We remain a buyer of market weakness over the longer term but given the escalation of the war in the Mideast, we would be cautious this week since war can be chaotic and messy. The war took a dangerous turn after Iran launched widespread retaliatory missiles and drone attacks targeting US military assets, as well as airports and oil infrastructure across the Middle East. The countries impacted include all six of the Arab nations in the Gulf Cooperation Council (GCC): Kuwait, Oman, the United Arab Emirates (UAE), Saudi Arabia, Qatar, and Bahrain, as well as Jordan. Attacks have also hit civilian infrastructure, oil facilities, British air bases in Cyprus, and oil tankers in the Strait of Hormuz. In our opinion, these appear to be acts of desperation by Islamic Revolutionary Guard Corps (IRGC), acts that could prove fatal, but this retaliation will make the next few days dangerous and unpredictable. We doubt most members of the IRGC have been or will be willing to negotiate and would rather fight to the death. This exemplifies a culture many in the Western world do not truly understand, and it is possible that the conflict could escalate, the number of participants in the war zone could increase, and this turmoil would hurt the production and flow of oil to the world. Weakness in the financial markets have been an obvious response to this threat, to which we add several important observations.

First, this conflict shows how vital US energy independence is to America. The disruption in oil exports is expected to have a nominal impact on the American economy since the US is a net exporter of energy. The effect will be minimal if the crisis lasts a month or less and financial markets appear to understand this. While the US equity market has declined in recent days, it has been a relative out-performer in terms of global markets. Over the last five trading sessions the S&P 500 index lost 1.1% versus the Vanguard FTSE All-Word ex-US ETF (VEU – $77.62) with a loss of 4.7%, or the iShares China Large Cap ETF (FXI – $36.06) with a decline of 6.0%. See page 10. 

Second, over the last five trading days Brent crude futures (LCOc1 – $81.73) and West Texas intermediate crude futures (CLc1 – $74.73) rose 15% and 14%, respectively. These oil price increases will be a benefit to exporters such as Russia, Canada, Venezuela, and the US; but they increase the cost of fuel and hurt most economies around the world. The recent rally in the dollar increases the pain for many importers of oil since crude oil is priced in dollars. China, in particular, imports 70% of its consumption of oil, 90% of which is seaborne imports. This could put China in a desperate situation. However, The Center on Global Energy Policy at Columbia reported in January* that China’s recent aggressive stockpiling of crude oil suggests it could weather a multi-month disruption of imports from Iran and Venezuela. Time will tell. These two countries were the source of at least 15% of China’s imports in 2025.

Third, it should not go unnoticed that the conflict with Iran goes well beyond Iran’s borders. The combination of removing Maduro in Venezuela and potentially the radical government of Iran, could have major long-term implications for China and the global balance of power. It is a reset that stems China’s access to energy, natural resources, and its goal of economic dominance.

Fourth, the rising cost of crude oil is inflationary and the longer the conflict persists, the greater the risk to oil and natural gas production and refineries, and the more inflationary risk grows. OPEC+ has decided to unwind past production cuts, and the US and China could release strategic stockpiles, but these are small changes and sentiment could move prices higher, nonetheless. Moreover, natural gas markets are severely impacted. According to the Center on Global Energy Policy “Liquid Natural Gas (LNG) transiting through the Strait of Hormuz has been disrupted since February 28 and nearly 90% of the LNG transiting the Strait is destined for Asian markets, which will therefore be the most directly impacted. While China accounts for the largest share—approximately 25%—of the disrupted LNG volumes.” From a US perspective, this will likely postpone any future Federal Reserve rate cuts in coming months. It also has implications for long-term interest rates and the broad fixed income markets.

These inflation fears were already rising after last week’s PPI report which showed final demand rose 0.5% for the month of January and 2.9% YOY. Final demand for services rose 0.8% in January and 3.4% YOY. Conversely, final demand for goods fell 0.3% in January and rose only 1.6% YOY. The 0.5% increase in headline PPI was the highest in four months; the 0.8% rise for final demand services was the largest increase in six months and the 0.3% decline in final demand goods was the largest decrease in ten months. Note that most of January’s rise in PPI for final demand services can be traced to margins for final demand trade services, which jumped 2.5%. Trade indexes measure changes in margins received by wholesalers and retailers. We believe the concern over January’s PPI was overdone. See page 3.

Fifth, this Mideast conflict is negatively impacting many economies in the Middle East, Asia, and Europe and the longer it persists the more it will slow the global economy. Some economists estimate that every $10 increase in the price of oil reduces global GDP by 0.2%. Global air travel is also disrupted as the war has kept major Middle Eastern airports closed or severely restricted. Reuters reports that this is one of the sharpest aviation shocks in recent years. Initially, flights were halted over Iranian airspace, but this has spread to a much larger area after Dubai International Airport sustained damage during Iran’s attacks. United Arab Emirates, the world’s largest international carrier, said it suspended operations to and from its Dubai mega-hub, leaving thousands of global travelers stranded. In short, many economies in the area are put on hold, and this will impact the revenue and profits of many international companies.

However, while the war and oil prices dominate the headlines and create some near-term uncertainty, earnings season is generating another strong quarter. According to LSEG IBES, the estimated earnings growth rate for the S&P 500 for the fourth quarter of 2025 is 14.3%, and if the energy sector is excluded, the growth rate improves to 14.7%. The S&P 500 expects to see share-weighted earnings of $630.2 billion in the fourth quarter, compared to share-weighted earnings of $551.5 billion a year earlier. The LSEG IBES consensus earnings estimate for 2026 rose $0.76 this week to $315.36 and the 2027 forecast rose $0.90 to $365.44. The S&P Dow Jones consensus estimate for 2026 rose $1.60 to $312.32 and the estimate for 2027 jumped $2.59 to $362.80. This implies the market is trading at 21.6 times the IBES 2026 estimate and 18.7 times the 2027 estimate. Although some analysts feel PE multiples are rich, the forward earnings yield of 4.7% and dividend yield of 1.14% compare well to a 10-year Treasury bond yield of 4.1%. Plus, the 12-month sum of operating earnings per share shows a gain of 16.7% YOY, far better than the 75-year average of 8.1% YOY. See pages 5 and 12. In sum, strong fundamental underpinnings are why we remain a buyer on weakness.

*https://www.energypolicy.columbia.edu/where-china-gets-its-oil-crude-imports-in-2025-reveal-stockpiling-and-changing-fortunes-of-certain-suppliers-including-those-sanctioned/

Gail Dudack

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A day before President Trump’s State of the Union speech, a wave of panic rolled over the equity market. Some of this was due to a multitude of questions left unanswered by the Supreme Court after it struck down many of the administration’s tariffs. The law at the center of the case is the International Emergency Economic Powers Act, known as IEEPA, which authorizes the president to use the law “to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States, if the president declares a national emergency with respect to such threat.” A separate provision of the law provides that when there is a national emergency, the president may “regulate … importation or exportation” of “property in which any foreign country or a national thereof has any interest.” President Trump initiated tariffs early in 2025 after declaring a state of emergency and asserting that unfair trade posed a threat to the US economy. The Trump administration used tariffs to conduct foreign policy and at the same time to boost jobs and manufacturing in the US. After the Supreme Court decision, he responded by signing an executive order that imposes a 10% duty on articles imported to the US for a period of 150 days. In the interim, the administration will be looking at ways to reinstate its tariff policy.

Unfortunately, since the Supreme Court took no stand on tariffs already collected it leaves the US government open to lawsuits that will take many years to resolve. However, we ponder why companies would be suing the US for reparations if it is true, as most economists suggest, that tariffs were a “tax” on households and that they hurt the US consumer. Both cannot be true. And as we reported last week, the January 2026 CPI report showed that price indices for durables rose 0.4% YOY and nondurables rose 1.3% YOY. If tariffs on imported goods were the source of inflation, it should show up here. On the contrary, it was service sector inflation that rose 3.2% YOY and services have been the source of inflation throughout 2025.

