The Senate confirmed Kevin Warsh as the 17th Federal Reserve Chair on May 13 by a vote of 54–45. One Democratic senator crossed the aisle. Jerome Powell’s term as Chair expired May 15. He is staying on the Board of Governors — the first former Fed Chair to do so in roughly 75 years — because his governor term runs to January 2028 and because, apparently, the institution needs continuity in a way that the Trump administration is not providing. What this means in practice: Powell has a vote at the June 16–17 FOMC meeting, on a committee he no longer chairs, presided over by a man who was not his choice, facing the first hot inflation print of the new regime. The market priced all of this correctly in the initial days of the week. The S&P 500 set a new all-time high of 7,501.24 on Thursday. The Dow reclaimed 50,000 for the first time since the Iran war began in late February, closing at 50,063.46. The Nasdaq reached 26,635 intraday. Cisco had just reported $15.8 billion in revenue, record AI orders raised to $9 billion for the year, and the stock surged 15% after-hours. Applied Materials followed with $7.91 billion in quarterly revenue and a gross margin of 50% — its highest in 25 years. The AI capex supercycle narrative was alive and validated and priced into equities at new record levels.

Then the bond market voted. The 10-year Treasury yield rose roughly 12 basis points on Friday alone to close at 4.60%, its highest level since the spring of 2025. The 2-year added 9 basis points to 4.09%. The curve steepened to +51 basis points — not because growth is accelerating, but because the market is pricing out any 2026 cuts and beginning to take seriously the possibility that the next Fed move might not be a cut at all. The S&P 500 fell 1.24%. The Dow gave back 537 points. The Nasdaq shed 1.54%. The Russell 2000 — rate-sensitive, energy-cost-exposed, the canary in the macro coal mine — dropped 2.4%, the week’s worst performer. The proximate cause was oil. Brent crude moved above $111 a barrel on Friday. The Strait of Hormuz entered its 76th day closed to commercial traffic. Iran called U.S. demands “Unreasonable.” Trump called Iran’s counter-proposal “a piece of garbage.” The Pentagon said mine-clearing could take up to six months. The IEA has characterized this as the largest oil supply disruption in modern history. None of that was new information on Friday. What was new was the April CPI: +3.8% year-over-year, the hottest print since May 2023. And the April PPI: +6.0% year-over-year, the largest gain since December 2022. And the April NFP: +115,000 — well above the 48,000–55,000 consensus. That combination — accelerating inflation, resilient labor market, oil above $111, and a brand-new Fed Chair inheriting an FOMC whose forward rate expectations have already collapsed from 80 basis points of 2026 cuts to fewer than 20 — is the definition of stagflation risk re-entering the narrative. The record close on Thursday was real. The Friday reversal was also real. The question Warsh now owns: which of those two days describes 2026?

Nvidia reports on May 20. The consensus expects $78.8 billion in revenue — 78% year-over-year growth. The stock went into the week at all-time highs. JPMorgan noted that Mag-7 earnings growth is running more than 40 percentage points above the rest of the index. Cisco’s AI order trajectory and AMAT’s record margins say the infrastructure buildout is intact. The bull case says the AI capex cycle is large enough to sustain earnings growth even if the cost of capital rises. The bear case says 4.60% on the 10-year, CPI at 3.8%, a new Fed Chair with unknown reaction functions, and oil at $111 is not a backdrop for record P/E multiples. Both cases were represented in the same week. The ATH happened Thursday. The bond market answered Friday.

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The Federal Open Market Committee voted 8-4 on April 29 to hold the federal funds rate at 3.50–3.75%. That is the most divided the Committee has been since October 1992, and the split is not a footnote. On one side, Governor Miran argued for an immediate cut. On the other, Presidents Hammack, Kashkari, and Logan pushed to remove the easing bias entirely—effectively arguing that the next move might be up, not down. Powell held the center, kept rates unchanged, and delivered what markets will remember as his final press conference as Chair. He will remain as a Governor, but the institutional signal was unmistakable: the person who guided the Fed through the 2022 hiking cycle, the 2023 pivot debate, and the 2024–2026 cuts is stepping back from the podium at precisely the moment when the Committee can’t agree on its own direction. The bond market processed that complexity efficiently. The 10-year Treasury yield rose 8 basis points to 4.39%. The 2-year added 9 basis points to 3.89%. The curve is steepening, but not because growth is accelerating—it’s because no June cut is coming, and the path beyond June is genuinely unclear. The Strait of Hormuz remains closed, the ISM Manufacturing Prices subindex printed 84.6 in April (the highest since April 2022), and Core PCE for March came in at 3.2% year-over-year, the hottest reading since November 2023. That is the inflation data the next Fed Chair will inherit.

The week of April 27–May 1 was the most consequential earnings stretch of 2026, and the market’s verdict was surgical in a way that tells you something important about where we are in the cycle. Alphabet reported $109.9 billion in revenue, up 22%, with Cloud accelerating 63% to $20 billion—a genuine beat, and the stock jumped 10% the next session. Microsoft reported $82.9 billion in revenue, Azure up 40%, a clean beat on the headline—and the stock sold off 3% because the company guided $190 billion in full-year capital expenditure. Meta reported $56.3 billion in revenue, up 33%, $7.31 in EPS—and fell 5% after-hours because CapEx guidance came in at $125–$145 billion for the year. Amazon reported $181.5 billion in revenue, AWS up 28%, net income of $30.3 billion boosted by the Anthropic investment—broadly well-received. Apple reported Q2 FY2026 on April 30: $111.2 billion in revenue, EPS of $2.01, a $100 billion buyback authorization, and the stock added 3.2% on May 1. The sorting principle is not which company grew faster. It is which growth came with visible capital discipline versus unconstrained infrastructure spending. Cloud growth at Alphabet was rewarded because the return profile looks credible. CapEx at Microsoft and Meta was punished because $190 billion and $145 billion are numbers that require long holding periods to justify. The S&P 500 closed at a new all-time high of 7,230.12 on May 1. The Nasdaq ended the week at 25,114.44, also a record, capping what was April’s best month since 2020 at +14%. The index hit those numbers while the market was simultaneously telling two of the five mega-cap companies that their spending plans were a problem.

The macro data framing those records deserves its own paragraph. Initial jobless claims for the week ending April 26 printed 189,000—the lowest reading since 1969. That is not a typo. The labor market is not breaking. ISM Manufacturing for April came in at 52.7, an expansion reading, with the Prices Paid subindex at 84.6—the highest since April 2022, when the Fed was still in the early stages of its historic tightening cycle. Both the employment and the inflation data are running hotter than the Committee’s models projected. The VIX closed Friday at 16.99, down from 18.92 the prior week. The Russell 2000 closed at 2,812.82, up roughly half a percent on the day. The Dow finished at 49,499.27, essentially flat, continuing to lag on a relative basis as the chart above illustrates. The April NFP print will arrive May 8 and will either confirm that the labor market tightness is durable or provide the first genuine softening signal of the year. What the current data combination—ATH equities, 189K claims, 84.6 ISM Prices, a divided FOMC, and a still-closed Strait—most resembles is not the soft landing. It resembles the last quarter before the soft landing narrative breaks in one direction or the other.

The Bank of Japan’s April 28 decision was a 6-3 hawkish hold—meaning the Committee held at current rates but three members voted to hike immediately to 1.00%, and the FY2026 core CPI forecast was lifted from 1.9% to 2.8%. That is not a central bank preparing to ease. The Nikkei 225 closed above 60,000 for the first time in its history on April 27, touching 60,537 before pulling back—with Tokyo then closed for Golden Week through May 6. The index is the dominant story in international developed markets, running well above the S&P 500 on a relative basis across the four-month period. June 15–16 is now the live date for the next BoJ hike, with implied probability sitting near 66%. What the BoJ decision clarified is that Japan’s central bank is more concerned about inflation persistence than about the yen’s structural weakness—a posture that the FX market tested immediately and violently. The STOXX 600 finished essentially flat for the week at 611.55. The DAX added 0.6% to roughly 24,339, the strongest performer in continental Europe, benefiting from industrial activity that has not yet been fully repriced for energy cost inflation. The FTSE 100 at 10,364, roughly flat on the week, continues to lag, weighed down by a UK inflation print that came in at 3.3% in March—three-tenths above the Bank of England’s own forecast—and a Bank of England that has held at 3.75% with its next decision meeting not until June 18.

The ECB held unanimously at 2.00% on April 30, but Lagarde’s characterization of the decision as “informed but based on insufficient information” is among the more honest admissions from a central bank in recent memory. The Committee debated a hike. Both the adverse and severe macro scenarios embed two hikes in their projections. Q1 GDP came in at just +0.1% quarter-on-quarter, below the 0.2% consensus, as energy cost transmission worked its way through the industrial base. April CPI for the eurozone surged to 3.0%, with energy up 10.9%—a direct function of the Hormuz supply shortfall and TTF gas at €45.41 per megawatt-hour, up 39% year-on-year. On the earnings side, BP reported Q1 profits up 453% year-on-year to $3.8 billion—the highest quarterly figure in four years—and Adidas topped guidance by 16%. Shell reports May 7. The energy sector is the clearest beneficiary of the Hormuz disruption and the reason XLE is the best-performing US sector at +10.3% year-to-date, even as nearly every other cyclical sector lags. What the international developed chart shows is an asset class that has been outperforming the S&P 500 for four months straight, driven by earnings momentum and a weaker dollar, now beginning to price a more complicated second half.

