U.S. equity markets capped off an eventful month of January with mixed performance last week as investors digested a deluge of corporate earnings reports and key Federal Reserve developments. The S&P 500 rose about +0.3% for the week, while the Dow fell roughly -0.4% and the Nasdaq slipped about -0.2%. Beneath the surface, last week’s gains were somewhat concentrated, but the broader January pattern has been a gradual broadening in market participation—helped by strength in small caps, international stocks, and cyclically sensitive areas even as software and other high valuation pockets of the market remained under pressure. Zooming out, markets have started 2026 on steady footing despite rapid shifts in federal policy, geopolitics, and a fast-evolving AI narrative all competing for attention. For the month, the S&P 500 gained +1.4%, the Dow rose +1.7%, the Nasdaq added +1.0%, and the Russell 2000 surged +5.3%, a notable rotation into small caps that hints at improving optimism around growth and the interest-rate outlook.

That constructive start to the year also came with an important counter-signal: precious metals. Gold and silver were strong for much of January, reflecting investor demand for hedges amid policy and geopolitical uncertainty. But the end of the month delivered a reminder that momentum cuts both ways—both metals saw sharp, sudden sell-offs late last week following the Fed chair announcement, highlighting how quickly crowded positioning can unwind.

Against that backdrop, the Federal Reserve took center stage. The January FOMC meeting itself was largely a non-event, with policymakers holding rates steady as expected and emphasizing a meeting-by-meeting approach as they balance moderating inflation against a still-resilient economy. Recent data continue to support that caution: inflation has eased from its peak, but it remains sticky, underscored by last week’s core PPI reading of +3.3% year-over-year, which came in hotter than expected.

The bigger development was President Trump’s nomination of Kevin Warsh as the next Fed Chair to assume the role when Chair Powell’s term ends in May. Initial market commentary has leaned constructive: Warsh is generally viewed as a candidate who would be more likely to preserve the Fed’s institutional credibility and independence than some other figures in contention. At the same time, there is an active debate about his policy lean—Warsh was seen as more hawkish during his earlier tenure, yet his more recent commentary has sounded more open to easing if inflation continues to cool. Investors are also focused on his preference for a smaller Fed balance sheet, which could keep added pressure on longer-term yields even in a world where short-term rates eventually decline.

Earnings were the other major driver last week, with reports from four of the Magnificent Seven shaping day-to-day market swings and reinforcing how high the bar has become. Meta rallied sharply after strong results and upbeat signals on ad monetization, even as management pointed to aggressive investment plans tied to AI. In contrast, Microsoft sold off despite solid earnings, as investors focused on cloud growth that came in just shy of elevated expectations and the implication that near-term AI investment will remain intense. Apple posted what many observers described as blockbuster iPhone demand, but the market also weighed concerns around rising memory-component costs and supply constraints. More broadly, AI capex expectations continued to move higher across the industry—supportive for semiconductors and infrastructure—but software remained an area of pressure, reflecting concern that AI tools and agents could reshape purchasing priorities and competitive moats. Meanwhile, earnings results in aggregate continue to surprise to the upside: S&P 500 blended earnings growth for 4Q is trending near ~12% year-over-year, up meaningfully from initial expectations below 8%, yet price reactions have been mixed as investors demand not just beats, but durable guidance.

Looking ahead, markets will balance another busy earnings calendar, headlined by tech giants like Alphabet and Amazon alongside blue-chip reports including Eli Lilly and PepsiCo, with a heavy slate of economic data. The week’s focal point is January jobs data, including Friday’s payrolls report, with additional reads from JOLTS and ADP earlier in the week. As always in a policy-heavy environment, markets may remain sensitive to fast-moving headlines, but January’s returns—and especially the rotation into small caps—suggest investors are still willing to look through noise when the fundamental backdrop holds up.

2026 The Long View | First Merchants Bank