Weekly Market Recap: Markets Absorb Earnings and Fed Noise as Leadership Rotates Beneath the Surface

Market Overview

U.S. equities ended the week modestly lower as investors digested a steady flow of earnings, geopolitical developments, and continued sector rotation. The S&P 500 slipped 0.4% for the week, while the Dow Jones Industrial Average declined 0.3% and the Nasdaq Composite fell 0.7%, pressured by weakness in large-cap growth. In contrast, small caps continued to lead, with the Russell 2000 advancing 2.1%, extending its relative outperformance early in the new year.

Beneath the surface, market leadership continued to broaden. Real estate, consumer staples, and energy posted the strongest weekly sector gains, while technology and financials lagged. Big tech stabilized late in the week after Taiwan Semiconductor’s strong earnings reaffirmed confidence in long-term artificial intelligence demand, helping cap broader market losses.

International markets outperformed U.S. equities. Developed international stocks gained 1.4%, while emerging markets rose 2.3% for the week. European equities posted their fifth consecutive weekly advance, supported by energy stocks and improving growth data. In Asia, Japan’s equity markets surged more than 5%, reaching new highs amid speculation of a snap election and continued fiscal support, while South Korea rallied on renewed tech optimism. Chinese equities lagged modestly following regulatory efforts to curb speculative activity.

Federal Reserve Insights and Economic Roundup

Treasury markets reflected little concern over renewed headlines surrounding Federal Reserve independence. The Bloomberg U.S. Aggregate Bond Index edged higher as yields declined modestly, with the 10-year Treasury finishing the week near 4.24%. Inflation expectations eased and demand at U.S. Treasury auctions remained strong, signaling continued confidence in policy stability.

Inflation data showed continued progress, though not enough to declare victory. Several goods categories posted outright price declines, while core services inflation continued to cool. “Super-core” inflation has fallen meaningfully from mid-2024 highs, reinforcing the view that inflation pressures are gradually easing. That said, near-term inflation remains slightly above comfort levels, keeping the Fed in pause mode.

The balance of risks continues to tilt toward the labor market. Forward-looking indicators suggest slower job growth and rising unemployment ahead, with expectations that the unemployment rate could approach 4.6% by the end of the quarter. Markets are now pricing fewer than two rate cuts in 2026, with the Fed likely waiting for clearer labor market weakness before acting.

In credit markets, spreads remain near historic tights amid heavy issuance and strong institutional demand. Municipal bonds have started the year well, supported by seasonal reinvestment flows and improving relative value.

The Week Ahead

Monday: Markets closed for Martin Luther King, Jr. Day
Tuesday: ADP Employment Change, Philadelphia Fed Non-Manufacturing
Wednesday: MBA Mortgage Applications, Building Permits, Leading Index, Pending Home Sales
Thursday: GDP (3Q final), Personal Income and Spending, PCE Inflation, Initial Jobless Claims
Friday: S&P Global PMIs, University of Michigan Consumer Sentiment, Kansas City Fed Services