A New York Federal Reserve study found that 86% to 94% of the burden of 2025 tariffs hurt US businesses and consumers, not foreign exporters. Yet, if this is true why did General Motors (GM – $81.29) and Ford Motor Co. (F – $14.20) report solid 2025 financials despite absorbing significant EV-related charges? Tariffs on autos were some of the first to go into effect, were some of the highest tariffs enacted, were not tied to IEEPA, and continue to be in force. And yet, General Motors generated $12.7 billion in adjusted EBIT and $2.7 billion net income, despite absorbing significant EV-related charges. Moreover, the company indicated that its core business remains highly profitable, and they expect profits will increase in 2026 despite roughly $7 billion in fourth quarter 2025 EV restructuring. In our opinion, too many economists and media commentators are quoting each other instead of looking at the actual numbers.

The other catalyst for a selling wave this week was a report by a little known firm called Citrini Research that rattled investors by envisioning a future in which autonomous AI systems – or agents – upend the entire US economy, from jobs to markets and mortgages. A warning from Nassim Taleb, author of the 2007 best-selling book “The Black Swan: The Impact of the Highly Improbable” told investors they should brace for escalating volatility as the AI rally enters a fragile phase and even bankruptcies could be ahead for the software sector. In response, International Business Machines Corporation (IBM – $229.32) fell 13% on February 23^rd.

There is another development that has investors worried and that is the vast and opaque $1.8 trillion private credit market. Blue Owl Capital (OWL – $10.73), an asset manager specializing in private debt financing, recently announced it was limiting withdrawals from a $1.6 billion fund. This sent ripples through the private credit industry. We are concerned about this as well, particularly since this is an unregulated area of finance. It is unlikely that the private debt market represents a systemic risk to the banking system, however, private credit firms have been partnering with insurers which potentially broadens the risk they represent. 

While no one likes to see the stock market go down, we see a silver lining to the recent selloff. If the stock market were in a bubble – and one could materialize someday – this kind of panic linked to concern about future fundamentals and earnings, is not typical of a market top. And as we noted last week, as the S&P approaches a milestone of 7,000 it is not unusual to see a bit of fear and consolidation. In short, this fear is good. It is also showing up in investor surveys. Last week’s AAII sentiment survey showed bullishness fell 4.0% to 34.5% and bearishness fell 1.2% to 36.9%. Bullishness is now below average for the first time in 12 weeks. Bearishness is above average for the fifth time in 12 weeks. The 8-week bull/bear index is 10.2% and neutral. The last significant signal in this indicator was a positive one in late September. See page 10.

There was a series of economic releases during the week, and in a nutshell, it showed that the economy was slowing at the end of 2025. This begins with the first estimate for fourth quarter GDP of 1.4%, which follows on the heels of the 4.4% reported for the third quarter. The weakness was concentrated in a decline in residential investment and decline in government spending, but the consumer, while still resilient, did slow consumption. Housing starts for December were down 7% YOY despite a small gain for the month. Single-family starts fell 9% YOY. Housing permits were down 2.2% YOY and single-family permits declined 11% YOY. For the year ending in December, 1.5 million housing units were completed, a decline of 8% from the previous year. See page 3.

International trade was an interesting release. In 2025, the trade deficit in goods and services was $901.5 billion, down $2.1 billion, or 0.2% from 2024. Exports were $3.4 trillion, up $199.8 billion, or 6.2%, and imports were $4.3 trillion, up $197.8 billion, or 4.8%. The oddity of 2025 was the erratic trade in nonmonetary gold — which is included in the trade numbers for goods. Much of this activity in gold trade was triggered by uncertainty regarding tariffs announced in April 2025 and the shift to hard assets. Some of these tariffs are now nullified by the recent Supreme Court decision. Nonmonetary gold imports surged to a record $80.8 billion in the first quarter of 2025; however, nearly half of this, or $34.8 billion of gold was exported in the second quarter of 2025. Notably, the $34.8 billion gold exports represented 6.5% of total exports in the second quarter — a record. See page 4. However, what gives us comfort is earnings growth. This week the LSEG IBES consensus earnings estimate for 2026 rose $0.17 to $314.62 and the 2027 forecast rose $0.54 to $364.54. The S&P Dow Jones estimate for 2026 rose $0.33 to $310.72 and the new consensus estimate for 2027 debuted at $360.22. This means the market is trading at 21.7 times 2026 estimated earnings and 18.75 times 2027 estimated earnings. Although PE multiples are a bit rich, the forward earnings yield of 4.7% and dividend yield of 1.15% compare well to a 10-year Treasury bond yield of 4.08%. Plus, the 12-month sum of operating earnings shows a gain of 16.7% YOY, far better than the 75-year average of 8.1% YOY. We remain a buyer on weakness.

Gail Dudack

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US Strategy Weekly                    

Lower Inflation Ahead

We like to find “crowded trades” or extremes in sentiment regarding an investment and then find the flaws in the view. One of these crowded views is the global stance on the US dollar. According to a recent Bank of America survey, global fund managers have the most bearish outlook on the US greenback in over a decade. Analysts attribute this weakness to concerns regarding US policy predictability and Federal Reserve independence. In both cases, we feel the fear is overhyped and would not hold up to scrutiny. Nevertheless, pessimism has been correct with the dollar down over 11% since its peak in early January 2025. But we would point out that part of the dollar’s weakness is a result of the narrowing of the trade deficit since this results in less demand for dollars. Analysts may simply be using policy and the Fed as the reason for the weakness. Ironically, a weaker dollar makes US exports more attractive so in the long run a weaker currency can be good for the economy. In our opinion, a weaker dollar is not a major concern — although it can be inflationary — and the reason is simple. Modern currency is fiat money backed only by trust and confidence in a country. This trust is based upon the stability and transparency of its government and banking system, the strength of its economy, the relative level of inflation, and geopolitical and military power. In sum, the US has more of these important qualities than any other competing currency. Dollar weakness could simply be the greenback’s adjustment to the narrowing of the trade deficit.   

In terms of measuring US economic strength and relative inflation there were two important reports last week. January payrolls are always a problem — for several reasons. Each January, the establishment survey is benchmarked to new data gathered from the Quarterly Census of Employment and Wages – QCEW – which counts jobs covered by the unemployment insurance tax system. In addition, seasonal adjustments are reworked with more current data. This January the BLS also changed the birth-death model to include current sample information.

The household survey also undergoes an annual adjustment for new population data from the Census Bureau in January; however, this adjustment was delayed this month. And finally, the BLS noted that severe winter storms resulted in the household data response rate falling to 64.3%. In short, the January jobs report was riddled with issues making any worthwhile analysis impossible. Nevertheless, we did see the growth rate for total household employment fall from 1.5% YOY to 0.4% YOY. The establishment growth rate was also low at 0.2% YOY and has been relatively unchanged since October. In short, recent data releases suggest weak job growth. See page 3.

We have been writing about the weak growth in total employment which began in 2024 and continued in 2025. One risk is that AI will continue to dull job growth. If so, we worry that this could lead to a recession, particularly since a recession is best defined as a year-over-year decline in total employment. Nonetheless, the unemployment rate fell from 4.4% to 4.3% in January. The underlying data showed a significant divergence in unemployment rates among levels of education. The rate for those with less than a high school diploma fell from 5.6% to 5.2%. High school graduates saw unemployment jump from 4.0% to 4.5%. The rate for those with some college or an associate degree fell from 3.8% to 3.6%; whereas a college degree or higher saw a rate increase from 2.8% to 2.9%. These were unusual changes, but due to the various adjustments and low survey response in the January jobs report we believe the numbers are too unreliable to draw any conclusions. See page 4.   