The Strait of Hormuz remains closed. Brent crude peaked intraday at $126 on April 29—a four-year high—before reversing to approximately $105 by April 30 as a combination of demand destruction signals and short-covering unwound the spike. WTI was trading in the $103–$106 range on May 1. The EIA’s April estimate puts the supply shortfall at 9.1 million barrels per day. Approximately 2,000 vessels remain trapped. The IRGC announced a “new management framework” for the Persian Gulf on May 2, language that neither reopens the Strait nor signals imminent resolution. The War Powers Act 60-day clock expired May 1; the Trump administration is claiming a “ceasefire” pauses it, a legal position that has not been tested in a comparable context. The UAE left OPEC effective May 1, the most significant structural change to the cartel’s composition in years, removing a member that has increasingly aligned production decisions with market pricing rather than cartel discipline. Against that backdrop, Korea’s KOSPI hit a new intraday all-time high above 6,750 on April 30, closing at 6,598.87 on May 1—a pullback of 1.38% from the high, but still the dominant performer in the EM complex. Korea is a net energy importer and a semiconductor exporter, and the AI buildout cycle that is punishing Microsoft’s CapEx multiples is simultaneously driving demand for the chips Korea’s fabs produce. The EEM ETF closed May 1 at $63.50, up 15.99% year-to-date.

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The S&P 500 closed Friday at 7,126.06. That is a record high. The Nasdaq gained 6.8% on the week, extending its winning streak to 13 consecutive sessions. The Russell 2000 surged 5.6%, bringing its year-to-date return to +11.9%—nearly triple the S&P 500’s +3.6%. The Dow finished at 49,447.43, up 3.2% on the week. Every major index is now above its January 1 starting line. The VIX collapsed from 19.23 to 17.48. By the numbers, this was one of the best weeks of 2026. The market is celebrating. And here is what it is celebrating: a statement by Iran’s Foreign Minister on Friday morning that the Strait of Hormuz is “completely open.” That single sentence, issued at 8:14 a.m. Eastern time, moved global asset prices by trillions of dollars. Trump echoed the claim on Truth Social. Both said “completely open.” Yet Hapag-Lloyd, Maersk, and the Norwegian Shipowners’ Association all said they would not send ships through until safety and insurance questions are resolved. Only two vessels transited on Thursday. The strait is “open” the way a road with mines on it is open: technically passable, practically terrifying.

The sector breakdown tells a story the headline index conceals. Energy—XLE—fell nearly 5% on the week as WTI crude collapsed 13.2% to roughly $84 and Brent dropped roughly 10% on the week to $90.38. Yet XLE remains the year’s best-performing sector at approximately +22% year-to-date, which tells you how far it had run in the preceding weeks. At the other end, consumer discretionary (XLY) surged +6.66% on the week as falling oil prices fed through to consumer spending expectations. IGV, the software ETF, sits near 52-week lows at approximately -27% year-to-date. The spread between sector winners and losers is not narrowing—it is simply rotating. Small caps are the notable story on the domestic side: the Russell 2000’s +11.9% YTD return versus the S&P 500’s +3.6% represents the clearest regime signal in domestic markets. The bounce from mid-March has not merely recovered the crash—it has exceeded the pre-crash highs.

The macro data was mixed in ways that matter. March CPI came in at 3.3% headline and 2.6% core—hotter than most hoped, cooler than feared. Initial jobless claims beat at 207,000. The Philadelphia Fed index printed 26.7, a substantial beat. But industrial production missed at -0.5%. Bank earnings were excellent across the board: JPMorgan reported $5.94 EPS, Goldman Sachs hit $17.23 billion in quarterly revenue—its second-highest quarter ever with segment records across the board, Citigroup grew earnings 14%, Bank of America 7%. Netflix beat on EPS but fell 10% after guiding weak on Q2 subscriber growth. The FOMC meeting is April 28–29, and betting markets assign a 99% probability of a hold. Oil’s collapse this week is being read as incrementally positive for a June cut, but the Fed’s credibility is staked on not cutting into record equity prices. The market is pricing a soft landing. What it may be getting is a ceasefire rally into a binary geopolitical event.

The STOXX 600 closed at 626.58, marking its fourth consecutive weekly gain and a +1.91% advance on the week. The DAX rose 3.77% to 24,702. The Nikkei 225 gained 2.73% and touched an all-time high of approximately 59,500 on Thursday before settling at 58,476—the latest benchmark to join the record-high club in what is becoming an unusually synchronized global equity rally. The FTSE 100 lagged at +0.63% to 10,668, held back by stubbornly elevated UK inflation. The ECB is widely expected to hold at its April 30 meeting, with approximately 97% probability priced in. Eurozone CPI sits at 2.6%, and a June hike is increasingly discussed rather than dismissed. ASML had a standout week, reporting €8.8 billion in sales with a 53% gross margin—numbers that confirm semiconductor infrastructure spending is accelerating even as software multiples compress. TTF natural gas fell nearly 10% to €38.6 per megawatt-hour, a six-week low, as the Hormuz relief trade spread from oil to gas.

Japan is the chart’s central irony. The Nikkei hit an all-time high while the Bank of Japan’s hike probability collapsed from approximately 70% to approximately 10%. BoJ Governor Ueda refused to signal any tightening at the IMF/G20 meetings, citing Hormuz uncertainty and global financial conditions. The consensus has shifted: June or July is now the expectation. USD/JPY sits at 159.24, just under the 160 psychological trigger that Finance Minister Katayama has warned against. He has warned before. The market has heard warnings before. The BoE is projected to hold at 3.75% through all of 2026 as UK GDP beat with +0.5% month-over-month growth—a data point that sounds positive until you consider that it’s coming alongside inflation that refuses to cooperate. Europe is outperforming the S&P 500 year-to-date by a meaningful margin, but that margin was built in the first six weeks of the year before the Hormuz crisis rewired every cross-asset correlation.

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The market had its best week of the year, and it happened because of a ceasefire that has already begun to unravel. The S&P 500 surged 3.56% to close at 6,816.89. The Dow added 3.03% to 47,916.57. The Nasdaq led with a 4.68% gain to 22,902.89. The Russell 2000 jumped 4.00% to 2,630.59, pushing small caps to +1.9% year-to-date—outperforming the large-cap index by nearly six points on a relative basis. Look at the chart above. The mid-March crash—the one that sent small caps deep into the red—is visibly recovering. The S&P 400 and Russell Microcap led the bounce, which is exactly what you would expect from a risk-on, ceasefire-driven relief rally. Smaller companies are more domestically oriented, more sensitive to liquidity conditions, and more responsive to fear dissipation. When the VIX collapses from 23.87 down to 19.49 in a single week, it is small caps that move first.

The sector story is extraordinary and has not gotten the attention it deserves. Energy came into this week up roughly 41% year-to-date, a number that simply has no precedent in modern market history for a full calendar-year run. Then came the ceasefire. Oil crashed nearly $19 per barrel in a single session—the largest one-day dollar collapse since April 2020. WTI settled at $96.57. Brent at $95.20. XLE—the energy ETF—fell 3.9% on the week and is now approximately +27% year-to-date, having given back roughly a third of its peak gains almost instantly. On the other end: IGV, the software ETF, sits at $74.67, down 27.5% year-to-date, hitting a fresh 52-week low. A 54-point spread between the best and worst performing major sectors is not a market anomaly. It is a market that has been repriced around a single geopolitical variable for four straight months. UMich consumer sentiment printed 47.6—an all-time record low—and you can draw a straight line from oil prices through gasoline through consumer confidence to that number. March CPI headline came in at 3.3% year-over-year. Gasoline was up 21.2% month-over-month, the largest single monthly gain ever recorded. Core at 2.6%. This is not mysterious.

The 10-year Treasury closed at 4.31%. That number tells you something the equity bulls may not want to hear: the bond market is not celebrating the ceasefire. Oil down $19, inflation impulse fading, and yet the 10-year barely moved. That means the bond market has already partially priced out the oil-driven inflation spike—and what remains is structural. The rate cut cycle is not being brought forward by this ceasefire. The Fed is still data-dependent, the data is still hot, and the uncertainty shock from the Strait closure is not fully resolved. The VIX at 19.49 is lower than last week but still elevated relative to the 2024 baseline. This market is pricing relief, not resolution. And those are very different things.

