When Running with the Bulls, Watch the Horns! The final quarter of 2025 ended on a familiar note: strong markets, steady growth, and just enough inflation to keep everyone on guard but not panicked. The economy kept advancing. The labor market cooled, but didn’t crack. And the consumer stayed in the game despite moaning and groaning.. Not a boom—but certainly not a bust. Despite a strong start, early 2026 has been a reminder that “calm” is not a permanent market feature. Volatility has popped back up, rates have stayed stubborn, and investors have had to, once again. re-learn that stocks can go down as well as up. Valuations remain high, leadership remains narrow, and the margin for error is thin. And of course, the Fed remains in its favorite posture—waiting for perfect clarity, which tends to arrive right after it’s needed. Still, the bull case continues to build. AI investment is no longer theoretical, productivity advancement is showing signs of life throughout the globe, and pro-growth expectations are gaining traction. The upside narrative is real. The issue is timing, magnitude, and ultimately price. The market is already paying in advance for a lot of good news. If the boom shows up, great. If it doesn’t, this is the kind of setup where complacency gets expensive.
How the Markets Fared
Fixed income delivered a steadier quarter than expected, as inflation drifted lower and the Fed continued easing—cutting rates twice in Q4 (at the late October and December FOMC meetings) to bring the target range down to 3.50%–3.75%. The brought the total for the year to three 25 bps. cuts, before eventually pausing at the January 2026 meeting. The 10-year Treasury yield finished at 4.16% at year-end, essentially flat from 4.16% at the end of the third quarter, underscoring how much of the adjustment had already occurred earlier in the cycle. Credit spreads remained tight, signaling that bond markets were not pricing in a near-term recession. Outside the U.S., a softer dollar and earlier easing expectations offered some support, but higher yields and heavy issuance largely offset those tailwinds, leaving international bond returns muted.
Stocks edged higher in Q4, climbing the wall of worry as tariff panic cooled and the economy refused to crack. Globally, modest gains were had virtually across the board with shockingly narrow volatility. Investor confidence was bolstered by steady consumer spending and resilient earnings. International stocks, both in developed and emerging markets edged out those in the U.S. due mostly to a continued sag in the dollar. But the continuation of 2025’s rally came with strings attached: valuations are rich, concentration remains high, and the margin for error is thin. The market is increasingly pricing the bull scenario as the base case.
Cool Breezes In Inflation Forecast
Inflation continues to move in the right direction. January CPI printed 2.4% year-over-year, with core at 2.5%—not quite mission accomplished, but meaningfully closer to the Fed’s 2% target. Producer prices were firmer in December on a month-over-month basis, yet remain contained at 3.0% year-over-year. The broader trend is not reaccelerating. Goods prices are far less problematic than they were two years ago, and while services inflation remains sticky, it is no longer broadening.
The Fed, for now, has room. Two rate cuts in Q4 followed by a January pause suggest policymakers believe progress is real, though incomplete. Financial conditions are not restrictive in a way that threatens growth, and bond markets are not signaling renewed inflation stress. That combination—cooling inflation without recession—leaves space for additional easing. With Kevin Warsh nominated to assume the Chair, markets will be watching closely to see whether the next phase of policy emphasizes patience, preemption, or something in between.
Labor & Wages–The Water is Cooling, but Not Icing Over
The labor market continues to moderate without unraveling. January unemployment dipped to 4.3%, and nonfarm payrolls rose by 130,000—a pace consistent with slower, but still positive, growth. Average hourly earnings increased 3.7% over the past 12 months, remaining above inflation and expanding real purchasing power for households.
Job openings, as measured by the December JOLTS report, declined to 6.5 million (November revised to 6.9 million), reflecting a labor market that is clearly less overheated than in prior years. That moderation has helped ease wage pressures without triggering meaningful job losses. Importantly, however, the latest payroll report came in stronger than many expected. If JOLTS openings begin to reaccelerate alongside firm hiring, it could signal that tightness is returning—raising the question of whether wage pressures prove stickier than anticipated.
