Categories:
Key areas of focus
- Earnings season kicks off this week, led by large U.S. financials. The macro calendar is equally busy. Key releases include December CPI, PPI, Retail Sales, and Industrial Production, with January Empire State and Philly Fed surveys offering early insight into manufacturing momentum and broader economic activity.
- Friday’s jobs report reinforced signs of labor market cooling. December payrolls rose by just 50,000, well below expectations, while the prior two months were revised down by a combined 76,000. For all of 2025, monthly job growth averaged 49,000, which was less than one-third of 2024’s pace.
- Small-cap stocks have regained momentum to start the year. U.S. small caps outperformed their large-cap peers by a wide margin, with the Russell 2000 climbing 4.6% last week and reaching a new record high. Over the past six weeks, the index is up nearly 14%, highlighting a meaningful shift in market leadership.
Week in review
Markets entered the first full week of 2026 amid heightened uncertainty following the U.S. military’s removal of Venezuelan President Nicolás Maduro over the weekend. We published a separate market bulletin outlining potential implications for oil markets, geopolitics, and the global economy. Despite the headlines, U.S. equities moved higher on Monday. Manufacturing data remained soft, with the ISM slipping further into contraction. However, there is a disconnect between weak ISM readings and strong equity performance. Over the past three years, the S&P 500 is up roughly 70% despite the ISM being below 50 in all but two months. Stocks extended gains Tuesday amid a quiet macro backdrop. Wednesday’s data was mixed with job openings falling sharply while service-sector activity rebounded to its strongest level since late 2024. Equities were flat Thursday as investors digested strong productivity gains, declining unit labor costs, and a sharply narrower trade deficit driven by gold and pharma. Stocks finished higher Friday, capping a strong first full week of 2026 following softer payroll growth, weaker housing starts, firmer building permits, and improving consumer sentiment.
Spotlight
The U.S. economy may be entering a somewhat unusual phase. One that has solid economic growth, but sluggish hiring. Rising productivity is allowing firms to do more with fewer workers. The Bureau of Labor Statistics reported on Thursday that Nonfarm productivity rose 4.9% in Q3 on an annualized basis, matching consensus expectations and accelerating from 4.1% in Q2. That level is near the top end of productivity growth observed since 2022 and marks a notable improvement relative to pre-pandemic trends. Technology is widely viewed as a key driver of these improvements, with AI adoption increasingly cited as a source of efficiency gains. During the Q3 earnings season, companies across several sectors discussed productivity gains tied to AI initiatives. However, despite the optimism, few have explicitly reported significant/tangible cost savings to date. Beyond technology, other factors may also be contributing, including more flexible work environments and management teams running leaner after reassessing labor needs during the pandemic.
Markets
Sectors
Style & Market Cap
Sources
Institute for Supply Management, Institute for Supply Management (ISM) Purchasing Managers Index (PMI) Manufacturing Report, retrieved from ISM, https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/pmi/december/
2. JOLTS Report
U.S. Bureau of Labor Statistics, Job Openings and Labor Turnover Survey, retrieved from U.S. Bureau of Labor Statistics; https://www.bls.gov/jlt/
3. ISM Services
Institute for Supply Management, Institute for Supply Management (ISM) Purchasing Managers Index (PMI) Services Report, retrieved from ISM, https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/services/december/
4. Trade Deficit
Bureau of Economic Analysis, International Trade in Goods and Services, retrieved from BEA, https://www.bea.gov/data/intl-trade-investment/international-trade-goods-and-services
5. Jobs Report
U.S. Bureau of Labor Statistics, Employment Situation Summary, retrieved from U.S. Bureau of Labor Statistics; https://www.bls.gov/news.release/empsit.nr0.htm
6. Consumer Sentiment
Surveys of Consumers, University of Michigan Consumer Sentiment Index Summary, retrieved from University of Michigan, https://www.sca.isr.umich.edu/
7. Nonfarm Productivity
U.S. Bureau of Labor Statistics, Productivity, retrieved from U.S. Bureau of Labor Statistics; https://www.bls.gov/news.release/prod2.nr0.htm
8. Housing Starts & Building Permits
United States Census Bureau, Monthly New Residential Construction, retrieved from U.S. Census, https://www.census.gov/construction/nrc/current/index.html
Market Data
Morningstar Direct using Morningstar Indices
Authors:
Anthony Silva, CFA®
Senior Director of Strategy Management
World Investment Advisors, LLC