Europe had a massive week. The MSCI Europe indices are at or near year-to-date highs on a relative basis against the S&P 500, and the chart above shows why: while US equities were crashing through mid-March as the Hormuz disruption worsened, Europe—which depends heavily on Gulf oil but had partially pre-hedged through LNG diversification post-Ukraine—was simultaneously pricing both the energy risk and the possibility of resolution. When the ceasefire hit, Europe ripped harder than the US on a percentage basis. The DAX, CAC 40, and FTSE all surged. European small caps, which had been the best-performing cohort globally even through the worst of the crisis due to domestic demand insulation, extended that lead. The ceasefire is particularly meaningful for Europe because natural gas, which had been creeping back toward post-Ukraine highs as Hormuz-linked LNG shipments backed up, has begun to ease. This matters more to a German manufacturer or a Spanish consumer than it does to a Midwestern service business.

Asia Pacific is a more complicated picture. Japan’s Nikkei bounced hard on the ceasefire news—oil down sharply is unambiguously good for a country that imports essentially all of its energy—but the yen story is still working against Japanese equities on a dollar-adjusted basis. USD/JPY sits at 159.25. The yen has weakened steadily against the dollar throughout this entire period, which means that MSCI Asia Pacific returns in dollar terms lag the headline Nikkei index. The April 27–28 Bank of Japan meeting is now the key event: markets currently price a 57% probability of a hike. If the BoJ moves, the yen strengthens, Japanese equities fall in local terms but rise in dollar terms, and the carry trade unwinds again. The 2024 carry trade unwind episode should still be fresh in everyone’s memory. It is not a small risk. Meanwhile, MSCI Asia Pacific Small Cap remains the worst-performing developed market cohort year-to-date, still sitting well below the S&P 500 reference line. The bounce was real but the hole is deep.

The two-week ceasefire created a binary flip in emerging markets that the chart above makes visible. EM Latin America large cap—driven by Brazil’s Petrobras, Mexico’s Pemex, and Colombia’s Ecopetrol—has been the top-performing EM cohort all year, precisely because these are net oil exporters benefiting from elevated crude prices. Now oil has crashed $19 in a week. This will hit EM LatAm earnings. But here is the counterintuitive point: those stocks barely sold off. The market is treating the ceasefire as temporary, and the forward oil price curve reflects that. The ceasefire lasts two weeks. The Strait is not open. Only 15 ships transited in the first three days post-ceasefire announcement—compared to a normal rate of roughly 500 per week. US Navy destroyers entered the Strait on April 11 to begin mine-clearing operations, and Iran immediately threatened to attack them. The market is not pricing EM LatAm large caps as if WTI is going to $70. It is pricing them as if $96 is a temporary floor on the way back to $110.

EM Asia bounced hard on the ceasefire—India’s Nifty, South Korea’s KOSPI, and Taiwan’s TAIEX all surged as energy input costs fell. These are net energy importers, so oil down is unambiguously good for their current accounts. But the Islamabad talks collapse introduces a new ceiling. The first direct US-Iran negotiations since 1979 ran for 21-plus hours over April 11-12. VP Vance led the US side. They covered the nuclear program. They collapsed. Iran said there is “no plan for a next round of negotiations.” Trump responded by announcing a full naval blockade of any vessel that had paid Iran a Hormuz transit toll. That is not a ceasefire extension. That is escalation by another mechanism. EM Asia was buying relief; it is now re-pricing blockade risk. EM Europe—Russia-adjacent, commodity-linked, sanctions-constrained—remains the worst EM cohort by a wide margin and barely moved on the ceasefire news. There is no positive scenario for EM Europe in any of the outcomes currently on the table.

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The five-week losing streak is over. The S&P 500 surged 3.4% this week to close at 6,582.69 on Thursday—the last trading day before Good Friday—snapping what had become the longest consecutive weekly decline since the 2022 bear market. The Dow rose 3.0% to 46,504. The Nasdaq led with 4.4%. The Russell 2000 gained 3.3%, putting small caps firmly into positive territory year-to-date and continuing their relative outperformance over large caps. But before anyone declares the all-clear, understand what drove this rally: a single rumor. On Wednesday, Trump told reporters the Iran conflict would end “within weeks.” Markets ripped. Then on Thursday he walked it back, threatening energy infrastructure strikes after April 6. Markets gave back half the gains. This is not a durable bottom. This is a market trading one headline at a time with one eye on the calendar.

The sector divergence widened further into absurdity. XLE is now up nearly 38% year-to-date with a record 14-week winning streak—though it actually fell 3.9% on Thursday as WTI surged 11.4% in a single session. Read that again: the energy ETF fell on the day oil had its largest single-day dollar gain since the April 2020 Covid rebound. The explanation is positioning—traders taking profits into a $111 WTI print that screams “peak fear.” IGV remains down 24.5% year-to-date. The 62-point spread between the best and worst sectors is no longer an anomaly. It’s a regime. Consumer discretionary got a brief reprieve but Tesla fell another 5% on Thursday. The VIX dropped to 23.87 from 31.05 the prior week—the largest single-week VIX decline of the year—but still sits well above the 15–18 range that defined calm in 2024.

The macro data was a study in contradiction. March nonfarm payrolls shocked at +178,000 versus the +59,000 consensus—released on Good Friday while markets were closed, meaning equities will digest this number Monday. ISM Manufacturing came in at 52.7, expanding for a third consecutive month, but Prices Paid surged to 78.3—the highest since June 2022—confirming what every consumer already knows: oil is flowing through to everything. Initial claims at 202,000 hit a near two-year low. The 10-year Treasury jumped to 4.37% in after-hours trading Friday on the jobs beat. The bond market is now telling you what the equity market refuses to accept: rate cuts are not coming. Betting markets give a 92% probability the Fed holds all year. The word “stagflation” keeps getting thrown around. I’d call it something more specific: a labor market that won’t crack and an inflation impulse that won’t quit, all while the geopolitical risk premium expands by the hour.

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Five consecutive weekly losses. The worst monthly decline in the S&P 500 since 2022. And a VIX that just closed above 31 for the first time since the initial Iran shock. If you’re looking for a bottom in this market, the tape is telling you we haven’t found one yet. The S&P 500 closed the week at 6,368.85, down 3.42% on the week and 6.74% year-to-date. Three out of four stocks in the index fell on Friday alone. The Dow entered formal correction territory—down more than 10% from its February record high—and joined the Nasdaq in what is now a broad-based, multi-week liquidation. The Russell 2000, interestingly, posted a mild gain of 0.36% on the week, making small caps the relative outperformer for the first time in three weeks. But let’s not call that a rotation. IWM is still down 2.28% year-to-date and 10.5% from its January high. This is a market where the best you can say about small caps is they fell less.

The sector story is becoming cartoonishly divergent. Energy, measured by XLE, is now up 37% year-to-date. Software, measured by IGV, is down 25%. That is a 62-percentage-point spread between the best and worst performing sectors in the U.S. market. I don’t think investors fully appreciate how extreme that is. IGV fell another 7.35% this week alone—the worst weekly performance of the month—and is now nearly 35% below its 52-week high. Meanwhile, XLE hit a new year-to-date high at $62.79, gaining 5.48% on the week. Consumer discretionary was the worst broad sector, down 2.89% on Friday as cruise lines, restaurants, and retail got hammered by gasoline-price anxiety. Amazon and Meta each fell 4% on Friday. The VIX closed at 31.05, up from 26.78 the prior week. What’s notable is the VIX “stair-stepped” higher even on days when stocks rallied, indicating persistent elevated demand for hedges regardless of direction.

The macro data confirmed the uncomfortable picture. The University of Michigan consumer sentiment final reading for March came in at 53.3, below both the preliminary estimate of 55.5 and February’s 56.6. One-year inflation expectations surged to 3.8%—up 34% from the prior month’s 3.4%. This is the kind of expectations unanchoring that keeps the Fed awake at night. Vice Chair Jefferson acknowledged the dilemma in his March 26 speech: “I confront an outlook where there is downside risk to the labor market and upside risk to inflation.” He estimated February core PCE at 3.0%—“little progress in lowering core inflation over the past year.” Governor Barr echoed the same message. The April FOMC hold probability stands at 94.8%. Betting markets now give a 26-to-41% chance of a rate hike in 2026. Q4 GDP was revised down to 0.7% from 1.4%. The polite word is “stagflation.” The honest word is “trapped.”

European markets whipsawed all week on conflicting Iran signals. The STOXX 600 managed a tiny +0.35% gain, but that number masks violent daily swings—up 1.3% Wednesday on de-escalation hopes, down 1.2% Thursday after Lagarde warned markets were “too optimistic,” and down nearly 1% Friday on the U.S. selloff. The DAX closed at 22,300, roughly 12% below its pre-war February high. The FTSE 100 briefly reclaimed 10,000 mid-week before giving it back, closing at 9,967. ECB President Lagarde’s March 25 speech at the ECB Watchers Conference was the week’s most important central bank communication. She called Iran “a real shock” and outlined a three-principle framework for responding to energy shocks. The key signal: J.P. Morgan and Barclays now forecast up to three ECB rate hikes in 2026; Goldman Sachs expects two, in April and June. The ECB went from a cutting cycle to a potential hiking cycle in less than a month. European natural gas prices are up 89% since February 28. The OECD cut the eurozone GDP forecast to 0.8% from 1.2%.