Consumers: Soft Sentiment, Steady Spending
Consumer confidence remains volatile, but not collapsing. The Conference Board’s February reading rebounded to 91.2, up from January’s 84.5—the weakest level since 2014. The Present Situation index slipped, but Expectations improved, suggesting anxiety persists even as near-term outlook stabilizes. The University of Michigan survey tells a similar story: sentiment remains subdued at 56.4 in January, with a preliminary February tick up to 57.3. One-year inflation expectations edged lower, while longer-term expectations nudged slightly higher—hardly a runaway signal in either direction.
Importantly, hard data continues to look better than the headlines. Retail sales were virtually unchanged from November on the initial report, running +2.1% year-over-year. Not booming—but not retrenching. Income and spending data for December remain delayed, but there is little evidence thus far of a material consumer pullback. Balance sheets remain stable, wage growth continues to outpace inflation, and debt-service levels are not flashing stress. For now, the consumer appears cautious, not cornered.
Housing – Competing Inputs, Net Neutral
Housing remains stuck between improving affordability and uneven demand. Existing home sales fell in January, likely due to extreme weather in much of the country. Sales are down 4.4% year-over-year, a reminder that transaction activity remains fragile. Inventory sits at 3.7 months of supply, down from 4.2 in November. Supply it is far from loose and starting to look more and more constrained; once again, moving into the key spring selling season.
Price pressures continue to cool. The median existing-home price stands at $396,800, up just +0.9% year-over-year, while the Case-Shiller national index is running +1.3% year-over-year. Mortgage rates drifting into the sub-6% range are incrementally improving affordability, but not enough to spark a meaningful rebound in volume. Housing is neither collapsing nor accelerating. It remains a neutral input to growth—sensitive to rates, steady in values, and waiting for clearer direction.
Activity: Green Shoots, or Just Tax Fertilizer?
Business activity showed a notable improvement to start the year. The ISM Manufacturing PMI® rose to 52.6 in January, returning to expansion from 47.9 in December, with New Orders surging to 57.1. That is not a marginal move — it is a meaningful shift in forward momentum. The Services Report on Business® remained solid as well, with the ISM Services PMI® at 53.8 and New Orders at 53.1, suggesting broad-based demand remains intact.
The acceleration raises an important question. The reinstatement of accelerated depreciation under the OBBBA may be encouraging firms to bring capital expenditures forward. That may be genuine expansion — or it may be timing. (We think it’s a bit of both.) Tax policy can stimulate activity, but it can also rearrange it. The coming quarters will tell us whether this is the beginning of a sustained investment cycle, or simply a pull forward effect dressed up as growth. Next month may also reflect the, once again, shifting sands of tariff policy, as well.
GDP–Solidly Unspectacular
Real GDP increased 2.2% in 2025, down from 2.8% in 2024, reflecting moderation rather than contraction. Quarterly volatility masked some of that story. Q3 surged at 4.4%, while Q4’s first estimate came in at 1.4%, as earlier trade distortions faded and growth normalized.
Under the surface, the composition remains constructive. The consumer continued to carry much of the load, supported by steady employment and real wage gains. Business investment contributed as well, consistent with improving PMIs and rising optimism from previously subdued levels. Add it up: decent jobs, an “OK” consumer, and firmer business activity produced a solid year. Not a boom. Not a bust. Just growth settling closer to trend.
Global Valuations Look Swell(ed)
Global equity markets are trading above long-term valuation averages. That alone is not alarming—it reflects stronger earnings, lower inflation risk, and improved sentiment. But the degree matters. U.S. equities remain priced meaningfully above historical norms and above global peers on most forward and trailing measures. The premium is not new, but it is persistent—and increasingly dependent on continued earnings delivery.
International markets, by contrast, began the year with more modest premiums, despite continued gains. Both developed and emerging markets are off to strong starts, led by a softer dollar and capital flows rotating in from U.S. outflows. While valuations abroad are no longer “cheap” relative to their own histories, they remain more reasonable relative to U.S. multiples. With expanding international PMIs®, there may still be fuel left in the tank on which internationals can run.