January’s inflation numbers were better than expected with the headline CPI index falling from 2.7% YOY to 2.4% YOY and core inflation falling from 2.6% YOY to 2.5% YOY. However, many of the components of the CPI grew faster than headline, especially the index for fuels and utilities which rose 1.1% for the month and 6.1% YOY. This inflation in utilities and energy services is taking place even though energy commodities fell 6.6 % YOY in January after falling 3.0% YOY in December. This contradiction is due to supply and demand disruptions at the consumer end. The previous administration’s environmental policies resulted in the subtraction of nearly 17 gigawatts of reliable baseload power generation in the US. These 17 gigawatts are enough to power 12 to 15 million homes or the equivalent of the output of 17 large nuclear reactors. This huge decline on the supply side was coupled with soaring demand for energy from large data centers which support AI and crypto mining. These two factors are the likely causes for the differentiation between falling raw material prices and soaring energy services pricing. See page 5.

The debate regarding the inflationary impact of tariffs on consumers is answered by the chart on page 6. There was some increase in durable and nondurable consumer prices in the middle of 2025, but this never rose to more than 1.9% YOY in durables and 2.3% YOY in nondurable. In January 2026, the price indices for durables rose 0.4% YOY and nondurables rose 1.3% YOY. However, service sector inflation rose 3.2% YOY. Service inflation has been high, first driven by housing prices, then by motor vehicle insurance, followed by a spike in hospital & related services, and more recently led by household insurance pricing. These rolling spikes in pricing have kept service inflation above 3% YOY for the last four years. Nevertheless, the 3.2% YOY seen in January matches the November 2025 level, both of which were the lowest since August 2021. Note that service sector inflation is closely tied to employment costs and the employment cost index (ECI) was 3.4% in the fourth quarter, the lowest since the second quarter of 2021. AI should also help to keep employment costs low and employee productivity high in coming years. See page 6.

Core CPI indices have been steadily decelerating since the cyclical peak made in September and are now clustered in a range of 1.8% YOY to 2.4% YOY. In all cases, core indices are equal or down from January a year ago. This is good news for consumers. But a few sticking points remain, and these currently include necessities such as utility and housing insurance costs. See page 7.  

A main reason for our optimistic inflation forecast of 2.2% or less in 2026 is that crude oil prices continue to be negative on a year-over-year basis. Inflation has rarely if ever moved substantially higher when energy commodity prices are falling. However, as we noted, policy factors and demand changes have impacted energy services pricing. We expect the current administration will address both supply and demand issues this year. If so, the fed funds rate could move lower in 2026, but we would not be surprised if the FOMC required several more months of data before cutting rates. Traders are currently pricing in a 63% chance of a 25-basis-points rate cut at the June meeting, which is a recent upward shift. Note that in March 2022 the real fed funds rate was at its lowest and most dovish level in over 75 years! See page 8. This was a contributing factor to the 9.1% YOY peak in the CPI in June 2022. If the Fed delays cutting rates again in the face of a weakening job market, they risk being wrong one more time.

Technical indicators favor the bulls, particularly the NYSE cumulative advance/decline line which made a new high on February 17, 2026. However, the 10-day average of daily new lows has moved above 100, shifting this indicator from positive to neutral. The rotation of leadership and questioning of AI-related fundamentals is a positive factor for the longer run in our view; but we would not be surprised if the S&P index spends more time consolidating below the 7,000 level. We remain a buyer of weakness.

Gail Dudack

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There has been a string of data releases this past week, but the most important reports on employment and inflation for January are still ahead. The combination of these two releases could shift the consensus view on rate cuts in 2026, which now stands at one or two 25-basis point cuts and would bring the current range of 3.5% to 3.75% closer to 3% by year end. The FOMC dot plot projects only one 25-basis point cut this year, but the Fed’s dot plot is less a projection of interest rates than a data trend follower. And there is reason to be cautious about inflation since economic activity as measured by GDP has been strong. The 3.8% and 4.4% growth rates in the second and third quarters of 2025 were the best economic activity seen since the 4.7% and 3.4% rates seen in the third and fourth quarters of 2023. However, it is important to point out that inflation did not accelerate in 2023, and we do not believe it will accelerate this year either.

One reason inflation is less likely to accelerate this year is that employment costs are down. A recent employment cost index (ECI) report shows that total compensation, wages & salaries, and benefit costs for civilian workers each rose 0.7% in the final quarter of 2025. This was better than expected, and on a year-over-year basis, total compensation rose 3.4%, benefits rose 3.4%, and wages rose 3.3%. In each case, these were the lowest increases seen since 2021. See page 3. In the second half of 2023, the ECI was falling from a peak of 5.1% in the second quarter of 2022, but costs were still rising 4.4% and 4.2%, respectively. And despite this fact, inflation continued to decelerate. In our view, inflation is likely to slow in 2026 as well, particularly since crude oil prices remain relatively low. The fourth quarter deceleration in the ECI indices has been a positive for businesses and is showing up in recent corporate earnings releases as margin improvement.

The January jobs report will be an important data point for the Federal Reserve to ponder, but it will be a difficult report to analyze due to annual adjustments to seasonality and population benchmarks. Nevertheless, a weak employment report coupled with mild inflation could be a recipe for the dot plot to raise its estimates of rate cuts for this year. If so, it would spark more demand for equities.

Despite our concern about the weakening job market, there are signs that the consumer remains resilient. Outstanding consumer credit surged $24.1 billion in December, nearly five times the increase seen in November. Revolving credit, which includes credit cards and other short-term borrowing, grew $10.2 billion, or at an annualized rate of 13.4%. This gain was in sharp contrast to November’s annualized decline of 1.5%. Total credit grew 3.3% YOY, which was the highest growth rate seen since September 2023. Revolving credit rose 2.4% YOY, the first YOY increase since November 2024. We welcome this growth in consumer credit since negative revolving credit growth, like that seen in revolving credit recently, is closely correlated with recession. See page 4.

The advance estimate for retail and food services sales in December (adjusted for seasonal variation, holiday and trading-day differences, but not price changes), was $735.0 billion, virtually unchanged from the previous month, but up 2.4% YOY. Real retail sales rose 1.1% YOY. This report was viewed as a disappointment by most economists, but total sales for the 12 months of 2025 were up a healthy 3.7%. Nonstore retailers were up 5.3% YOY and food service and drinking places rose 4.7% YOY.

A separate report on vehicle sales was a concern since it showed that total vehicle sales were 15.4 million units (annualized rate) in January, down 6% month-to-month and down 3.5% YOY. Unit sales were reported to be 16.4 million in December 2025, down an even larger 5.2% YOY. In short, there has been a sharp 2-month deceleration in auto sales. A good part of this may be due to severe weather across much of the US but it is a trend worth monitoring since it could point to a weakness in consumption. See page 5.

The NFIB Small Business Optimism Index fell 0.2 to 99.3 in January. Seven components declined and the only improvements were in expectations for expansion, sales and credit. Hiring plans edged lower, and the uncertainty index, which dropped to its lowest level since mid-2024 in December, rose modestly in January. The most significant problems reported by small business owners were taxes (18%), followed by labor quality (16%) and insurance cost (13%). See page 6.

The University of Michigan consumer sentiment survey inched up to 57.3 in February from 56.4 in January, due primarily to the 2.9 point increase in present conditions, which rose to 58.3. Expectations slipped to 56.6 from 57.0. However, sentiment surveys have been in recession levels below 60, for ten of the last twelve months despite steady growth in the economy and retail sales. In our opinion, sentiment indicators have become victims of negative media coverage and are less useful than they had been in the past. See page 7.

