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