PIERing Ahead
Commerce Secretary Lutnick recently suggested that 5–6% GDP growth is possible in the year ahead. Though that may prove ambitious, it does capture the logic behind today’s bull case: AI investment is accelerating, productivity is showing early signs of life, and policy has shifted toward capital formation. If accelerated depreciation, automation, and infrastructure buildout reinforce one another, growth could surprise to the upside. But technological revolutions rarely unfold in straight lines. The prevailing assumption has been that a handful of centralized LLM platforms and hyperscale providers will control the AI ecosystem. Yet, that narrative is already being tested. Projects like OpenClaw (an open-source, locally deployable AI framework designed to run advanced models outside of the major cloud platforms) hint at a more decentralized future. The term “OnPrem” has re-entered the conversation, referring to companies (and potentially even households) running their own AI agents and localized servers rather than relying entirely on centralized cloud providers like ChatGPT. That shift would not necessarily eliminate the giants, but it would change the economics and current growth narrative. Recent volatility among certain SaaS names like Salesforce (down 50% from it’s 2025 high) is an early reminder that when new towers rise, the names on the penthouse doors don’t always stay the same.
When new towers rise, the names on the penthouse doors don’t always stay the same.
This is where valuation meets humility. Today’s multiples may look expensive — or they may look like early entry points when viewed in the rear-view mirror. In March of 2000, Cisco Systems was widely believed to be the backbone of the internet for a generation to come; and it traded accordingly. Shockingly, it only just reclaimed that peak this month… 26 years later! Meanwhile, an online bookseller called Amazon is up roughly 6,000% from those levels. Few saw that script being written.
We don’t know all the companies will define the AI era. We do know that technological shifts of this magnitude tend to reward unexpected winners. For now, the economy is stable, inflation is cooling, activity is improving, and the bull case is intact. But when change is moving this quickly, conviction should travel with discipline. It may work brilliantly. It may evolve unpredictably. Either way, prudence remains part of the plan.
Winter 25-26 Market and Economic Commentary
When Running with the Bulls, Watch the Horns! The final quarter of 2025 ended on a familiar note: strong markets, steady growth, and just enough inflation to keep everyone on guard but not panicked. The economy kept advancing. The labor market cooled, but didn’t crack. And the consumer stayed in the game despite moaning and groaning.. Not a boom—but certainly not a bust. Despite a strong start, early 2026 has been a reminder that “calm” is not a permanent market feature. Volatility has popped back up, rates have stayed stubborn, and investors have had to, once again. re-learn that stocks can go down as well as up. Valuations remain high, leadership remains narrow, and the margin for error is thin. And of course, the Fed remains in its favorite posture—waiting for perfect clarity, which tends to arrive right after it’s needed. Still, the bull case continues to build. AI investment is no longer theoretical, productivity advancement is showing signs of life throughout the globe, and pro-growth expectations are gaining traction. The upside narrative is real. The issue is timing, magnitude, and ultimately price. The market is already paying in advance for a lot of good news. If the boom shows up, great. If it doesn’t, this is the kind of setup where complacency gets expensive.
How the Markets Fared
Fixed income delivered a steadier quarter than expected, as inflation drifted lower and the Fed continued easing—cutting rates twice in Q4 (at the late October and December FOMC meetings) to bring the target range down to 3.50%–3.75%. The brought the total for the year to three 25 bps. cuts, before eventually pausing at the January 2026 meeting. The 10-year Treasury yield finished at 4.16% at year-end, essentially flat from 4.16% at the end of the third quarter, underscoring how much of the adjustment had already occurred earlier in the cycle. Credit spreads remained tight, signaling that bond markets were not pricing in a near-term recession. Outside the U.S., a softer dollar and earlier easing expectations offered some support, but higher yields and heavy issuance largely offset those tailwinds, leaving international bond returns muted.