All in all, recent economic reports show a healthy, although somewhat sluggish, economy. Fourth quarter earnings season, on the other hand, has been stellar. At present, the 12-month sum of operating earnings shows a gain of 16.7% YOY, far better than the 75-year average of 8.1% YOY. Consensus operating earnings estimates for the S&P 500 this year are currently $314.24 for LSEG IBES and $310.64 for S&P/Dow Jones. Our $315 estimate looked high in December when we published our outlook for the year, but it is becoming consensus view. But as we stated in December, our estimates are likely to prove to be too conservative. See pages 8 and 15.

Technical indicators continue to favor the bulls, even though our 25-day up/down volume oscillator, now at 1.78, remains in neutral territory. However, the 10-day average of daily new highs was strong at 553 this week and new lows ticked higher at 162. This combination of daily new highs above 100 and new lows above 100 lowered this indicator from positive to neutral last week. But most importantly, the NYSE cumulative advance/decline line made a new high on February 10, 2026, confirming new highs in the broad indices. See pages 10 and 11. Investors should be aware that the backdrop for the financial markets includes several risks. On the geopolitical front Israeli Prime Minister Benjamin Netanyahu will be visiting Washington this week to discuss possible military options against Iran with US President Donald Trump. There are reports that Israel is preparing contingencies should US-Iran talks collapse. We are also concerned about possible liquidity issues linked to cryptocurrencies following the roughly 45% decline in Bitcoin (BTC – $68,758.59) from its October peak of $126,000. One analyst estimated that there were roughly $10 billion in realized losses locked in by investors last week, the second-highest total since June 2022. Massive selloffs in one asset can create liquidity pressures that roll into other parts of the financial system. Nonetheless, we remain a buyer on weakness.

Gail Dudack

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Just like the market was not concerned about last week’s FOMC meeting, it was unaffected by the current partial government shutdown. Both are rational reactions in our view. Lower interest rates in a good economy are less necessary (and could be inflationary), and more importantly, fiscal policy will “trump” monetary policy in 2026. Plus, the anxiety surrounding a government shutdown and the political posturing during one has become far less relevant to equity investors today, particularly since the record-breaking 43-day shutdown that began on October 1, 2025, did little to nothing to impact the overall economy last year.

This latter statement is quite amazing, particularly since federal government employment fell by 179,000 in October 2025 during the shutdown, reaching its lowest level since July 2014. Recent data shows that over 212,000 civil servants have left the federal workforce through voluntary and involuntary mechanisms aimed at reducing the number of federal employees. This should dampen employment levels; nevertheless, in October 2025 while retail sales slowed to a gain of 3.3% YOY from 4.1% YOY a month earlier, this pace was still better than the 3.2% YOY gain seen in October a year earlier.

But, as we go to print, the threat of a shutdown is ending since the House of Representatives has voted to end a four-day partial shutdown. The legislation will fully fund five sectors of the federal government through the end of the fiscal year (September 30, 2026), while extending funding for the Department of Homeland Security for ten days, or until February 13, 2026.

And despite all the political bluster the economy appears to be strengthening. The ISM manufacturing index increased from 47.9 to 52.8 in the month of January, and this gave a boost to the stock market earlier this week. It was the first reading above the breakeven 50 level since the back-to-back 50.9 and 50.3 readings seen in January and February 2025. However, these two readings were preceded by 26 straight months of readings that were below the breakeven 50 level – a sign of contraction in the sector. Three of the ten components in the index shifted from under to over 50 in January – new orders were impressive jumping from 47.4 to 57.1 – and production rose from 50.7 to 55.9. Employment increased from 44.8 to 48.1 but remains in contraction territory. See page 3. The ISM nonmanufacturing index will be released later this week.

Despite our concern about housing affordability and the inability of young adults to buy homes, homeownership rates increased in the third quarter of the year, with the overall reading rising 0.3 points to 65.3%. The largest increases were seen in the Northeast (61.4% to 62.5%) and the South (66.6% to 67.2%). Homeownership rates were flat in the West and down in the Midwest. Still, the most surprising and important fact seen in the survey was the 1.1% increase in homeownership for those under 35 years of age which rose to 37.5%. Homeownership remains highest for those 65 years of age or more at 77.9%, however the percentage was down from 78.6% in the second quarter. See page 4.

In general, we believe inflation worries are fading; however, the 0.5% increase in the PPI index in December was the largest monthly gain in five months. Still, this larger-than-expected monthly gain left the year-over-year unchanged at 3% YOY. The increase in December’s PPI final demand index can be traced to a 0.7% rise in the index for final demand services. Prices for final demand goods were unchanged in December, again indicating that tariffs on imported goods are not the source of inflation.

The deceleration in CPI and PPI indices has carried most inflation measures to a range of 2.7% to 3%. On one hand this range is well above the Fed’s 2% target, but it is also below the long-term average for inflation of 3.4% YOY. More importantly, it would be highly unusual to see any acceleration in inflation in coming months since oil prices continue to be negative YOY. Lower oil and energy prices provide a favorable backdrop for consumers and inflation.  See page 5.

Labor productivity increased by 4.9% (annualized) in the third quarter, after rising 4.1% in the second quarter. This acceleration was predictable since GDP accelerated to 4.4% in the third quarter after rising 2.8% in the second quarter. The US Bureau of Labor Statistics (BLS) calculates labor productivity index by dividing an index of output by an index of hours worked. Output can be measured in most industries, but for those industries where employees do not punch a clock, hours worked can only be estimated. As a result, we believe productivity numbers are unreliable. But it is clear to us that productivity did rise in the third quarter because nonfarm unit labor costs decelerated to 1.2% YOY from 2.0% YOY in the second quarter. Note that the BLS data on employment costs also shows compensation has been relatively stable at 3.5% YOY. Stable labor costs are good for corporate profit margins and for earnings growth. See page 6.

While the economy appears to be doing well, the risk is that the job market may be weakening for a variety of reasons. Unfortunately, BLS will not release January’s employment data this week. However, the January jobs report is always fraught with issues since the establishment survey undergoes an annual benchmarking process and seasonal adjustment factors are updated. The household survey is also adjusted for updated population estimates from the Census Bureau. All these factors make January data difficult to compare to previous months. It will be an important, but tricky month to analyze when we get the data. 

But if we were to choose one factor that is important for the equity market it would be earnings. The LSEG IBES consensus earnings estimate for 2025 rose $0.35 (more than offsetting last week’s $0.30 decline) to $271.92 this week and the 2026 estimate was unchanged at $313.04. The 2027 forecast rose $0.71 to $361.32. The S&P Dow Jones estimate for 2025 rose $1.81 to $265.41 and the 2026 estimate fell $0.02 to $310.24. Using IBES estimates this means the market is trading at 25.4 times 2025 estimates, 22.1 times 2026 estimates, and 19.1 times 2027 earnings. What is interesting about these PE multiples is that they have not changed much in the last two years (apart from the tariff panic in April 2025) even as equity prices continue to rise. In short, this is, and has been, an earnings-driven market. That is the best kind of bull market.

And though PE multiples are rich, the forward earnings yield of 4.65% and dividend yield of 1.14% compare well to a 10-year Treasury bond yield of 4.2%. Perhaps most importantly, 12-month trailing operating earnings are growing at 16.2% YOY, far better than the 75-year average of 8.1% YOY. See page 7.

All in all, we remain a buyer of weakness, and as this will be a midterm election year, one should expect several bumps in the road ahead. But if the economy and earnings continue to grow, and we expect they will, we expect the long-term bull market will remain intact.

