technology‑driven momentum across emerging markets in Asia. Precious metals also extended gains, as gold and silver rallied in December.

Figure 1. New Tenant Rent Index, Quit Rates and Core Goods Inflation Trends
Disinflation remains on track as shelter and wage pressures ease

As of 6/30/2025. Source: Bloomberg L.P.

View accessible version of this chart.

Short takes

Imbalances (e.g., in artificial intelligence (AI) capital expenditure plans, federal debt) are elevated but not at a tipping point.

Once-in-a-generation technology developments should underpin growth.
Typically, imbalances require a “trigger” such as the Fed raising interest rates.
It will continue to be important for long-term interest rates to remain range bound.

Much ado about equity valuation

Valuation is more about regimes than it is about mean reversion.
Structural shifts in the economy and markets should uphold a high-valuation regime.
We consider current valuation levels to be a minor drag on long-term returns, not a prima facie reason to avoid equity market risk.

Reasons for optimism in 2026

The disinflationary forces of AI and housing should help to offset fading tariff inflation.
Higher personal and business tax deductions should support spending.
Increased labor market weakening would likely be met with Fed rate cuts.
Productivity is set to shift into high gear (see “The big picture” section).

The big picture: Productivity shifts to a higher gear

Productivity has emerged as a defining driver of the economy and markets in 2026, with ongoing AI innovation underpinning this trend. Productivity shows up as business growth without commensurate cost increases. The last sustained productivity boom coincided with the proliferation of the internet during the mid-1990s. Currently, productivity growth is supported by infrastructure spending and the growth of AI (Figure 2), and we believe the trend is in the early stages.

Figure 2. Technology Spend as a Share of GDP vs. Labor Productivity
Higher investment in digital infrastructure is supporting a rebound in productivity

As of 9/30/2025. Source: Bloomberg L.P.

View accessible version of this chart.

Evidence of efficiency gains driven by AI is emerging across industries. For example, retail behemoths such as Walmart Inc. and Amazon.com, Inc. have publicly stated their intentions to leverage automation and AI rather than increase employee headcount to support growth. Powerful anecdotes of productivity gains from AI in diverse areas such as fraud detection, healthcare, coding, agriculture, marketing, driverless technology and manufacturing point to the initial stages of a long-lasting trend.

For investors, the implications are material. An elevated trajectory for productivity, powered by AI and technology innovation, drives margin expansion, reduces unit costs and generates structurally higher corporate earnings even with moderate revenue growth. Additionally, technology innovation is inherently a deflationary force, which should ease inflation concerns as 2026 progresses. Labor market concerns, however, are a different matter, and technology-enabled growth may offer little reprieve. The mixture of a soft labor market and moderating inflation opens the door for potentially more dovish Fed policy, which would support both the economy and markets.

At December’s Federal Open Market Committee meeting, the Fed’s updated economic projections surprised many investors with an upgraded 2026 real GDP forecast of 2.3% - up half a point from its projections just three months earlier. Given a subdued job growth forecast, the implicit growth driver is an increase in productivity. New technologies typically take several years to impact productivity. While some are concerned with the current level of tangible economic benefits from AI, we are thoroughly encouraged. As AI moves from pilot use cases to everyday operations, its cumulative economic impact becomes more visible in aggregate data.

Outlook and portfolio positioning

We expect the investment landscape to continue to be favorable for risk assets. Earnings growth is poised to be the dominant driver of market returns, supported by easing inflation, dovish monetary policy and accelerating AI-driven productivity. With tariff pressures on the decline, we expect relative performance leadership from AI and technology-heavy areas of the market both in the U.S. and in emerging markets.

TEXT VERSION OF CHARTS

Figure 1. New Tenant Rent Index, Quit Rates and Core Goods Inflation Trends (view image)
Disinflation remains on track as shelter and wage pressures ease

	U.S. New Tenants Repeat Rent (NTRR)	U.S. Quits Rate	Core Goods Inflation
6/2013	2.86%	1.60%	-0.23%
12/2014	3.35%	1.80%	-0.79%
6/2016	3.99%	2.10%	-0.63%
12/2017	3.67%	2.20%	-0.71%
6/2019	2.95%	2.30%	0.16%
12/2020	1.69%	2.40%	1.68%
6/2022	12.46%	2.70%	7.16%
12/2023	2.27%	2.10%	0.17%
6/2025	-9.28%	2.00%	0.70%