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The Great Rotation is dead. Or at least it’s on life support. The Russell 2000 was up 8.9% year-to-date as of March 11. As I write this nine days later, it’s down 0.41% on the year. That’s a 9.3-percentage-point drawdown in less than two weeks. The S&P 500 is at roughly 6,583, down 3.49% year-to-date and sitting at four-month lows. Small caps, mid caps, micro caps—everything that was leading the market in early March has been destroyed by the combination of triple-digit Brent crude, a scorching PPI print, and a Fed that is now openly discussing a rate hike. The energy sector is the sole winner, up 34% year-to-date. Software, measured by IGV, is down 20%. The VIX spiked back to 26.5 after briefly dipping to 22.45 on Tuesday’s relief rally. The pattern this week was textbook: hope on Monday, reality on Wednesday.

Let me walk through the macro data because it was genuinely ugly. The February PPI, delayed by the government shutdown, finally dropped on March 18—the same day as the FOMC decision. Headline PPI came in at 0.7% month-over-month, more than double the 0.3% consensus. Year-over-year headline PPI hit 3.4%, a 13-month high. Core PPI was 0.5% month-over-month and 3.9% year-over-year, the hottest in 13 months and the fourth consecutive hot print. Pipeline prices, measured by Stage 1 intermediate demand, are running at 5.3% year-over-year, the worst since December 2022. This is not transitory. This is inflation re-accelerating in the parts of the supply chain that take months to filter through to consumers. Hours later, the Fed held at 3.50–3.75% in an 11-1 vote, with Miran dissenting for a cut. The dot plot still shows one cut in 2026, but seven of nineteen officials now see zero cuts, up from six in December. Powell raised the core PCE forecast to 2.7% from 2.5% and admitted the committee discussed a potential rate hike at the April meeting. He rejected the stagflation label, but then said the Fed is “in a difficult situation” with inflation progress “not as much as hoped.” That’s stagflation with a press-conference smile.

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LEADERS: ENERGY DOMINANCE, DEFENSIVE ROTATION, AND A LUMBER COMEBACK NOBODY SAW COMING

Energy (XLE) – South Pars Changed Everything

Energy’s dominance reached a new level this week after Israel struck Iran’s South Pars gas field — the world’s largest — on March 19, and Iran retaliated by hitting Qatar’s LNG facilities, knocking out an estimated 17% of global LNG export capacity for what analysts expect will be a 3–5 year repair timeline. The XLE/SPY ratio surged another leg higher and is now up a staggering 35.6% over three months, the most extreme relative energy move since the Russia-Ukraine shock of early 2022. Brent crude spiked to $119 intraday on March 19 before pulling back as a late-session geopolitical headline triggered a reversal; WTI hit approximately $98. Iran is now developing a “selective” vetting system for Strait of Hormuz transit, with traffic down 95% and only India, Pakistan, China, and Iraq actively negotiating passage. The FOMC held rates at 3.50–3.75% on March 18 with an 11–1 vote, acknowledging the impossible bind: oil-driven inflation running hot while the economy decelerates. Energy isn’t just a trade anymore — it’s the axis around which every other asset class is rotating. With Brent still above $110 and no Hormuz resolution in sight, the XLE/SPY ratio could have substantially more room to run.

Utilities (XLU) – The Only Shelter That’s Actually Working

Utilities extended their remarkable 2026 run with the XLU/SPY ratio climbing another 11.3% over three months, making this the most sustained period of utility outperformance since the 2022 bear market. In a week where the S&P 500 fell to fresh 2026 lows at 659.80 on March 19 — down approximately 0.4% for the week through Thursday — utilities continued to attract capital as the ultimate defensive allocation. The AI data center demand narrative provides a rare secular growth tailwind for a traditionally boring sector, but make no mistake: this is primarily a fear trade. The FOMC’s dot plot showed 14 of 19 officials expecting zero or one rate cut in 2026, with the median at just one cut, and Waller — who had been a reliable dove — flipped to hold. That hawkish repricing should theoretically hurt rate-sensitive utilities, but the risk-off bid is overwhelming any yield sensitivity. When oil spikes to $119 and a major gas field gets bombed, investors aren’t doing duration math — they’re reaching for the safest equity exposure available.

Treasuries (GOVT) – The Flight to Quality Deepens

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A week ago I said the rotation was real. It’s more than real now—it’s accelerating in a way that’s forcing even the most stubborn large-cap bulls to pay attention. The Russell 2000 is up 8.9% year-to-date through March 11. The equal-weight S&P 500 is positive on the year by several percentage points. Meanwhile, the cap-weighted S&P 500 sits at 6,672.62 as of Wednesday’s close, down 2.53% on the year. That’s a spread of more than 11 percentage points between the Russell 2000 and the S&P 500, and it’s happening while the VIX is at 27.85 after spiking to 35.3 intraday on Monday. This is not a calm, orderly rotation. This is a market that’s simultaneously pricing in a regime change in equity leadership and a geopolitical crisis that has no clear resolution.

The sector story is equally dramatic. The Energy Select Sector SPDR is up roughly 27% year-to-date, hitting fresh 52-week highs almost daily as Brent crude trades above $100 a barrel for the first time since 2022. WTI is at roughly $96. The software sub-sector of the S&P 500, measured by the IGV ETF, is down 19.5% year-to-date. That’s a nearly 47-percentage-point divergence between the best and worst-performing sectors. I’ve been in this business a long time, and I cannot recall a YTD sector spread this extreme by mid-March. February CPI came in at 2.4% year-over-year on March 11, largely in line with expectations. But the real inflation story is in the ISM Manufacturing Prices Paid index at 70.5%, the highest since June 2022, and that reading was taken before Brent broke through $100. The February PPI release has been delayed to March 18 due to the government shutdown—the same day as the FOMC decision. The Fed is boxed in. CME FedWatch shows an overwhelming probability of a hold at the March 18 meeting. The dot plot update will be the real event. If the median dot shifts higher, that’s the Fed admitting the stagflation scenario is becoming baseline.

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Two days ago I wrote about the small-cap rotation being real. It still is, but the market just threw a curveball that complicates the story considerably. The Russell Microcap Index remains up roughly 8% year-to-date. The S&P 400 is up about 5.7%. The Russell 2000 is holding a 4.2% gain. Meanwhile, the S&P 500 is essentially flat on the year at − 0.22%. That relative outperformance in smaller names has not been erased. But the Iran conflict and today’s disastrous jobs report have injected a level of uncertainty that could either accelerate or completely derail the rotation depending on what the Fed does next.

Let me start with the number that matters most right now. February nonfarm payrolls came in at negative 92,000. Not positive 50,000, which is what the consensus was. Not even zero. Negative 92,000. And if that’s not enough, December was revised down to negative 17,000 from an already-weak 48,000. January was revised down 4,000 to 126,000. The combined revision is negative 69,000 jobs. The unemployment rate ticked up to 4.4% from 4.3%, and average hourly earnings came in hot at 3.8% year-over-year. Health care lost 28,000 jobs on strike activity. Federal government shed another 10,000. This is a labor market that is cracking in real time.

Now layer in the oil picture. WTI crude is at $80 per barrel as I write this, up over 20% in a single week since the U.S.-Israel strikes on Iran began. Brent is above $84. The Strait of Hormuz has effectively been closed for six days, which accounts for roughly 20% of the world’s oil and gas supply. The ISM Manufacturing Prices Paid index hit 70.5% in February, the highest since June 2022, and that was before the latest oil spike fully filtered through. Core PCE was already running at 3.0% in December. The energy sector is up 26% year-to-date while the software sub-sector of the S&P 500 is down roughly 17%. The divergence is breathtaking. And it puts the Fed in an impossible position. You cannot cut into rising inflation. You cannot hike into a labor market that just printed a negative payroll number. This is what stagflation looks like in practice, and it’s why the market has pushed the next expected rate cut all the way out to September.

Despite what has been an awful week for risk assets globally, European equities are still outperforming the S&P 500 by 300 to 500 basis points on the year. The STOXX 600 is up about 1.4% year-to-date even after falling nearly 5% this week, its worst weekly decline since April 2025. To put that in context, the STOXX 600 hit an all-time high of 634 on February 27, the day before the Iran strikes began. Europe has given back the late-February surge but the structural outperformance story remains intact. Germany’s €500 billion infrastructure fund is now into its implementation phase, with defense spending at roughly €108 billion in 2026, the highest since the Cold War ended. Goldman Sachs is projecting 1.1% GDP growth for Germany this year, which doesn’t sound like much until you remember the country had six consecutive years of stagnation. The ECB has held at 2.0% for five straight meetings and the March 19 decision is a 99% probability hold. Eurozone headline inflation ticked up to 1.9% in February from 1.7% in January, and the Iran oil shock has made any near-term cut a non-starter.