Gail Dudack

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A torrent of problems appears to be challenging US equities. Congress faces a January 30 deadline to fund the government or risk another partial government shutdown. Atomic scientists suggest the ‘Doomsday Clock’ is closer to midnight than ever before. The European Union and India reached a landmark trade deal to reduce tariffs and more importantly, trade in local currencies to sidestep the dollar. President Trump’s rhetoric to acquire Greenland has the Prime Ministers of Greenland and Denmark huddling with German Chancellor Fredrich Merz in Berlin, while UK Prime Minister Keir Starmer and Finnish Prime Minister Petteri Orpo are openly courting President Xi Jinping of China. All of this suggests a disturbing shift in geopolitics, so not surprisingly, many emerging market central banks (China, Poland, and Brazil) as well as individuals are buyers of gold sending precious metal prices to record highs. But it was the Trump administration’s proposal to keep the Medicare rates it pays insurers unchanged in 2027 that decisively smacked the health insurance sector this week, and the Dow Jones Industrial Average. Nonetheless, if one looks at the broad environment for equities, it is questionable whether these events present a shift for the financial world or are merely background noise.

In our view, it is merely background noise. In fact, even this week’s FOMC meeting has become less important to equity investors, who not long ago were laser focused on rate cuts to support their positive view of stocks. Today it is widely viewed that there will be no change in policy, and this is not expected to cause any ripples in the markets.

Earnings Are Stellar

What is important to the equity market is earnings and although the fourth quarter earnings season is still young, the season is off to a strong start, apart from a few isolated exceptions in the financial sector due to potential policy changes by the administration. According to LSEG IBES, of the 64 companies in the S&P 500 that released earnings last week, nearly 80% reported above analyst expectations. This was well above the long-term average of 67%. And equities are performing well. Small-cap stocks have outperformed large caps for 15 consecutive sessions, a run not seen in decades. The Russell 2000 index is beating the S&P 500 with a gain of 7.5% year-to-date, versus the S&P 500’s gain of 1.9%. However, even amid the turmoil we just noted, the S&P 500 and the Wilshire 5000 reached record high territory on January 27, 2026.The Russell 2000 index made an all-time high on January 22, 2026, at 2718.77.

None of this is surprising given the strength of the economy. The second estimate for third quarter 2025 GDP was 4.4% (SAAR), up from the initial 4.3% estimate. Part of this improvement came from updated data on trade. The net impact of trade on economic activity was negative 2.4% in the third quarter, down from negative 3.0% in the second quarter. More importantly, this percentage is below the long-term average of negative 3.7%. The improvement in net trade came primarily from a decline in the importation of goods which fell from 12.3% of GDP in the first quarter of 2025 to 10.4% in the third quarter. The imports of goods as a percentage of GDP have averaged 12.4% over the last 25 years. See page 4. In short, the administration’s tariff policy is raising money for the US Treasury and improving GDP. And as we noted last week, it is also improving the all-important US debt to GDP ratio.

This stellar economic activity is also supporting corporate earnings. Four-quarter trailing GDP corporate earnings increased 6.9% in the third quarter, after growing 4.5% in the second quarter. This is solid performance but far from the best performance seen in GDP profits. S&P 500 earnings grew at a healthy 13.0% pace on a cumulative four-quarter basis at the end of the third quarter, and some analysts see the current 14% YOY pace as peak earnings and a sign that earnings growth is about to decelerate. But historically, peak earnings growth has been greater than 25% YOY, as seen in the chart on page 5. Rates of 25% or more were seen in the quarters ending December 1973, September 1979, June 1984, December 1988, December 1993, June 2004, and September 2018. Peak growth rates more than 35% have been seen but were rebounds from recession level earnings. Plus, while the current trailing PE multiple is rather high at 26 times, it too has been much higher at major peaks. 

There were several economic releases in the past week but most of them were for November and not noteworthy. Pending home sales were down 3% YOY for December, a sign that the residential market continues to weaken. For the month of January, the Conference Board’s Consumer Confidence Index fell 9.7 points to a 12-year low of 84.5, but we would caution readers that the Conference Board has a pattern of revising previously released data upward. In sharp contrast, the University of Michigan sentiment for January rose 3.5 points to 56.4, and present conditions jumped 5 points to 55.4. The University of Michigan has a pattern of revising data lower. More importantly, both surveys are politically skewed and neither has been a good guide for economic or equity performance. See page 3.

Dollar Yen

We are not concerned about the current messiness of geopolitics, but we are worried about the weakness in the dollar and the yen and the ramification this can have on security markets. The weakness in the yen is the result of the stimulus proposed by Prime Minister Sanae Takaichi coupled with Japan’s debt to GDP ratio of 230%, the highest in the developed world. This combination makes Japanese sovereign debt a risky investment. Although foreign ownership of Japan’s sovereign debt has been rising in recent years, it is still less than 12%; nevertheless, foreigners account for over 50% of daily trading volume and this adds to volatility. Japan is also the single largest holder of US Treasuries with $1.2 trillion as of November 2025. Japan is followed by the UK with $888.5 billion and China with $682.6 billion of US Treasuries. In comparison, the Federal Reserve currently holds $4.24 trillion US Treasury securities. The immediate risks are twofold. Japan could intervene in currency markets to strengthen the yen which could also mean selling US Treasuries to buy yen. This would raise interest rates and weaken the dollar. A second concern in the yen-dollar carry trade. Estimates for the total size of the yen-dollar carry trade range from $250 billion to over $1 trillion (when leverage is included) and an unwinding of the carry trade could be very disruptive to markets. The yen-carry trade has worked for many years because borrowing in yen (where interest rates are currently low and were negative from January 2016 to March 2024) and investing in higher yielding investments, like US stocks and bonds is a solid strategy — as long as currencies remain stable. But with Japanese interest rates headed higher and US interest rates potentially headed lower, this trade is becoming less attractive, particularly in the current environment of weakening and/or volatile currencies. Keep in mind that a potential unwinding of the carry trade, while unsettling, would not impact corporate earnings growth, which is the foundation of the current bull market. In short, an unwinding of the carry trade would be a buying opportunity, in our view. Technical indicators improved this week. In particular, the NYSE cumulative advance decline line made a new high on January 27, 2026, in line with, and confirming the record highs seen in the S&P 500 and the Wilshire 5000. And while the S&P 500 made a new high, most sectors of the market are outperforming this index as seen on page 11. This is due to the rotation of leadership that has taken place this year. Rotation is a healthy sign in a bull market advance.  

Gail Dudack

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This week, as President Trump approached his one-year anniversary in the White House, the Wall Street Journal wrote “economists have learned to stop worrying about Trumponomics” and are now forecasting GDP growth to exceed 2% this year. In our view, even a 2% estimate may be too conservative for 2026; still, it is obvious that the stagflation forecasted for 2025 never came to pass. December’s core CPI decelerated to 2.6% YOY, down from 3.3% YOY in January and GDP was running at a hot 4.3% pace in the third quarter.

President Trump has proven the media wrong about the economy; however, he continues to find new and bigger ways to agitate them. This week, along with threatening to place tariffs on countries that disagree with his view on acquiring Greenland, a 10% cap on credit card interest rates, he signed an executive order that implied defense contractors “are not permitted in any way, shape, or form to pay dividends or buy back stock, until such time as they are able to produce a superior product, on time and on budget.” In short, he wants defense companies with government contracts to invest in their businesses and become more efficient, instead of repurchasing stock or paying their top executives salaries of $5 million or more a year. In line with this, Defense Secretary Pete Hegseth has made overhauling Pentagon acquisition policy a priority and pledged to broaden its range of vendors with more startups and commercial companies. In our opinion, this executive order is Trump being Trump, i.e., a businessman and a disruptor, and like any normal consumer, he wants value when spending tax-payer dollars. The intent may be commendable, but the approach is creating a major backlash among corporate leaders and may generate more harm than good in the longer run.

Nevertheless, we disagree with the following Wall Street Journal statement: “Stock buybacks, like dividends, return capital to investors. They also boost earnings per share and help propel stock prices, which is why many investors prize them and would recoil at the notion of government interference.”