Stocks edged higher in Q4, climbing the wall of worry as tariff panic cooled and the economy refused to crack. Globally, modest gains were had virtually across the board with shockingly narrow volatility. Investor confidence was bolstered by steady consumer spending and resilient earnings. International stocks, both in developed and emerging markets edged out those in the U.S. due mostly to a continued sag in the dollar. But the continuation of 2025’s rally came with strings attached: valuations are rich, concentration remains high, and the margin for error is thin. The market is increasingly pricing the bull scenario as the base case.
Cool Breezes In Inflation Forecast
Inflation continues to move in the right direction. January CPI printed 2.4% year-over-year, with core at 2.5%—not quite mission accomplished, but meaningfully closer to the Fed’s 2% target. Producer prices were firmer in December on a month-over-month basis, yet remain contained at 3.0% year-over-year. The broader trend is not reaccelerating. Goods prices are far less problematic than they were two years ago, and while services inflation remains sticky, it is no longer broadening.
The Fed, for now, has room. Two rate cuts in Q4 followed by a January pause suggest policymakers believe progress is real, though incomplete. Financial conditions are not restrictive in a way that threatens growth, and bond markets are not signaling renewed inflation stress. That combination—cooling inflation without recession—leaves space for additional easing. With Kevin Warsh nominated to assume the Chair, markets will be watching closely to see whether the next phase of policy emphasizes patience, preemption, or something in between.
Labor & Wages–The Water is Cooling, but Not Icing Over
The labor market continues to moderate without unraveling. January unemployment dipped to 4.3%, and nonfarm payrolls rose by 130,000—a pace consistent with slower, but still positive, growth. Average hourly earnings increased 3.7% over the past 12 months, remaining above inflation and expanding real purchasing power for households.
Job openings, as measured by the December JOLTS report, declined to 6.5 million (November revised to 6.9 million), reflecting a labor market that is clearly less overheated than in prior years. That moderation has helped ease wage pressures without triggering meaningful job losses. Importantly, however, the latest payroll report came in stronger than many expected. If JOLTS openings begin to reaccelerate alongside firm hiring, it could signal that tightness is returning—raising the question of whether wage pressures prove stickier than anticipated.
Consumers: Soft Sentiment, Steady Spending
Consumer confidence remains volatile, but not collapsing. The Conference Board’s February reading rebounded to 91.2, up from January’s 84.5—the weakest level since 2014. The Present Situation index slipped, but Expectations improved, suggesting anxiety persists even as near-term outlook stabilizes. The University of Michigan survey tells a similar story: sentiment remains subdued at 56.4 in January, with a preliminary February tick up to 57.3. One-year inflation expectations edged lower, while longer-term expectations nudged slightly higher—hardly a runaway signal in either direction.
Importantly, hard data continues to look better than the headlines. Retail sales were virtually unchanged from November on the initial report, running +2.1% year-over-year. Not booming—but not retrenching. Income and spending data for December remain delayed, but there is little evidence thus far of a material consumer pullback. Balance sheets remain stable, wage growth continues to outpace inflation, and debt-service levels are not flashing stress. For now, the consumer appears cautious, not cornered.
Housing – Competing Inputs, Net Neutral
Housing remains stuck between improving affordability and uneven demand. Existing home sales fell in January, likely due to extreme weather in much of the country. Sales are down 4.4% year-over-year, a reminder that transaction activity remains fragile. Inventory sits at 3.7 months of supply, down from 4.2 in November. Supply it is far from loose and starting to look more and more constrained; once again, moving into the key spring selling season.
Price pressures continue to cool. The median existing-home price stands at $396,800, up just +0.9% year-over-year, while the Case-Shiller national index is running +1.3% year-over-year. Mortgage rates drifting into the sub-6% range are incrementally improving affordability, but not enough to spark a meaningful rebound in volume. Housing is neither collapsing nor accelerating. It remains a neutral input to growth—sensitive to rates, steady in values, and waiting for clearer direction.
Activity: Green Shoots, or Just Tax Fertilizer?