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• U.S. labor data remain low-fire, but survey growth indicators are cooling toward a ~1.5% annualized pace.¹ ²

• FOMC minutes reinforced a “higher for longer unless inflation reasserts disinflation” stance, with liquidity mechanics adding a subtle tightening bias.³

• Treasury yields drifted modestly lower across the curve, which remains positively sloped and not recessionary.⁴

• Equity index stability masks weak breadth and sharp dispersion within technology, particularly between semiconductors and software.⁵

• High-yield credit spreads remain near cycle tights, signaling risk repricing without systemic stress.⁶

Late-Cycle Macro With a Data and Policy Uncertainty Overlay

The defining feature of the Feb. 18–25 window was not a single outsized data surprise, but confirmation of a late-cycle configuration: labor markets remain resilient, growth is cooling at the margin, and policy uncertainty—particularly around trade—is injecting volatility into cross-asset risk premia.

Weekly initial jobless claims fell to 206,000 for the week ending Feb. 14, underscoring that layoffs remain subdued. Continuing claims rose to roughly 1.869 million, suggesting that while separations are limited, job-finding is becoming incrementally more difficult.¹ The signal is not labor stress, but labor normalization.

Forward-looking growth data tell a similar story. The February flash S&P Global composite PMI eased to 52.3 from 53.0, still expansionary but marking the slowest pace in roughly ten months. Survey-based GDP mapping implied growth closer to 1.5% annualized early in the year, down from the stronger late-2025 cadence.² Employment components hovered near stagnation. The expansion continues—but with diminishing momentum.

Inflation did not deliver a fresh catalyst during the week. Instead, the January FOMC minutes sharpened the Fed’s reaction function. Policymakers emphasized that inflation remains “somewhat elevated” and that further easing would require clearer evidence that price pressures are sustainably converging toward 2%.³ The Committee also referenced market pricing for one to two cuts in 2026, underscoring that policy is not on a preset path.

Importantly, the minutes highlighted liquidity mechanics that can tighten or ease conditions without a change in the policy rate. Reserve management purchases, Treasury General Account flows, and tax receipts were discussed as endogenous drivers of reserve levels.³ In an environment where reserve scarcity could re-emerge, these balance-sheet dynamics matter for money markets and front-end stability.

Macro uncertainty is also literal. The Chicago Fed’s CFNAI publication process has flagged delays stemming from federal shutdown-related disruptions and delayed statistical releases.⁷ The FOMC minutes similarly acknowledged data delays as a forecasting challenge.³ This is a subtle but material shift: uncertainty is no longer purely economic—it is embedded in the data pipeline itself.

Overlaying this backdrop is policy volatility. On Feb. 20, the U.S. Supreme Court struck down emergency tariffs, prompting the administration to signal new levies under alternate legal authority.⁸ The macro transmission channel here is uncertainty rather than immediate price effects. Rapid shifts in trade policy elevate risk premia across equities, credit, and FX—even absent a deterioration in hard data.

In short, growth is cooling but intact, inflation remains a constraint, and policy volatility has become the dominant shock variable.

The Rates Transmission: Mild Easing, No Recession Signal

Rates markets translated this environment into modest duration support but no recession warning.

Between Feb. 18 and the latest H.15 data available during the week (through Feb. 23), the 10-year Treasury yield declined from 4.09% to 4.03%, while the 2-year fell from 3.47% to 3.43%. The curve remained positively sloped, with the 10-year minus 2-year spread narrowing only slightly.⁴ This is not inversion; it is mild flattening within an upward-sloping structure.

Real yields also eased. The 10-year TIPS yield declined from 1.80% to 1.77%.⁴ That incremental decline supports duration-sensitive equities, but it does not suggest a collapse in real-rate expectations. Markets are pricing moderation—not contraction.

Fed communication reinforced this equilibrium. Governor Christopher Waller indicated he could support holding rates steady at the March meeting if incoming labor data confirm improved momentum.⁹ That conditional stance keeps front-end expectations tightly linked to labor confirmation rather than preemptive easing.

The curve’s message is therefore consistent: growth is decelerating, but not rolling over. Inflation is moderating, but not definitively conquered. The Fed is patient, and duration is drifting lower without signaling recession.

This rates backdrop matters because it forms the discount-rate anchor for equities. With real yields stable to slightly lower and no acute credit stress, equity volatility must be interpreted through the lens of dispersion rather than systemic repricing.

Equity Dispersion and Credit Containment Define the Regime

U.S. equities exhibited two simultaneous truths during the window. Index-level resilience persisted, but participation narrowed.

From Feb. 18 to Feb. 24 closes, the S&P 500 rose modestly, and the Nasdaq gained, while the Dow and Russell 2000 declined.⁵ This divergence signals that headline stability masks underlying concentration.

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• January payrolls rose 130,000 and unemployment dipped to 4.3%, reinforcing a growth floor rather than signaling labor stress.¹

• CPI cooled to 2.4% year over year, reopening the path to potential mid-year easing without validating aggressive near-term cuts.²

• The Treasury curve flattened modestly as long-end yields declined, with the 10-year falling 13 basis points over the week.³

• High-yield spreads widened only slightly, suggesting repricing rather than systemic stress.⁴

• The dollar weakened on the week as rate futures increased the probability of a June cut.⁵

• The yen posted its strongest weekly gain in roughly a year amid renewed tightening expectations in Japan.⁶

The U.S.: A Growth Floor with Cooling Inflation

The macro sequence this week mattered more than the absolute numbers. Labor came first. January nonfarm payrolls rose by 130,000, while the unemployment rate edged down to 4.3%.¹ Wage growth remained firm at 0.4% month over month and 4.2% year over year, with the workweek ticking up to 34.5 hours.¹ Initial jobless claims declined to 227,000 for the week ended February 7, reinforcing the view that layoffs remain contained.⁷

The signal was clear: the U.S. economy is not breaking. It is slowing at the margin, but it is not rolling over.

Consumption, however, showed signs of fatigue. December retail sales were unexpectedly flat, with the Census Bureau describing activity as “virtually unchanged” from November.⁸ That nuance matters. The labor market may be stable, yet spending momentum is no longer accelerating.

Inflation then shifted the narrative. January CPI rose 0.2% on the month and cooled to 2.4% year over year.² Core CPI increased 0.3% month over month and 2.5% year over year.² Gasoline prices fell 3.2%, while several service categories reflected early-year price adjustments.⁹

The takeaway is not that inflation has vanished. Core remains sticky enough to prevent an immediate easing cycle. Yet the disinflation trend resumed. That was enough to revive the mid-year rate-cut conversation without forcing the Federal Reserve’s hand.

Markets translated the sequence into duration demand. From February 6 to February 12, the 10-year Treasury yield declined from 4.22% to 4.09%, while the 30-year fell from 4.85% to 4.72%.³ The 2-year eased modestly, producing a flattening in the 10-year minus 2-year spread.³

Rate futures responded quickly after CPI, increasing the implied probability of a June cut and adding easing expectations into 2026.⁵

Credit markets did not flash stress. The ICE BofA U.S. High Yield option-adjusted spread widened slightly from 2.87% to 2.92%.⁴ That move reflects risk repricing rather than funding pressure.

Equities behaved like a market still sensitive to rate volatility and crowded positioning. A sharp growth-led selloff midweek tied to AI-related positioning concerns was only partially repaired by Friday’s inflation relief.¹⁰ Dispersion remained elevated, with internal volatility masking headline index stagnation.¹¹

Liquidity plumbing also remained in focus. The New York Fed indicated that elevated reserve-management purchases of Treasury bills would continue into mid-April, framing the activity as operational rather than stimulative.¹² Meanwhile, the Treasury General Account remained elevated on a weekly basis, leaving near-term liquidity sensitive to bill issuance and tax flows.¹³

The dollar’s weekly decline aligned with the shift in rate expectations. Even as it stabilized into Friday, the broader move reflected markets rotating away from “higher for longer” protection.¹⁴ U.S. policy commentary describing the dollar as closer to a “more natural” trade level added to that tone.¹⁵

Developed Markets: Policy Divergence Reawakens

Europe’s story was more narrative than numeric. An ECB policymaker emphasized that Europe should prepare for a larger safe-haven role globally, highlighting the importance of liquidity backstops and institutional resilience.¹⁶ The euro held firm on the week, consistent with a softer dollar backdrop.¹⁴

The U.K. remains constrained by soft growth and persistent underlying inflation. Public reports showed marginal late-year growth, while the Bank of England’s chief economist emphasized that underlying inflation remains around 2.5% and policy must stay restrictive long enough to complete disinflation.¹⁷ Sterling traded within a tight range, reflecting cross-currents between U.S. repricing and domestic caution.¹⁸

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• January payrolls rose 130,000 and unemployment dipped to 4.3%, reinforcing a resilient labor floor.¹

• CPI cooled to 2.4% year over year, reopening the path to mid-year easing.²

• The 10-year Treasury yield fell from 4.22% to 4.09% over the week, with curve flattening at the margin.³

• High-yield spreads widened only slightly, signaling repricing rather than systemic stress.⁴

• The dollar declined on the week, while the yen posted its strongest weekly gain in roughly a year.⁵

United States: Resilient Labor, Softer Inflation

The week’s macro sequence mattered more than the individual releases. January nonfarm payrolls increased by 130,000, and the unemployment rate edged down to 4.3%.¹ Wage growth remained firm at 0.4% month over month and 4.2% year over year, while the average workweek ticked up to 34.5 hours.¹ That combination does not describe an economy sliding toward recession. It describes an expansion that is cooling without cracking.