Much like our argument that tariffs are not taxes, we believe stock buybacks are not dividends. Stock buybacks make earnings-per-share look better, but changing the denominator does not mean real earnings power (the numerator) has grown nor does it guarantee higher stock prices. We also disagree that buybacks are “prized” by investors; the real return on capital for equity investors is a combination of rising stock prices and dividend payouts. Stock buybacks do not guarantee higher prices to investors, whereas stock dividends represent real money in the pockets of investors. Moreover, dividends are typically a guaranteed revenue stream to shareholders.

We do agree that government interference is the antithesis of capitalism. However, government interference has been a part of every administration, although the interference is usually done behind closed doors. For example, it was revealed that government agencies controlled social media posts and medical studies regarding COVID-19 and vaccines several years after the fact. Vaccines continue to directly impact public health and wellbeing. Equally important, government-mandated vaccines resulted in extraordinary earnings gains for the pharmaceutical industry; yet the media has never investigated this connection. The current administration on the other hand, is unusually open and transparent, perhaps too much so and the chaos this creates is problematic for those who like order and tranquility.

As we go to print, President Trump is on his way to Davos, Switzerland, to speak at The World Economic Forum (January 19-23, 2026), an annual gathering of global leaders in business, government, and civil society. It comes at a time when Trump has upset the global community with his statement that there is “no going back” on his goal to control Greenland for national and world security. Moreover, the threat to impose 10% tariffs on the eight European countries that oppose his view has galvanized European leaders against President Trump. Ironically, Trump is threatening more tariffs just as the world awaits a US Supreme Court decision on the legality of the administration’s use of an emergency law to enact tariffs. Nonetheless, at a midday White House press conference, the President hinted that there may be a pathway that leads NATO nations to agree with his view. In short, it will be fascinating to watch egos colliding in the Swiss Alps this week.

There was a flurry of economic releases this week and the PCE deflator for October and November and the second estimate for 3Q25 GDP will be released later this week. Last week’s November’s PPI release showed final demand prices rising 2.9%, up slightly from October, but down from September. December industrial production rose 2% YOY, but utility production of 2.3% YOY was key to the strength. December’s existing home sales were surprisingly strong at 4.35 million units (annualized) which was a 1.4% YOY increase. At that pace the months of supply fell to 3.3 from 4.2 months in November. The median single-family home price was $405,400, up 0.4% YOY. However, the January NAHB housing index weakened to 37 from 39 and remains well below the breakeven 50 level. See page 5. The NFIB small business index inched up to 99.5 in January, representing the eighth consecutive month above the long term average of 98. See page 4.

In our opinion, the most important release of the week was the US current account deficit (trade plus investment income) which narrowed to $226.4 billion, or 2.9% of GDP, in the third quarter of 2025. This was $22.8 billion lower than the revised second quarter deficit of $249.2 billion, or 3.3% of GDP. The smaller deficit was the result of a few factors, including a shift from a deficit to a surplus in net income payments, a larger surplus in services, and a smaller deficit in goods. The importance of this is that deficits subtract from GDP. As deficits decline, GDP will strengthen. See page 3.

The current administration, Secretary of the Treasury Scott Bessent in particular, is focused on both US deficits, including the fiscal deficit. At the end of 2025 (December), the 12-month sum of monthly fiscal deficits represented 5.4% of nominal GDP (3Q25), down from 5.7% at the end of the fiscal 2025 year and down from the 6.2% seen at the end of fiscal 2024. This 5.4% should be lower once nominal GDP for the fourth quarter of the year is released. The goal of the administration is to get the fiscal deficit to 3% of GDP or less, and to have economic activity above 3.5%. This combination would reverse the unsustainable trend seen in 2024. In the long run it should also lower long-term interest rates.

There have only been twelve trading days in 2026, but they have been interesting ones. Despite January 20^th’s 871-point decline in the Dow Jones Industrial Average, the index is up 0.9% year-to-date. The Dow Jones Transports are up 2.9%, the DJ Utility index is up 1.5%, the S&P 500 is off fractionally, and the Nasdaq Composite is down 1.2%. However, the Russell 2000 index is up a stellar 6.6% year-to-date and has been a significant outperformer in 2026. This rotation of leadership among sectors and from large-cap to small-cap equities is characteristic of a healthy bull market cycle. And while this week’s decline — sparked by a 19-basis point jump in Japanese government bond yields and anxiety related to Greenland — was the largest since October 9, 2025, it did not generate a 90% down day. Our view has not changed. The 2025 equity market was driven by better-than-expected earnings growth, and we expect the same will be true in 2026. Trailing 12-month earnings growth is currently 14.3% versus the long-term average of 8.1%. See page 6. We remain a buyer of dips.

Gail Dudack

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Economic news was surprisingly supportive of a rate cut later this month, but this was not apparent in the news headlines. Regarding inflation, Reuters wrote “US consumer inflation increases steadily, but households paying more for food and rents.” The actual CPI report showed headline inflation was unchanged at 2.7% YOY and core inflation fell from 2.8% to 2.6% YOY in December. (Note: Due to the government shutdown, there was no inflation report for October, and only partial data for November. However, for our charts, we left October data unchanged from September and incorporated BLS data for November and December. The BLS release has a chart showing headline inflation falling from 3% in September to 2.7% in November/December and core CPI falling from 3% in September to 2.6% in November/December.)

It is true that food inflation was 3.1% in December, up from 2.6% in November but this was due to stubborn inflation seen in meats, poultry, fish, and eggs at 3.9%. However, this category is down from 4.7% in November and a recent peak of 7.9% in March 2025. The other culprit in the food category is nonalcoholic beverages and beverage materials which indicated prices rose 5.1% YOY, up from 4.3% YOY in November. Food away from home has always remained high and in December it showed prices up 4.1% YOY versus 3.7% in November. Yet despite the increases in food inflation, core CPI fell because energy price inflation fell from 4.2% YOY in November to 2.3% YOY in December. The Reuters headline regarding rents is true since prices are typically rising except for periods of recession or depression, but it is still misleading since homeowners’ equivalent rent was 3.4% YOY, down fractionally from November and down from 3.8% in September. In short, don’t rely on headlines if you want the real news.

The ISM nonmanufacturing index was 54.4 in December, up from 52.6 and six of the nine components rose during the month. The declines were seen in suppliers’ deliveries, order backlog, and prices paid (a plus!). The employment index was 52.0, up from 48.9, and the sum of employment in both surveys now totals 96.9. This is good news since it carries this index safely into neutral territory and above the danger zone of 92.1 or less. See page 6. This is especially reassuring since the December job report was worrisome.

The employment report indicated a below consensus 50,000 jobs were created in the month of December. However, the underlying data was weaker since previous months were reduced by a net 76,000 jobs. In short, the 3-month average fell to a loss of 22,330 jobs per month. Most concerning is that the year-over-year change in employment shows the growth rate fell to 0.4% YOY, which is well below the long-term average of 1.7% YOY. Note that when the year-over-year change in jobs turns negative it is a near-certain sign of a recession. In contrast, the household survey was more sanguine and showed the unemployment rate fell from 4.5% in November to 4.4% in December. This was due in large part to a decrease in the civilian labor force and a 278,000 decline in the number of people unemployed. The U6 unemployment rate fell from 8.7% to 8.4%. See page 3.

Deceleration in the labor market is obvious in the numbers. Over the last twelve months, the average growth in jobs was 48,670 per month; this fell to 14,500 per month over the last six months. The current 3-month change shows a loss of 22,330 jobs per month. As we noted, December’s household survey was the most positive of the two BLS surveys, but while the household survey tends to be volatile it rarely diverges from the establishment survey for long. See page 4. Keep in mind that the jobs report for January will incorporate several revisions including the annual benchmark revision. The BLS already estimated this benchmark revision will show that the economy generated 911,000 fewer jobs than reported between April 2024 and March 2025. This amounts to roughly 71,000 fewer jobs a month, far fewer than the original estimate of 147,000 jobs created per month. On a happier note, the misery index (the sum of the unemployment rate and the rate of inflation) is 7.1% and well below the 12.5% negative level. 

