Weekly Market Recap: Markets Navigate AI Scrutiny, Fed Leadership Shift, and Currency Crosscurrents
Market Overview
Markets closed the final full week of January under pressure as investors digested a heavy mix of earnings results, central bank developments, and sharp currency moves. U.S. equities finished mostly lower on the week, retracing early gains after renewed scrutiny around artificial intelligence spending weighed on large-cap technology. Despite the late pullback, major indexes remained positive year-to-date, reflecting resilient underlying breadth.
The S&P 500 rose 0.35% for the week, while the Dow Jones Industrial Average slipped 0.42%. Small caps underperformed meaningfully, with the Russell 2000 falling 2.07% as leadership rotated back toward index heavyweights. Growth stocks lagged value, with the Russell 1000 Growth down 0.48% compared to a 0.62% gain for value.
Communication Services and Energy led weekly gains, while Health Care, Consumer Discretionary, and Technology lagged amid renewed concerns over AI capital spending. On a year-to-date basis, Energy continues to lead all sectors, while Technology and Financials remain modestly negative.
International markets were comparatively steadier. European equities advanced modestly, extending their longest monthly win streak since August 2021, supported by improved trade optimism and strong corporate results. Asian markets were mixed: Japanese equities declined sharply as yen strength pressured exporters, while South Korea outperformed on continued AI-driven semiconductor demand. Emerging markets continued to lead on a year-to-date basis, up nearly 9%.
Federal Reserve Insights and Economic Roundup
The Federal Reserve left policy rates unchanged at its January meeting, as expected, with a 10–2 vote reflecting slightly more consensus than recent meetings. Officials struck a more balanced tone on inflation and employment, removing references to “downside risks” in the labor market. This shift signals policymakers now see the dual mandate as largely in equilibrium.
Bond markets reacted calmly to the decision. The Bloomberg U.S. Aggregate Bond Index was essentially flat on the week, while the yield curve continued to flatten as rate-cut expectations were gradually priced out. Short-term yields remain attractive, with the 2-year Treasury ending the week at 3.52%, while the 10-year finished near 4.26%.
Late-week attention shifted to Washington after President Trump nominated Kevin Warsh as the next Federal Reserve Chair. Markets interpreted the nomination as potentially more supportive of rate cuts later this year, prompting a modest steepening of the yield curve as shorter yields declined and longer yields edged higher. If confirmed, Warsh would bring a more disciplined monetary stance focused on balance-sheet restraint, even as inflation remains somewhat elevated.
Bottom line: With inflation and employment risks appearing more balanced, a March rate cut looks unlikely. Markets now expect easing to begin later in 2026 as housing pressures ease and tariff-related cost pass-throughs fade.
The Week Ahead
Monday: U.S. equities rallied to start the week, with the S&P 500 hitting a fresh all-time high as investors rotated back into mega-cap leaders ahead of heavy earnings and the January FOMC meeting.
Tuesday: Markets traded choppily as investors digested early earnings results and positioning remained cautious ahead of the Fed’s policy decision and upcoming big tech reports.
Wednesday: Stocks were little changed after the Federal Reserve held rates steady and struck a more balanced tone on inflation and employment, leaving rate-cut expectations largely intact.
Thursday: Equities sold off sharply, led by technology, as renewed scrutiny around AI spending followed Microsoft’s earnings and raised questions about the durability of the AI-driven rally.
Friday: Markets stabilized but risk appetite remained limited after President Trump nominated Kevin Warsh as the next Fed Chair, while investors continued to weigh earnings results and late-week currency volatility.