Weekly Investment Perspective

Markets delivered a mixed performance last week as investors digested improving manufacturing activity, uneven labor data, and another heavy round of corporate earnings. Sector leadership continued to shift beneath the surface, with value‑oriented groups gaining traction while technology stocks—especially software—faced renewed pressure. Mid and Small-caps were the leaders last week, with the S&P 400 Mid Cap and S&P 600 Small Cap indices gaining 4.38% and 3.96%, respectively, while the S&P 500 ended the week modestly lower down -0.1%.

Investment sentiment in technology remained fragile. Software shares extended their slide and are now down nearly 30% since late October (as measured by the IGV software ETF), reflecting mounting concerns that rapidly advancing AI tools could disrupt traditional software business models. Newly introduced AI tools intensified those worries, further weighing on the group. But not all tech faltered—semiconductors showed signs of stabilization later in the week, supported by aggressive capital‑spending plans from cloud providers aiming to meet rising AI‑infrastructure demand.

Outside the tech complex, market breadth was healthier. Banks, industrials, energy, and transportation stocks saw steady inflows. Precious metals remained volatile, with gold rising 5% for the week and silver down 2%. Oil prices fluctuated throughout the week and ultimately settled about 2.5% lower, marking the first weekly decline since December.

Economic data continued to show an economy that is expanding, though unevenly. The ISM manufacturing index surged to 52.6, its strongest level in more than three years (readings above 50 indicate expansion). New orders jumped to 57.1, and the backlog index returned to expansion territory at 51.6, suggesting activity could remain firm as we move further into the first quarter. Still, survey responses highlighted ongoing uncertainty around tariffs and capital‑spending plans.

The services side of the economy also showed resilience. The ISM non‑manufacturing index held at 53.8, supported by strong business activity, which climbed to 57.4. New orders dipped modestly but stayed in expansion territory. The prices‑paid index rose to 66.6, signaling that early‑year inflation pressures, while easing overall, have not fully subsided.

Labor‑market readings were mixed. The December JOLTS job‑openings figure fell to 6.542 million, the lowest since 2020, reflecting continued cooling in labor demand. At the same time, initial jobless claims increased to 231,000, though severe winter storms likely distorted the data. The unemployment rate remains steady at 4.4%, consistent with a job market that is softer but still stable. Economists note that slower population growth is lowering the bar for monthly job gains needed to maintain labor‑market equilibrium.

Consumer dynamics remain split across income groups. One‑year inflation expectations eased sharply from 4.0% to 3.5%, supporting sentiment at the margin. Vehicle sales, however, dropped sharply to 14.85 million annualized pace, down 7.7% from December, as winter storms disrupted activity. Despite this, economists expect auto demand to rebound later in the quarter as interest rates drift lower and tax‑refund season boosts household cash flow. Auto‑loan standards are also expected to ease throughout the year, further supporting demand.

Next week brings several key releases—including retail sales, the delayed January jobs report, and January CPI—that may clarify the trajectory of growth and inflation. Economists expect nonfarm payrolls to rise 80,000 and CPI to increase 0.3%, reflecting seasonal effects and still‑sticky prices, while strong earnings flow and $125 billion in Treasury auctions could add market volatility. With inflation gradually easing and labor conditions stabilizing, the Federal Reserve is still expected to stay on hold until mid‑year, when rate cuts in June and September remain the base case.

2026 The Long View | First Merchants Bank