Weekly jobless claims reinforced that narrative. Initial claims fell to 227,000 in the week ended February 7, consistent with stabilization rather than deterioration.⁶ Retail sales, however, hinted at marginal cooling. December sales were unchanged from November, with official characterization describing activity as “virtually unchanged,” though still positive year over year.⁷

Inflation provided the pivot. January CPI rose 0.2% month over month, bringing the year-over-year rate to 2.4%.² Core CPI increased 0.3% on the month and 2.5% year over year.² Energy softness helped the headline, while services categories reflected early-year price resets.⁸ The sequencing is critical. A firm labor print tightened the market’s tolerance for immediate cuts. A softer inflation reading reopened the debate around mid-year easing.

Rate markets translated that balance into a duration bid. The 10-year Treasury yield fell from 4.22% on February 6 to 4.09% on February 12, while the 30-year declined from 4.85% to 4.72%.³ The 10-year minus 2-year spread narrowed modestly, reflecting flattening pressure.³ By Friday, the 10-year traded near 4.067% following the CPI release.⁹

Term premia remain an underappreciated driver. The San Francisco Fed’s yield premium estimates show the 10-year term premium above one percentage point, underscoring that long-end yields reflect compensation for duration risk beyond expected policy rates alone.¹⁰

Operational liquidity also mattered. The New York Fed signaled that elevated reserve-management purchases of Treasury bills and short-dated government bonds would continue into mid-April, framed as technical rather than stimulus-oriented.¹¹ The Treasury General Account remained elevated, keeping near-term liquidity impulses dependent on bill supply and tax flows.¹²

Equities absorbed the macro mix unevenly. A sharp growth-led drawdown tied to AI-related positioning pressure drove major index declines midweek.¹³ Friday’s softer CPI stabilized sentiment, though dispersion remained elevated. Commentary highlighted that internal breadth was healthier than index-level performance suggested, pointing to fragile leadership and rotation beneath the surface.¹⁴

Credit markets did not flash systemic stress. The ICE BofA U.S. High Yield option-adjusted spread widened from 2.87% to 2.92% over the week.⁴ That magnitude aligns with equity volatility and modest risk repricing rather than a funding shock.

In FX, the dollar weakened on the week as rate futures increased the implied probability of a June cut following CPI.¹⁵ U.S. policy commentary also reflected tolerance for a weaker dollar, with the Commerce Secretary describing the currency as closer to a “more natural” level for trade.¹⁶

International Developed Markets: Divergence Re-Emerges

Europe’s story centered less on data and more on narrative. An ECB policymaker argued that Europe should prepare for a larger global safe-haven role, emphasizing stronger liquidity backstops.¹⁷ The euro traded near $1.1863 into Friday, modestly higher on the week.⁵ The implication is structural rather than cyclical. A stronger institutional bid for euro assets alters funding dynamics over time.

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• Central banks are pausing in unison, but policy pivots remain conditional and uneven.

• Labor markets are cooling just enough to sustain rate-cut expectations without confirming recession.

• Equity leadership is rotating toward value, cyclicals, and smaller caps beneath stable index levels.

• A weaker dollar, record gold prices, and emerging-market strength suggest global capital reallocation rather than outright risk-on behavior.

A Pause Before the Pivot

The first week of February delivered a familiar but still consequential outcome: patience. In the United States, the Federal Reserve held interest rates steady, acknowledging gradual softening in labor conditions while emphasizing that progress on inflation remains incomplete. Chair Jerome Powell characterized the economy as “solid,” reinforcing policymakers’ preference to wait for clearer confirmation before shifting course.¹

With the policy decision widely anticipated, attention quickly turned to labor data. A partial government shutdown delayed the official January employment report, leaving markets to rely on alternative indicators. The ADP private payrolls report showed job gains of just 22,000, a sharp undershoot relative to expectations and a sign that hiring momentum is fading more rapidly than forecast.² While unemployment remains historically low and is expected to hold in the mid-4% range, the direction of travel has become increasingly difficult to ignore.³

Bond markets reacted accordingly. Short-dated Treasury yields declined as investors increased bets on eventual rate cuts, while longer-dated yields remained relatively anchored. The result was a persistently inverted yield curve, reflecting confidence that inflation pressures are easing alongside lingering concern about medium-term growth prospects.⁴

Equities extended January’s gains but with noticeably higher volatility. Earnings season exposed investor sensitivity to guidance rather than headline results. Several mega-cap technology companies reported strong quarterly numbers only to see their share prices fall sharply, as markets reassessed valuation and growth durability.⁵ At the same time, select consumer and hardware companies delivered upside surprises that helped stabilize broader indices.

One asset class stood apart. Gold surged to record highs above $5,500 per ounce, supported by a weaker dollar, declining real yields, and elevated geopolitical risk.⁶ The rally signaled not panic, but growing demand for insurance as markets transition away from peak-tightening conditions.

Rotation Beneath the Surface

Beneath relatively calm index levels, leadership continued to rotate. Value stocks extended their outperformance over Growth for a third consecutive month, driven by investor preference for cash-flow durability and valuation discipline.⁷ Cyclical sectors such as Energy, Materials, and Industrials again led the market, supported by higher commodity prices and supply-side uncertainty.⁸

Energy equities benefited from oil’s rebound toward the upper-$60s per barrel, its highest level since late 2025. While global demand growth remains modest, geopolitical risks and tighter inventories have sustained a risk premium in energy markets. Defensive sectors also held firm. Consumer Staples and Utilities attracted steady inflows as investors balanced optimism about easing policy with caution around slowing growth.

Market-capitalization dynamics reinforced the theme of rotation rather than speculation. Small-cap equities, which surged in January, continued to outperform large caps. The Russell 2000’s relative strength reflects easing financial conditions and domestic economic resilience rather than excess risk-taking.⁹ Importantly, leadership within small and mid-cap indices skewed toward profitable firms with improving fundamentals.

Financials lagged, weighed down by compressed yield spreads and uncertainty surrounding loan growth.¹⁰ Within technology, dispersion widened further. Profitable, established companies and AI-linked infrastructure providers continued to attract capital, while higher-valuation speculative growth names struggled to maintain momentum.

Overall, market behavior suggests broadening participation accompanied by selectivity. Investors appear willing to embrace opportunity, but only where quality and downside resilience remain evident.

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Global markets opened the year with a tone of cautious confidence. In the United States, economic momentum remains firm enough to keep the Federal Reserve on hold at its January meeting, with consensus firmly expecting no policy change.¹ Growth has proven resilient, inflation has moderated but remains above target, and policymakers appear comfortable maintaining restrictive settings while they assess how disinflation evolves.¹ Bond markets are already looking ahead. The decline in short-term yields relative to longer maturities reflects expectations that policy easing may arrive later in the year, even as the Fed signals patience.¹

Equity indices, however, tell only part of the story. Major benchmarks have been largely flat, masking a pronounced internal rotation.¹ Volatility remains subdued, suggesting investors are broadly comfortable with the macro backdrop despite political noise and ongoing debates about central bank independence.¹ The message from U.S. markets is not one of exuberance, but of stability paired with a growing willingness to reposition risk.

Rotation Beneath the Surface

That repositioning has been most visible in the shift away from mega-cap dominance. After several years in which a narrow group of large technology companies accounted for an outsized share of returns, leadership has begun to broaden.¹ Small- and mid-capitalization stocks have surged early in the year, recapturing investor attention after prolonged underperformance.¹ Equal-weight equity strategies have also attracted strong inflows, reflecting a desire for diversification away from heavily concentrated benchmarks.¹

This rotation appears tied to both valuation and macro expectations. As interest rate pressures ease and the prospect of future policy accommodation comes into view, investors have shown renewed interest in more cyclical and economically sensitive companies.¹ Energy, industrials, and value-oriented sectors have outpaced growth-heavy areas, while several of last year’s market leaders have stumbled out of the gate.¹ While similar false starts have occurred in the past, the current move has been notable for its breadth and its alignment with a clear policy catalyst: the Federal Reserve’s pause.¹

The durability of this shift remains an open question. If large technology companies simply consolidate rather than resume leadership, conditions remain favorable for smaller firms to continue outperforming.¹ Earnings season will be critical in determining whether this rotation reflects a genuine regime change or merely a temporary adjustment within an ongoing range-bound market.

