CWG Investment Committee: Markets Start the Year on the Right Foot

Markets started the year on a strong note, with major indexes posting solid gains in January. The S&P 500 reached new record highs before closing just below those levels. The DJIA led major indexes with a 4.7% gain followed by a 2.7% increase in the S&P 500 and a 1.6% rise in the Nasdaq Composite. Small-Caps also showed improvement, with the Russell 2000 gaining 2.6% after dropping 8% in December. Among equity styles, Large-Cap Value was the top performer, advancing to 4.5% in January.

The market breadth was strong, with all sectors finishing higher except Technology, which was down 0.7%. Health Care led sector gains were 6.8% . Beyond equities, Treasuries firmed, with some yield curve steepening, while gold surged 7.1% to record highs.

President Donald Trump was sworn in for his second term in mid-January, bringing renewed focus on his "America First" economic agenda. While investors initially responded positively to expectations of deregulation and a more business-friendly environment, tariff concerns resurfaced late in the month, weighing on sentiment.

The new administration has since announced and then paused 25% tariffs on imports from Mexico and Canada, while implementing 10% tariffs on Chinese goods. Despite these policy shifts, markets continued to benefit from strong animal spirits, corporate buybacks, and deregulation dynamics, plus a rate reprieve. However, the continuous trade policy uncertainty creates volatility, a theme that could persist in the months ahead.

The AI-driven market rally of the last two years hit a setback when Chinese start-up DeepSeek claimed its AI model could rival market leaders at a fraction of the cost, triggering a selloff. While concerns over Big Tech valuations and U.S. leadership briefly shook markets, fears about DeepSeek's cost advantage seem overstated, as established players still benefit from superior power and scale.

The Fed left interest rates unchanged at 4.25-4.50% in its January meeting, as widely expected. Chair Powell signaled no urgency to cut rates, citing encouraging inflation trends and potential relief from easing shelter costs, with markets now anticipating a possible rate cut by midyear.

The Q4 earnings season is underway, with 36% of S&P 500 companies having reported mixed results so far. While a solid 77% of companies have beaten profit expectations, the size of these earnings surprises has been smaller than usual.

Earnings growth is strong, up 13.2% year-over-year, the best in three years, signaling healthy profit expansion. Revenue growth has been muted, with many companies relying on cost-cutting. The market will be watching to see if this profit growth can continue in the coming quarters.

Looking ahead, February will bring the conclusion of Q4 earnings season and key economic data. With the Fed in a holding pattern, the focus may shift to specific company and sector results as well as tariff policy.

Historically, February tends to be a weaker month, with an average return of just 0.15%, according to Bloomberg data. We shall see if early-year momentum can continue.
 
We hope your year is off to a great start as the days grow longer and the weather warms up. Here's to a season of fresh opportunities and continued success!