Weekly Market Recap: Stocks Start 2026 Strong as Small Caps Surge and AI Demand Stays Hot

Market Overview

Headlines were plentiful during the first full week of 2026, but markets largely looked through the noise and pushed higher. U.S. equities posted broad gains, led by small caps and cyclical sectors as investors rotated beyond the largest tech names. The SCP 500 rose +1.6%, the Nasdaq gained +1.9%, and the Dow added +2.3% - while the Russell 2000 surged +4.6% to new highs.

Sector leadership told the story of improving breadth. Consumer Discretionary (+5.8%) and Materials (+4.8%) led, followed by Industrials (+2.5%) and Communication Services (+2.4%). Utilities (-1.6%) was the lone laggard, while Technology finished flat for the week - an unusual dynamic for a positive tape.

Internationally, European equities advanced as technology names helped lift sentiment and key inflation data remained consistent with the ECB’s 2% target. Asian markets were mostly higher, with strength in major tech and AI-linked names supporting Taiwan and South Korea.

In fixed income, core bonds were modestly higher, with the Bloomberg U.S. Aggregate up +0.35% as yields ended the week little changed overall. The 2-year Treasury yield rose to 3.54%, while the 10-year edged to 4.18%. Credit also held up well, with investment-grade corporates +0.34% and high yield +0.39%.

Commodities strengthened alongside the U.S. dollar. Crude oil finished the week higher on renewed geopolitical risk, while gold and silver rallied, continuing their strong tone from late 2025.

Federal Reserve Insights and Economic Roundup

Friday’s jobs report delivered a mixed signal - and the revisions were the bigger headline than the print. December payroll growth came in +50,000 net of revisions, and the three- month average slipped into negative territory (-22,000) after running above 200,000 earlier last year. The unemployment rate ticked down to 4.4%, and wage growth remained firm, with average hourly earnings up 3.8% year-over-year.

The takeaway: hiring demand appears to be cooling more than labor supply is tightening. That’s not an immediate “hard landing” signal, but it’s a reminder that the labor market’s margin of safety is shrinking. For the Fed, a steady unemployment rate and wages still outpacing inflation argue for patience - but weakening hiring trends keep the door open to easier policy if the slowdown broadens.

On the housing and rates front, mortgages remain elevated but eased slightly on the week (30-year fixed around 6.22%). Markets also focused on Washington headlines tied to housing finance, which helped put mortgage-backed securities back in the spotlight.

The Week Ahead

Some U.S. government releases may remain intermittent following the recent shutdown.

Monday: No economic releases scheduled

Tuesday: NFIB Small Business Optimism (Dec); Headline C Core CPI (Dec); Real Average Weekly/Hourly Earnings (Dec); New Home Sales (Sep C Oct); Federal Budget Balance (Dec)

Wednesday: MBA Mortgage Applications (Jan 9); Headline C Core PPI (Oct C Nov); Retail Sales (Nov); Current Account Balance (3Q); Existing Home Sales (Dec); Business Inventories (Oct); New Home Sales (Nov)

Thursday: Philadelphia Fed Business Outlook (Jan); Initial Jobless Claims (Jan 10); Continuing Claims (Jan 3); Import C Export Price Indexes (Oct C Nov); Empire Manufacturing (Jan); Total Net TIC Flows (Nov); Net Long-term TIC Flows (Nov)

Friday: New York Fed Services Business Activity (Jan); Industrial Production (Dec); Manufacturing (SIC) Production (Dec); Capacity Utilization (Dec); NAHB Housing Market Index (Jan)