Diverging Global Paths

Outside the United States, policy inflection points dominate the landscape. In Europe, business activity continues to expand modestly, though momentum is uneven across countries.¹ Inflation has fallen sharply from last year’s highs, allowing the European Central Bank to pause its tightening cycle.¹ At the same time, rising cost pressures in recent survey data have reinforced the ECB’s reluctance to discuss near-term easing.¹ The decision by the U.S. administration to step back from proposed tariffs on European goods has removed a key downside risk, offering relief to exporters and improving sentiment across the region.¹

The United Kingdom faces a more delicate balance. Inflation surprised modestly to the upside late last year, yet policymakers remain confident that price pressures will ease toward target in coming months.¹ With growth showing tentative signs of improvement and the labor market beginning to cool, the Bank of England appears inclined to proceed cautiously, holding rates steady while preparing the ground for gradual easing later in the year.¹

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• U.S. inflation continues to cool without a sharp deterioration in labor markets, reinforcing expectations that the Federal Reserve will remain on hold near term.¹

• Equity leadership is widening meaningfully, with small- and mid-caps outperforming mega-cap technology and signaling healthier market breadth.²

• Globally, disinflation is allowing central banks in Europe, the U.K., and parts of emerging markets to pause or pivot, while Japan begins a historic normalization cycle.³

Resilient Growth and a Shifting U.S. Market Narrative

The U.S. economic backdrop entering early 2026 reflects a rare combination of moderating inflation and continued growth. Consumer prices rose 2.7% year over year in December, with core inflation easing further to 2.6%, underscoring how far price pressures have retreated from their post-pandemic peak.⁴ The labor market has softened only modestly, with unemployment hovering near 4.4%, a level consistent with stability rather than contraction.¹

This balance has allowed Federal Reserve officials to step back from aggressive tightening. After cutting rates late last year, policymakers have signaled patience, emphasizing the need to assess incoming data before making additional moves.⁵ Futures markets still price in rate cuts later in the cycle, but stronger-than-expected retail sales suggest the economy retains momentum.⁶

Equities have responded accordingly. The S&P 500 remains near record highs, supported by earnings resilience and declining volatility.⁷ Temporary pullbacks tied to sector-specific news, including technology export restrictions and uneven bank earnings, have been met with renewed buying interest rather than broad risk aversion.²

Bond markets have reinforced this message. Treasury yields have edged lower as inflation expectations stabilize, easing pressure on valuations without signaling recession fears. The yield curve remains inverted, but the inversion has narrowed, suggesting markets are beginning to look beyond the tightening phase.⁴

Rotation Takes Hold as Market Breadth Improves

One of the most important developments of early 2026 has been the broadening of equity participation. After years of dominance by a narrow group of mega-cap technology stocks, smaller and more cyclical companies are regaining leadership. Both small- and mid-cap indices have reached record highs, while the equal-weighted S&P 500 has meaningfully outperformed its capitalization-weighted counterpart.²

This shift reflects several forces. Valuation dispersion widened significantly in prior years, leaving non-mega-cap segments comparatively attractive. As rate pressures eased, investors began reallocating toward sectors tied more closely to domestic growth, including industrials, materials, and selected financials. The result has been healthier internal market dynamics, with gains distributed across a broader range of companies rather than concentrated in a handful of names.

Sector rotation has followed a similar pattern. Cyclical and value-oriented groups have outperformed, while technology has paused after an extended run. Energy and materials benefited briefly from geopolitical headlines and commodity volatility, while defensive sectors quietly attracted flows during periods of equity consolidation.² Importantly, these rotations appear to reflect repositioning rather than wholesale risk reduction. Capital has remained largely within equities, shifting leadership rather than exiting the market altogether.

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The closing stretch of 2025 has been defined by record equity prices, broadening market participation, and an easing inflation backdrop that few anticipated a year ago. Central banks across developed markets have either paused or begun reversing tightening cycles, while investors have embraced a risk-on posture that has pushed valuations higher and volatility lower. The result has been a year of exceptional asset-price performance, paired with growing debate about how durable these conditions may be as 2026 approaches.

U.S. Macro and Markets

U.S. equities ended the year at fresh highs, with the S&P 500 and Dow Jones Industrial Average both closing at records after gaining solidly in 2025. The Federal Reserve cut rates for a third consecutive meeting in December, lowering the policy range to 3.50–3.75 percent. The decision exposed growing internal divisions, with dissenters split between holding rates steady and pushing for a larger cut. Chair Powell acknowledged the tension between moderating inflation and a labor market that is beginning to soften.¹

Inflation data supported the Fed’s more cautious tone. November consumer prices rose at a slower pace, while unemployment edged higher. Treasury markets responded with a notable decline in short-term yields and a re-steepening of the yield curve as two-year yields fell below long-term rates.² This shift has been interpreted less as a recession signal and more as confirmation that the peak in monetary restriction is likely behind us.

Equities embraced that interpretation. The Nasdaq outperformed on enthusiasm around artificial intelligence and continued earnings resilience among mega-cap firms, while broader benchmarks posted their third consecutive annual gain. Investor confidence has been reinforced by the absence of a clear recession despite aggressive tightening earlier in the cycle. At the same time, the combination of easing policy and still-elevated valuations has narrowed the margin for error going forward.³

Sector and Style Rotation

While mega-cap growth dominated much of the year, the final quarter saw a meaningful broadening of leadership. Small-cap stocks broke out to new highs after years of underperformance, aided by falling borrowing costs and renewed interest in domestically oriented businesses. Cyclical sectors such as industrials and regional banks benefited from this shift, while value-oriented names narrowed the performance gap with growth.⁴

Sector leadership also diversified. Technology and communication services remained strong beneficiaries of the AI cycle, while financials delivered outsized gains as credit conditions improved and the yield curve steepened. Materials stocks advanced sharply on the back of soaring precious-metal prices, while energy lagged as oil prices declined over the year. Defensive sectors such as utilities underperformed amid persistent risk appetite.⁵

This late-year rotation suggests investors are increasingly looking beyond a narrow set of winners. Whether it marks a durable change in leadership or simply a year-end adjustment remains an open question as markets enter 2026.

Developed Markets

Outside the United States, developed markets also posted robust gains. In Europe, the European Central Bank held rates steady in December after earlier cuts, citing improved growth resilience and inflation near its target. Officials emphasized uncertainty around services inflation and geopolitics, signaling a prolonged pause rather than a rapid return to easing. European equity markets responded favorably, with major indices hovering near record levels.⁶

The United Kingdom followed a similar path. The Bank of England cut rates again in December as inflation cooled, though policymakers warned that price pressures are likely to remain above target for some time. Despite these constraints, UK equities rallied strongly, supported by global risk appetite and rebounds in financial and commodity-linked stocks.⁷

Japan marked one of the most significant policy shifts of the year. The Bank of Japan raised rates again in December, continuing its gradual exit from decades of ultra-loose policy. Officials debated the need for further hikes to contain inflation and support the yen, which remained weak despite tighter policy. Japanese equities surged to multi-decade highs, driven by earnings growth, shareholder reforms, and renewed global interest in the market.⁸

Emerging Markets

Emerging markets presented a more mixed picture. China’s economy slowed into year-end as industrial output and retail sales weakened, reflecting persistent property-sector stress and soft domestic demand. Policymakers signaled a preference for targeted fiscal measures and structural reform rather than large-scale stimulus, even as trade surpluses hit record levels. Chinese equities rallied in the second half on policy optimism, but investor confidence remains fragile.⁹

India stood out as a relative bright spot. Inflation fell sharply, giving the Reserve Bank of India room to cut rates multiple times during the year. Domestic demand remained resilient, and growth expectations were revised higher. Equity markets reached record levels, though gains moderated toward year-end amid global capital flows.¹⁰

Latin America reflected divergent paths. Brazil’s central bank held rates at elevated levels to anchor inflation expectations despite slowing growth, while Mexico and Chile continued easing cycles as inflation cooled. Across emerging markets, a weaker U.S. dollar and global disinflation provided support, even as commodity price volatility created uneven outcomes.¹¹

Currencies and Cross-Market Signals

Currency markets reinforced the year’s broader themes. The U.S. dollar suffered its worst annual decline in years as interest-rate differentials narrowed and investors rotated away from dollar-centric trades. Most major currencies appreciated, led by the euro and Swiss franc, while the yen lagged amid cautious Bank of Japan tightening.¹²

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• Markets are embracing a soft-landing narrative as central banks pivot toward easing, even as labor markets loosen and growth signals become more uneven beneath the surface.

• The Federal Reserve’s rate cuts have supported risk assets, with cooling inflation and rising unemployment giving policymakers room to ease without immediately signaling recession.

• U.S. equity leadership remains narrow, as mega-cap stocks continue to dominate while small caps and cyclicals lag, reflecting late-cycle investor preferences.

• Global conditions are diverging, with Europe stabilizing faster than expected, Japan navigating a historic policy shift, and emerging markets following increasingly distinct paths.

• Cross-market signals point to caution, as record gold prices, a weaker dollar, and improving defensive performance contrast with equity-market optimism.

Central Banks Pivot as Markets Celebrate

As 2025 moves through its final stretch, markets are grappling with a familiar paradox. Asset prices continue to climb, buoyed by easing monetary policy and cooling inflation, even as underlying economic signals grow more uneven. Central banks have begun to pivot, investors are leaning into the soft-landing narrative, and risk assets are behaving as though the cycle’s most difficult phase is already behind us. Beneath the surface, however, labor markets are loosening, growth is diverging across regions, and risk appetite is becoming more selective.

In the United States, the Federal Reserve has now delivered three consecutive 25-basis-point rate cuts, bringing the federal funds target range to 3.50%–3.75%.¹ Recent inflation data has given policymakers room to maneuver. Core consumer prices have slowed to roughly 2.6% year over year, the lowest pace in four years, while the unemployment rate has risen to 4.6%, its highest level since early 2021.² Together, these trends suggest that restrictive policy is finally gaining traction.

