A Goldilocks Expansion Amid Headline Volatility

1. Market Volatility and Positioning The S&P 500 has delivered three consecutive years of exceptional performance, up +24% in 2023, +23% in 2024, and +18% in 2025.¹ Concentration has been prevalent with the Mag Seven dominating the returns along with the technology sector, which accounts for 35% of the SPX.

Headlines tend to be sold before fundamentals are fully assessed. Recent episodes tied to tariffs and geopolitics, including Deep Seek, Liberation Day volatility, the November growth scare, Greenland-related tensions, and renewed tariff rhetoric toward Europe, have each triggered short-term pullbacks, which we discussed in depth in last week’s Weekly Wisdom. Importantly, these drawdowns have consistently proven to be buying opportunities rather than signals of a broader deterioration in fundamentals. With economic momentum intact and earnings growth still supported, market corrections driven by sentiment and positioning continue to present opportunities for disciplined investors to add at more attractive entry points.

2. Fundamentals and Productivity The most important anchor for markets remains the underlying strength of economic fundamentals. The Atlanta Fed’s GDPNow tracker is currently running at 5.4%, well above the long-term average of roughly 2%. This acceleration continues to be driven by a resilient consumer and sustained investment tied to artificial intelligence, but it is increasingly being reinforced by a powerful policy backdrop. Roughly $1 trillion of combined fiscal, monetary, and deregulation support is flowing into the economy, which is equivalent to about 1% of GDP. This includes measures from the One Big Beautiful Bill framework, the lagged impact of Federal Reserve rate cuts, and a gradual normalization of regulation, all of which are adding incremental support to growth. At the same time, the Federal Reserve’s balance sheet expansion is providing additional liquidity to the system.

If there is a single variable that matters most in this environment, it is productivity. Last quarter, productivity rose 4.9%, a sharp break from the roughly 2% pace. This improvement has occurred alongside a 1.9% decline in unit labor costs², easing inflation pressures rather than exacerbating them. This combination represents a true “Goldilocks” setup: stronger trend growth supported by efficiency gains and lower inflation.

The economy has managed to sustain above-trend activity without meaningful support from housing, underscoring the breadth and durability of the current expansion. Should housing begin to recover, particularly if financing conditions ease, it would represent an incremental upside catalyst that could extend and potentially amplify the growth cycle from already-strong levels.

3. Davos Signals a Constructive Corporate Backdrop The tone from Davos this week was notably constructive, with CEO commentary reinforcing an optimistic outlook. Comments from Morgan Stanley’s CEO, Ted Pick, were particularly telling. He described the current environment as “excellent,” noting that “the lights are pretty green” with M&A, IPO pipelines, and Wealth Management all doing well. Importantly, he highlighted that the ongoing normalization of the regulatory environment is creating opportunities to increase market share, while also emphasizing that both corporations and consumers remain in solid financial health, even as the economy continues to exhibit a K-shaped profile.

4. Consumer Strength The U.S. consumer continues to enter 2026 on a solid footing, with spending trends, income growth, and credit performance reinforcing a constructive outlook. Recent data show personal income rising 4.3% year over year, while disposable income increased 3.8%. Spending remains strong, up +5.4% year-over-year, and core PCE is up +2.8% year-over-year.³ Most firms continue to point to supportive tailwinds for the consumer, including incremental deregulation and a potentially stronger tax refund season. Importantly, credit conditions remain constructive with delinquencies and broader credit performance improving.

5. Fixed Income U.S. Treasury yields drifted modestly higher across the curve last week, a move that obscured notable intra-week volatility as markets absorbed renewed geopolitical tensions stemming from President Trump’s threat to impose tariffs on several NATO allies amid disputes related to Greenland. By Friday’s close, the 2-, 10-, and 30-year yields were higher by 1, 1, and 2 basis points, respectively. Credit markets saw continued strength last week. Investment-grade spreads tightened 1 basis point to +102, while high-yield spreads narrowed 3 basis points to +311.⁴ In the municipal market, tax-exempt yields were mixed, with front-end maturities edging 1–2 basis points lower, while intermediate and long-term segments saw yields rise by 3–5 basis points.

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Return for Selected Indices⁵

Sources:

1. Bloomberg: As of January 2026 ↩︎
2. Bloomberg: As of January 8, 2026 ↩︎
3. Bloomberg: As of January 25, 2026 ↩︎
4. Bloomberg: As of January 25, 2026 ↩︎
5. Bloomberg: As of January 25, 2026 ↩︎

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