Under normal circumstances December’s weak employment report coupled with December’s mild inflation report might inspire the Federal Reserve to lower rates at their January 27-28, 2026, meeting. However, the controversy over subpoenas sent to Powell asking for more information regarding the Fed’s $2.5 billion renovation project may result in a harder stance by the FOMC later this month.

Federal Reserve Chair Jerome Powell announced over the weekend that he has been indicted by the Department of Justice; however, President Trump said he was unaware of the situation. US Attorney Jeanine Pirro stated that the word indictment only came from Powell and subpoenas would not have been needed had he responded to requests for information. Nevertheless, President Trump’s comments calling Powell “incompetent or a crook,” only stoked the situation into a global media frenzy.

Equities, particularly financial stocks, fell this week after President Trump said credit card rates should be capped at 10%. We doubt that any president has the power to cap credit card rates; nevertheless, equity prices fell. President Trump is also fomenting uncertainty by urging Iranians to continue to protest and indicating that “help is on the way.” He also announced his intention to impose 25% tariffs on countries doing business with Iran. These events have pushed the capture of Nicolas Maduro, Venezuela, Greenland, and the pending Supreme Court decision on tariffs, to the background. Of these, only the decision on tariffs will have economic ramifications, in our view.

What is most important for investors is fourth quarter earnings season. In 2025, the equity market was supported by a steady string of positive earnings surprises. This will be more difficult to accomplish in 2026, but we believe it is possible. Financials typically start the earnings season and JPMorgan Chase & Co.’s (JPM – $310.90) results were less than stellar and this weighed on the stock market on Tuesday. Ten more financial stocks will be reporting fourth quarter results this week. Good earnings reports are critical.

The LSEG IBES consensus earnings estimate for 2026 fell $0.04 to $313.84 this week. The S&P Dow Jones estimate for 2026 fell $0.42 to $310.43. Our estimate for 2026 is $315, and we believe this could prove to be conservative. Although PE multiples appear rich, it is important to note that the forward earnings yield for the S&P 500 is 4.6% and the dividend yield is 1.2%. This sum of 5.8% compares well to a 10-year Treasury bond yield of 4.2%. Plus, the 12-month sum of S&P 500 operating earnings shows growth of 14.2% YOY, far better than the 75-year average pace of 8.1% YOY. On a technical basis, breadth data has been bullish. The NYSE cumulative advance/decline line made a record high on January 13, 2026. This means that advancing stocks outnumbered declining stocks despite the 398.21-point decline in the Dow Jones Industrial Average on January 13^th. The 10-day average of daily new highs is currently 461 and the 10-day average of daily new lows is 77. Since the new high list is averaging well over 100 per day, this is positive. Some have worried that sentiment has become too bullish; however, the AAII bullish index is at 42.5% and bearishness is at 30%. This is far from the 50/20 split that is negative. We remain a buyer of weakness.   

Gail Dudack

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Venezuela

Sometimes presidential actions have no economic significance, but often they do. There were many political stories to discuss this week, but the main one is that of Venezuelan President Nicolas Maduro and his wife Cilia Flores who were seized from their Caracas compound on Saturday and swiftly flown to the US as part of a special forces operation to face charges in a US federal court. Not surprisingly, politicians are looking for ways to divide public opinion and are campaigning on this action. Democrats are calling it an act of war and a US-driven regime change, while Republicans are calling it an enforcement of outstanding warrants for illegal drug, weapons, and narcoterrorism charges. There has not been a regime change in Venezuela. Delcy Rodríguez, Maduro’s vice president, is currently the acting president. Most of Nicolas Maduro’s ministers are still in their posts, and the powerful military remains loyal to her. It is also worth noting that left-of-center Wikipedia describes Maduro’s reign as “characterized by electoral fraud, human rights abuses, corruption, censorship and severe economic hardship. The United Nations (UN) and Human Rights Watch have alleged that under Maduro’s administration thousands of people died in extrajudicial killings and seven million Venezuelans were forced to flee the country due to economic collapse resulting from crippling US sanctions.”

But the seizure of Maduro could have economic as well as political repercussions. Experts are theorizing about Venezuela and Venezuela’s oil, but no one can be certain of what the future will bring. Still, oil and oil equipment stocks responded to the news as seen by year-to-date gains of 2.1% in the Energy Select Sector SPDR (XLE – $45.64) and 8.7% in the iShares DJ US Oil Equipment & Services ETF (IEZ – $22.69). See page 10. The ideal result of Maduro’s capture and imprisonment would be for current leadership in Venezuela to allow for a new election, the US helps rebuild Venezuela’s crippled resource sector, and all Venezuelans reap the benefits of a re-energized Venezuela and its wealth of oil and mineral reserves. This is aspirational but an extremely big leap. At present, one can assume that there should be more infrastructure spending in Venezuela and more oil coming to market in the future. More oil means lower oil prices, which also means lower inflation. This would be a plus for all consumers and investors and it should be good for US oil services and integrated oil companies.

Santa Claus Rally

2025 was a good year for equity investors but many are worried about 2026 for a variety of reasons. Equities did not follow seasonal patterns in the last year, yet some are still worried that there was no Santa Claus rally. The Santa Claus rally is determined by the last five trading days of the old year and first two trading days of the new year. In the S&P 500 index, this 7-day period ended with a loss of 0.11% and it was a cause for concern. The Nasdaq Composite index also lost 0.7%. However, the Russell 2000 index gained 0.3% and the Dow Jones Industrial Average gained 1.1%. In other words, not only was there a Santa Claus rally this year, but it was a demonstration of sector rotation with gains in small cap and non-technology issues. Sector rotation is a sign of a healthy bull market. So, we would ignore the naysayers and believe in Santa Claus.

Equity Ownership

Federal Reserve data regarding total household and nonprofit assets in June of 2025 showed equity ownership at a record 31%. This exceeds the prior June 2021 peak level of 30% and the March 2000 peak of 27%. Economists are worried. And when just measuring financial assets, equities represented a record 31% of household assets, far more than the 27.4% seen in June 2021 and 24.5% in March 2000. Nevertheless, the charts on page 3 explain why equity ownership has been rising. As corporations shifted pensions from defined benefit plans to defined contribution programs, household assets in pension fund reserves declined nearly 10% from a peak of 34.4% in March 2003 down to 24.8% in June 2025. Fed data includes equities owned directly or indirectly (through defined contribution or insurance plans) and therefore equity ownership levels have increased. Assets in noncorporate, or proprietors’ equity have also declined, and as a result, historical comparisons regarding household equity ownership are difficult. If one only looks at household assets in cash, bonds, and equities, the equity percentage in June was 70.5%, just below the 70.7% recorded at the end of 2021 and just above the 69.6% recorded in March 2000. Real estate ownership has also been declining, and young adults have been shut out of the real estate market due to unaffordable prices and high interest rates. As a result, we are seeing more young people investing in equities and Bitcoin. In sum, the level of household equity ownership for this generation is different and not easy to compare historically. In short, we are not worried about current equity ownership levels.

Economies by State

We were intrigued by a recent article on interstate migration. U-Haul Holding Company (UHAL – $53.37), the do-it-yourself moving and storage operator for household and commercial goods reviewed more than 2.5 million one-way transactions across the US and Canada for its 2025 Growth Index. The results showed that Texas tops the ranks of in-migration states, followed by Florida, North Carolina, Tennessee, and South Carolina. The states with the most people leaving are California, Illinois, New Jersey, New York, and Massachusetts. Blue-to-red state migration has become a hotly debated topic particularly now that states are redistricting and population has consequences in the House of Representatives. According to U-Haul, “the migration became more pronounced after the pandemic of 2020, continues to be a discernable trend, and seven of the top ten growth states currently feature Republican governors, and nine of those states went red in the last presidential election.” As a past New Yorker, who now enjoys Florida, the migration is understandable in so many ways.