Business activity showed a notable improvement to start the year. The ISM Manufacturing PMI® rose to 52.6 in January, returning to expansion from 47.9 in December, with New Orders surging to 57.1. That is not a marginal move — it is a meaningful shift in forward momentum. The Services Report on Business® remained solid as well, with the ISM Services PMI® at 53.8 and New Orders at 53.1, suggesting broad-based demand remains intact.
The acceleration raises an important question. The reinstatement of accelerated depreciation under the OBBBA may be encouraging firms to bring capital expenditures forward. That may be genuine expansion — or it may be timing. (We think it’s a bit of both.) Tax policy can stimulate activity, but it can also rearrange it. The coming quarters will tell us whether this is the beginning of a sustained investment cycle, or simply a pull forward effect dressed up as growth. Next month may also reflect the, once again, shifting sands of tariff policy, as well.
GDP–Solidly Unspectacular
Real GDP increased 2.2% in 2025, down from 2.8% in 2024, reflecting moderation rather than contraction. Quarterly volatility masked some of that story. Q3 surged at 4.4%, while Q4’s first estimate came in at 1.4%, as earlier trade distortions faded and growth normalized.
Under the surface, the composition remains constructive. The consumer continued to carry much of the load, supported by steady employment and real wage gains. Business investment contributed as well, consistent with improving PMIs and rising optimism from previously subdued levels. Add it up: decent jobs, an “OK” consumer, and firmer business activity produced a solid year. Not a boom. Not a bust. Just growth settling closer to trend.
Global Valuations Look Swell(ed)
Global equity markets are trading above long-term valuation averages. That alone is not alarming—it reflects stronger earnings, lower inflation risk, and improved sentiment. But the degree matters. U.S. equities remain priced meaningfully above historical norms and above global peers on most forward and trailing measures. The premium is not new, but it is persistent—and increasingly dependent on continued earnings delivery.
International markets, by contrast, began the year with more modest premiums, despite continued gains. Both developed and emerging markets are off to strong starts, led by a softer dollar and capital flows rotating in from U.S. outflows. While valuations abroad are no longer “cheap” relative to their own histories, they remain more reasonable relative to U.S. multiples. With expanding international PMIs®, there may still be fuel left in the tank on which internationals can run.
PIERing Ahead
Commerce Secretary Lutnick recently suggested that 5–6% GDP growth is possible in the year ahead. Though that may prove ambitious, it does capture the logic behind today’s bull case: AI investment is accelerating, productivity is showing early signs of life, and policy has shifted toward capital formation. If accelerated depreciation, automation, and infrastructure buildout reinforce one another, growth could surprise to the upside. But technological revolutions rarely unfold in straight lines. The prevailing assumption has been that a handful of centralized LLM platforms and hyperscale providers will control the AI ecosystem. Yet, that narrative is already being tested. Projects like OpenClaw (an open-source, locally deployable AI framework designed to run advanced models outside of the major cloud platforms) hint at a more decentralized future. The term “OnPrem” has re-entered the conversation, referring to companies (and potentially even households) running their own AI agents and localized servers rather than relying entirely on centralized cloud providers like ChatGPT. That shift would not necessarily eliminate the giants, but it would change the economics and current growth narrative. Recent volatility among certain SaaS names like Salesforce (down 50% from it’s 2025 high) is an early reminder that when new towers rise, the names on the penthouse doors don’t always stay the same.
When new towers rise, the names on the penthouse doors don’t always stay the same.
This is where valuation meets humility. Today’s multiples may look expensive — or they may look like early entry points when viewed in the rear-view mirror. In March of 2000, Cisco Systems was widely believed to be the backbone of the internet for a generation to come; and it traded accordingly. Shockingly, it only just reclaimed that peak this month… 26 years later! Meanwhile, an online bookseller called Amazon is up roughly 6,000% from those levels. Few saw that script being written.
We don’t know all the companies will define the AI era. We do know that technological shifts of this magnitude tend to reward unexpected winners. For now, the economy is stable, inflation is cooling, activity is improving, and the bull case is intact. But when change is moving this quickly, conviction should travel with discipline. It may work brilliantly. It may evolve unpredictably. Either way, prudence remains part of the plan.
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