Markets have responded enthusiastically. The S&P 500 has pushed to fresh record highs, extending a powerful rally fueled by falling yields and resilient growth data. Third-quarter GDP surprised to the upside, expanding at a 4.3% annualized pace and reinforcing the view that policy easing does not necessarily imply an imminent recession.³ Volatility has eased, financial conditions have loosened, and risk assets have broadly benefited.

A Narrow U.S. Rally

Equity leadership, however, remains concentrated. Large-cap stocks continue to dominate performance, while smaller companies lag meaningfully behind. The Russell 2000 has posted only modest gains, underscoring investors’ ongoing preference for scale, balance-sheet strength, and earnings visibility.⁴ Periodic bursts of small-cap outperformance have appeared when expectations for rate cuts intensified, but those rotations have faded quickly.

Sector performance reflects a late-cycle tension. Growth stocks have reasserted leadership in recent weeks, but defensive areas have quietly gained traction. Healthcare, utilities, and consumer staples have outperformed during bouts of market uncertainty, suggesting that investors are hedging even as indexes grind higher. Credit spreads have tightened modestly, though enthusiasm for lower-quality risk remains measured rather than exuberant.

For now, U.S. markets appear to be pricing a near-ideal scenario: inflation continues to cool, growth remains intact, and the Fed eases policy without sacrificing credibility. History suggests that such equilibrium tends to be temporary.

Europe Finds Its Footing

Europe enters the final stretch of the year in better shape than many anticipated. After flirting with stagnation earlier in 2025, economic activity has stabilized. Purchasing-manager surveys have moved back into expansion territory, inflation is hovering near the European Central Bank’s 2% target, and policymakers have signaled that the tightening phase is firmly in the rearview mirror.⁵

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• Central bank divergence intensified into year-end. The Federal Reserve signaled a pause after its latest cut, while the Bank of Japan tightened further and European policymakers leaned toward stability rather than additional easing.

• Market leadership broadened meaningfully. Small-cap and cyclical stocks outperformed as investors rotated away from stretched mega-cap technology, improving overall market breadth.

• The U.S. economy cooled without cracking. Inflation continued to ease while labor market data softened, reinforcing expectations of a late-cycle slowdown rather than a sharp recession.

• Europe surprised to the upside. Improving business activity and inflation near target allowed the ECB to hold rates steady, supporting the euro and stabilizing regional markets.

• Emerging markets diverged sharply. India sustained strong growth momentum, Brazil benefited from earlier policy discipline, and China remained constrained by weak confidence and property stress.

• Cross-asset signals pointed to normalization, not stress. Yield curves re-steepened, volatility stayed contained, and risk appetite improved, even as elevated cash balances reflected caution.

The final weeks of 2025 underscored how fragmented the global macro environment has become. While the Federal Reserve moved toward the sidelines after its latest rate cut, other major central banks pushed policy in different directions. Investors responded not by abandoning risk, but by shifting leadership within markets. As 2026 approaches, divergence—across monetary policy, regions, and asset classes—has replaced synchronization as the defining theme.

The Fed Pauses as Markets Reprice the Cycle

The Federal Reserve closed the year with a third consecutive rate cut, lowering the federal funds target range to 3.50%–3.75%. Chair Jerome Powell emphasized uncertainty and described policymaking as “driving through fog,” signaling that further easing is no longer automatic. Recent data support that caution. The U.S. unemployment rate climbed to 4.6% in November, its highest level in more than four years, even as payroll growth recovered modestly following an October slowdown.¹

Inflation trends have given the Fed room to pause. Headline consumer prices rose 2.7% year over year in November, the slowest pace since early 2021, while core inflation eased to 2.6%.² Together, softer inflation and cooling labor conditions suggest an economy decelerating toward trend rather than slipping abruptly into recession.

Bond markets reacted decisively. Treasury yields fell across the curve, and the long-running inversion finally reversed. The spread between 10-year and 2-year yields turned positive for the first time in over two years, reflecting expectations that policy is no longer restrictive enough to choke off growth.³ Equity markets absorbed the shift with relative calm. December trading proved choppy, but the S&P 500 still finished the year firmly higher, extending a multi-year run of strong performance.⁴

A Rotation Beneath the Surface

Beneath the surface of headline indexes, leadership shifted meaningfully. After years of dominance by mega-cap technology stocks, the fourth quarter saw investors rotate toward smaller companies and more cyclical sectors. Falling interest rates improved financing conditions for smaller firms, while stretched valuations in large-cap growth encouraged profit-taking.⁵

At the same time, enthusiasm around artificial intelligence began to cool. Investors grew more selective as questions emerged about the timing and scale of returns on massive AI infrastructure spending.⁶ The result was not a collapse in technology stocks, but a pause that allowed other segments of the market to participate more fully.

This broadening of participation matters. Rallies driven by a narrow group of stocks are inherently fragile, while advances supported by multiple sectors and styles tend to be more resilient. Increased contributions from small caps, industrials, and value-oriented areas suggest a healthier market foundation, even if the transition introduces short-term volatility.

Europe Finds Its Footing

Europe ended the year in better shape than many anticipated. Business activity surveys showed expansion at the fastest pace in more than two years, driven largely by a resilient services sector that offset ongoing manufacturing weakness.⁷ Inflation across the eurozone has largely converged with the European Central Bank’s target, giving policymakers confidence to hold rates steady after a year of easing.⁸

At its December meeting, the ECB left policy unchanged and upgraded its growth outlook, signaling that the disinflation phase is largely complete.⁹ This steady stance helped support the euro, which strengthened meaningfully against the dollar into year-end.¹⁰ Europe enters 2026 with improving momentum, inflation under control, and a central bank focused on maintaining stability rather than reigniting stimulus.

The United Kingdom and Japan Take Different Paths

In the United Kingdom, the Bank of England cut rates by 25 basis points after inflation fell faster than expected. The decision, however, revealed sharp divisions within the Monetary Policy Committee. Several members favored easing to support a stagnant economy, while others warned that inflation risks remain elevated relative to peers.¹¹ Markets now expect any additional cuts to be gradual and closely tied to incoming data.

Japan moved in the opposite direction. The Bank of Japan raised its policy rate to 0.75%, the highest level in three decades, marking another step away from ultra-accommodative policy. Policymakers expressed growing confidence that wage growth and inflation expectations are becoming self-sustaining.¹² Yet the yen weakened after the decision as investors concluded that further tightening would proceed slowly. Japan’s policy shift remains cautious, but its global implications are increasingly significant.

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Source: YCharts

Europe offered a more straightforward storyline. The eurozone composite PMI reached a 30-month high.² Inflation eased to 2.2%, essentially matching the ECB’s target.³ The UK remained the inflation outlier with CPI stuck at 3.8%, the highest in the G7, raising expectations for another BoE cut.⁴ Japan moved in the opposite direction: new fiscal spending and firmer exports strengthened the case for the Bank of Japan to consider its first meaningful rate hike in years.⁵

Cross-asset flows reflected similar tension. Money-market assets climbed to a ten-month high as investors sought safety.⁶ Yet global equities still attracted inflows. The U.S. yield curve remained roughly 50 bps inverted.⁶ Currency markets added drama: the dollar softened on expectations of Fed easing, while the yen briefly spiked as traders priced in BoJ tightening before retreating.⁷ ⁸

U.S. Macro & Market Backdrop

With official data delayed, investors were left to decipher contradictory labor signals. Revelio Labs estimated job losses in November even as jobless claims hit their lowest reading since 2022.¹ Layoff announcements, which had surged in October, fell sharply.¹ The overall impression: an economy cooling unevenly, not collapsing.

Expectations for rate cuts hardened quickly. Fed funds futures now imply an 85% chance of easing at the December meeting.⁷ Reports that the White House is considering a more dovish successor to Chair Jerome Powell strengthened that view.⁷ Treasury yields drifted lower, with the 10-year near 4% and the 2-year around 3.5%, maintaining a modest inversion.⁶

Source: YCharts

Equities reflected that uncertainty. After a strong autumn, the S&P 500 stalled on low volume. Defensive sectors such as utilities and healthcare outperformed, while high-beta names softened. With earnings decelerating and the Fed’s path shifting, markets appear to be waiting for clearer direction from both incoming data and policymakers.

Developed Markets

Europe

The eurozone continued to outperform expectations. The composite PMI climbed to 52.8.² Inflation hovered near target.³ ECB officials expressed confidence that inflation is “largely defeated”.³ Markets do not expect rate cuts until late 2026.³ Unemployment remains low, and surveys point to an economy holding up better than feared.³

United Kingdom

Britain’s inflation challenge persists. CPI held at 3.8%.⁴ Services inflation remains elevated.⁴ The Bank of England, having already cut rates five times since August 2024, now sits at 4.0%.⁷ Markets expect another cut soon. Fiscal tightening introduced in November may ease inflation next year, though household inflation expectations remain high.⁴

Japan

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