The December ISM manufacturing index fell from 48.2 to 47.9, its tenth consecutive reading below 50. However, five of the ten components of the index rose for the month, and one — prices paid — was unchanged. Production fell slightly to 51.0, imports fell 4.3 to 44.6, inventories fell 3.7 to 45.2, and customers’ inventories fell to 43.3. But employment, new orders, suppliers’ deliveries, order backlog, and exports all rose. Overall, the survey was better than the headline, but manufacturing remains sluggish. See page 4.

Our recent outlook for 2026 indicated that our S&P 500 earnings estimate of $315 coupled with an unchanged trailing PE of 26 translates into a price target for the S&P of 8190. We continue to emphasize that this has been an earnings-driven rally. The LSEG IBES consensus earnings estimate for 2026 rose $1.51 to $313.88 this week. The 2027 forecast rose $1.46 to $359.43. The S&P Dow Jones 2026 earnings estimate rose $1.88 to $310.85. Both surveys are moving toward our estimate of $315, which may prove to be conservative. See page 5. At present, the forward earnings yield of 4.6% and dividend yield of 1.2% compare well to a 10-year Treasury bond yield of 4.2%. Plus, the 12-month sum of operating earnings shows a gain of 14.2% YOY, far better than the 75-year average of 8.1% YOY. And technical indicators remain positive. Most importantly, the NYSE cumulative advance/decline line made a new high on January 6, 2026, confirming the new highs in the indices. This implies the market advance is broad based and healthy. See pages 6-8.

Gail Dudack

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As expected, the Federal Reserve lowered interest rates by 25 basis points at its December meeting. It was the third consecutive meeting with a rate cut, and it brought the fed funds rate down to a range of 3.5% to 3.75%. The committee indicated that it anticipates one more quarter-point cut in 2026. The Fed also increased its median forecast for real 2026 GDP to 2.3%, up from 1.8% in September and 1.6% in June — and we believe this forecast will still prove to be too low. Unemployment expectations were unchanged and the core personal consumption expenditure inflation forecast fell slightly to 2.5%, a pace we believe could be on the high side for 2026.

At his press conference, Chairman Powell noted that “goods inflation remains elevated and the impact of tariffs remains a risk for future inflation.” We fail to see this in the numbers. Headline and core CPI have been hovering at the 3% level after rising from a 2025 low of 2.3% in April. However, goods inflation remains much lower at 2%. Even though Google states that “auto tariffs are taxes imposed on vehicles and components … raise vehicle costs for consumers, increase insurance/repair expenses, and disrupt complex global supply chains, leading to higher prices on new cars, even impacting U.S.-made ones due to imported parts.” The data shows that the price of a new auto rose a mere 0.8% YOY in September, up from minus 0.3% YOY in January. On the other hand, the broad service inflation index remained elevated at 3.7% YOY in September, down a bit from 3.9% in January. It is true that the CPI index for motor vehicle maintenance and repair was high at 7.7% YOY in September (down from 8.5% in August). But it is also true that it peaked at 14% YOY (nearly double the current level) in January of 2023, well before any tariffs were in place. See page 3. In short, recent maintenance pricing may be more “opportunistic” due to recent tariff mania, than due to imposed tariffs. We continue to point out that tariffs are not taxes. Taxes cannot be avoided. Tariffs can be avoided since consumers usually have the choice of alternative products. Moreover, tariffs are often absorbed or mitigated by foreign producers, foreign governments, intermediaries, and domestic sellers, well before they reach the consumer. This is not true of taxes. November CPI data will be released later this week.

Delayed releases are being reported this week and the most important of these is employment. November employment increased by 64,000, which was above expectations, however, it was offset by a loss of 105,000 workers in October. Federal jobs declined by 6,000 in November and a massive 162,000 in October. The October loss included federal employees who accepted a deferred resignation offer which became effective in October. August data was also revised down by 22,000 and September was revised down by 11,000. After all these revisions the 6-month pace of job growth fell from 53,000 in September to 16,670 in November. The year-over-year rate of change was 0.6% in November, down from 0.8% in October and quickly approaching a dangerous negative level. This decline in job growth is a big concern of ours since year-over-year declines in employment correlate highly with recessions. Moreover, the BLS has already announced its annual benchmark revision will be published with January’s employment report. It is estimated to lower total employment by 911,000.

In contrast to the establishment survey, the household survey showed employment increased by 323,000 in November. However, the household survey was not done for October, and this could be an estimate for November. This series can also be volatile, so we are not sure how to incorporate it into our analysis.

The household survey also includes the unemployment rate which rose to 4.6% from 4.4% in September. See page 4. However, while the regular unemployment rate rose from 4.4% to 4.6% the U6 unemployment rate which includes marginally attached workers plus total employed part-time for economic reasons rose from 8.0% to 8.6%. In line with this, discouraged workers rose to 681,000, the highest level since July 2020. In short, the job market is clearly weakening. See page 5.

People working part time for economic reasons rose by 909,000 to 5.49 million in November. October data was not available, so this change was between September and November; however, the 5.49 million was the highest level since the 5.8 million reported in January 2021 in the post-pandemic era. The brightest part of November’s report was that total average weekly earnings rose 3.5% YOY and earnings for production and nonsupervisory employees rose 4.2% YOY. Both were above the rate of inflation. Average weekly hours for private industry workers increased from 34.2 to 34.3 hours. See page 6.  

The employment cost index (ECI) was 3.6% in the third quarter, unchanged from the first and second quarters, but down from 3.9% seen a year earlier. It is also down substantially from the 5.1% peak seen in the second quarter of 2022. The ECI is likely to continue to fall as the implementation of AI expands and raises productivity. This will be good news for employers, corporate earnings and for inflation. Labor costs are the largest expense for most businesses and the gap between labor costs and inflation (the ability to pass on these costs) is narrowing, which is a favorable trend and a positive for future earnings. See page 7.

However, in terms of the ECI, there is a distinct difference between private and government workers compensation and costs. According to the BLS, as of June 2025, total compensation for civilian workers averaged $48.05 per hour worked. Total compensation costs for private industry workers averaged $45.65 per hour worked and state and local government workers averaged $63.94 per hour worked or were 40% higher. Within employer costs, benefit costs averaged $15.03 per hour worked for all civilian workers in June 2025, $13.58 per hour worked for private industry workers and $24.63 per hour worked for state and local government workers. This means benefits costs were 80% higher for government workers than private industry workers. This differential does not get much publicity, but perhaps it should. There were also big differences between paid leave, insurance costs, and retirement benefits, with costs for government workers much higher than for private workers. See page 8.

It is also worth noting that the federal deficit for November was $173.3 billion, down roughly 50% from a year earlier. The fiscal deficit year-to-date is $457.6 billion, down 25% from a year earlier. The reduction materialized from a combination of higher tax receipts and lower outlays. This is an important statistic for the debt markets, since this administration inherited deficits that were running at 7.2% of GDP in January. The current 12-month deficit through November was 5.3% of second quarter nominal GDP. This is an impressive accomplishment, and we believe GDP will be much higher in the third and fourth quarters – which means the ratio to GDP is even lower. The trade deficit also improved in September to negative $52.8 billion after peaking at negative $136 billion in March. This is decline in the trade deficit will translate into a higher GDP in the third quarter. All in all, while eyes are focused on the weak employment report and the upcoming CPI report later this week, there was good news in the cost of labor and the twin deficits. We remain a buyer of dips.

Gail Dudack

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