US Stock Weekly Report

2026-01-04

Previous Week’s Market Review & Analysis

Macroeconomic Landscape: The annual inflation rate in the U.S. for December 2025 came in at 2.7%, marking the lowest since July and falling below the 3.1% forecast. Core inflation also eased to 2.6%, its lowest since March 2021. This data, released early in the new year, provided a softer inflationary picture. The U.S. labor market remained a key focus, with anticipation building for the December jobs report. Expectations were for nonfarm payrolls to show a rise of approximately 55,000, down from November's 64,000, and for the unemployment rate to dip slightly to 4.5% from 4.6%. Average hourly earnings were projected to increase 0.3% month-on-month. The Federal Reserve's monetary policy trajectory was under scrutiny, with the market pricing in two 0.25% rate cuts in 2026, despite the Fed indicating only one such cut. Anticipation for the Federal Open Market Committee (FOMC) minutes from the December 9–10 meeting was high, as investors sought clarity on the central bank's rate-cut conviction following its third consecutive rate reduction. Geopolitical developments, including President Trump's tariffs, continued to be cited as potential economic headwinds for 2026, as evidenced by consumer sentiment in 2025 recording its lowest annual average since 1960.

Market Performance Overview: The holiday-shortened week, with markets closed on January 1 for New Year's Day, saw major indices generally close in negative territory. The S&P 500 declined 1.0% for the week, the Dow Jones Industrial Average shed 0.7%, and the Nasdaq Composite fell 1.5%. This overall weekly decline occurred despite the Dow Jones and S&P 500 breaking a four-day losing streak to post gains on January 2, the first trading day of 2026. Sector performance on January 2 saw energy and industrials lead with advances of 2.09% and 1.88%, respectively. Conversely, consumer discretionary and communication services lagged, declining 1.14% and 0.38%. Chip stocks, including Nvidia and Micron Technology, demonstrated strong performance, while Tesla notably declined 2.6% on reports of annual sales drops. Large-cap equity funds attracted net inflows during the week ending December 31, while small-cap and mid-cap funds experienced divestments.

Key Events Analysis: The release of December's inflation data (2.7% headline, 2.6% core) was a significant event, coming in below expectations and potentially reinforcing the case for future Federal Reserve easing. Investors also keenly awaited the FOMC minutes from the December 9-10 meeting for deeper insights into the central bank's rate-cut outlook for the coming year. There were no significant corporate earnings reports scheduled or released during this holiday-affected period.

Flows & Sentiment: U.S. equity funds recorded $16.89 billion in inflows for the week ending December 31, largely concentrated in large-cap funds. Conversely, small-cap and mid-cap funds saw outflows. Money market funds attracted substantial inflows of $83.71 billion, marking the largest weekly net purchase in four weeks. The CBOE Volatility Index (VIX) closed December 29 at 14.20, rising to 14.51 by January 2, indicating some initial short-term volatility to start the new year, though it remained at a relatively low level compared to earlier in 2025. Despite broad Wall Street optimism for a fourth consecutive year of equity gains in 2026, the anticipated "Santa Claus rally" failed to materialize in late December.

Overall Assessment: The market navigated a subdued, holiday-shortened week, with major indices generally posting weekly losses despite a modest positive start to the trading year on January 2. Softer December inflation data provided some macro relief, potentially bolstering expectations for future Fed rate cuts. However, the absence of a "Santa Claus rally" and mixed sectoral performance, coupled with lingering concerns about elevated valuations and the impact of tariffs, signaled a cautious transition into 2026 after a robust 2025.

Next Week’s key market drivers & Investment Outlook

Upcoming Events: The upcoming week, being the first full trading week of 2026, will be dominated by key U.S. labor market data. The December jobs report, including Non-Farm Payrolls, the Unemployment Rate, and Average Hourly Earnings, is scheduled for release on Friday, January 9. Other important economic releases include the ISM Manufacturing PMI on January 5 and the ISM Services PMI and ADP Employment Change for December on January 7. The preliminary January reading of the University of Michigan Consumer Sentiment index will also be closely watched. Federal Reserve officials are slated to speak, offering potential insights into the policy outlook. The fourth-quarter earnings season officially kicks off on January 13 with major bank reports.

Market Logic Projection: The narrative for the week will likely be shaped by the incoming labor market data, which could significantly sway Federal Reserve policy expectations. Stronger employment figures might temper expectations for aggressive rate cuts, while weaker data could reinforce a more dovish outlook. Given the VIX 1-Day ending last week below 10, initial market reactions to the new economic data could introduce increased volatility. The market will continue to balance the overarching optimism for sustained equity gains in 2026, driven by AI productivity and anticipated lower interest rates, against the inherent risks of current high valuations and economic headwinds.

Strategy & Allocation Recommendations: Investors are advised to maintain a cautious and balanced approach as the market processes a significant slate of economic data. Selective positioning remains key. Continue to monitor the technology sector, particularly semiconductor stocks, for continued momentum. Industrials and energy sectors also demonstrated strength. Focus on companies with robust fundamentals and clear earnings execution potential, especially given current valuations.

Risk Alerts: The December jobs report on January 9 represents the primary immediate market risk, with the potential to trigger substantial shifts in Fed rate-cut expectations. Elevated market valuations continue to warrant attention. Lingering geopolitical risks, including trade policy developments, could introduce unexpected volatility. The absence of a traditional "Santa Claus rally" suggests that the start of 2026 may be more challenging than some had anticipated.