The end of January brought big market swings as divergent tech earnings and an impending changing of the guard at the U.S. Federal Reserve fueled significant market volatility. The first week of February was little different, as questions over the sustainability of artificial intelligence (AI) demand left the and slightly in the red after a multi-day sell-off in the technology sector—even after a surge on Friday that pushed the past 50,000 for the first time ever.
and prices also stabilized toward the end of the week despite extreme volatility after its parabolic move higher was followed by the prior week’s crash, and investors debated the implications of the recent nomination of Kevin Warsh as Fed Chair.
Friday’s rally came amid renewed pledges from tech giants to spend hundreds of billions on AI as well as reassurances from Nvidia (NASDAQ:) chief Jensen Huang that AI demand is “incredibly high,” encouraging investors to “buy the dip” after days of heavy selling. A significant bounce in , which rose back above $70,000 after falling as much as 52 percent from its October highs, also replenished investors’ appetite for risk.
Nevertheless, the end-of-week recovery in the major indices has masked a significant market leadership shift and broadening that is occurring within markets. Recent market leaders, including the “Magnificent Seven” technology heavyweights and cryptocurrency, have come under pressure. Amazon (NASDAQ:) fell 12 percent last week—wiping more than $310 billion from its market value after it announced a staggering $200 billion capital expenditure plan for 2026—and Alphabet (NASDAQ:) slid 4.6 percent after revealing its own sweeping AI expansion plans. This pulled the Bloomberg equal-weighted basket of Mag Seven stocks down 4.66 percent down for the week.
Meanwhile, a basket of non-profitable tech companies created by Goldman Sachs—the performance of which has been heavily tied to the AI boom—that we have previously pointed to as an area of concern fell as much as 11 percent last week as of Thursday and finished the week lower by 3.34 percent after Friday’s rally.
As mega-cap and AI-tied growth stocks have been increasingly challenged over the past few months, we have seen a rotation to other areas of the market that we believe offer compelling opportunities for patient, long-term investors who are willing to embrace diversification. The index of Small-Cap stocks gained 3.95 percent last week despite the broader tech rout and is up nearly 9.9 percent year to date, while the S&P MidCap 400 Index rose 4.36 percent and is currently up 8.6 year to date as investors went on the hunt for value.
An equal-weighted version of the S&P 500 also outperformed the Large-Cap index, rising 2.13 percent during the week and 5.6 percent year to date. Meanwhile, the S&P 500—which is heavily influenced by the Mag Seven, down 4.13 percent year to date—is up only1.35 percent for the year.
Some of this rotation is being fueled by the lower environment after the Fed made three consecutive 25-basis-point cuts in 2025, which has taken the pressure off more rate-sensitive areas of the economy, including smaller-cap companies. This was reflected by recent data from the Institute for Supply Management (ISM) Report, which we’ll touch on in greater detail below, showing that the manufacturing sector joined the services sector in expansion for the first time in 11 months.
However, we note that both the manufacturing and services reports show that price pressures remain, particularly in the services sector, due to persistent labor market tightness and the delayed pass-through of tariff costs, among other factors.
While the recent services expansion comes as a positive sign, we continue to worry about the weakness in the labor market, which, as we have consistently highlighted in recent months, has at least historically served as a canary in the coalmine when it comes to future economic weakness. While the January from the Bureau of Labor Statistics (BLS) that was set to be delivered on Friday was delayed until later this week, other labor market indicators continued to point to a weak labor market.
Reports by private payroll providers and Revelio Labs showed significant cooling in the U.S. economy. ADP showed that U.S.-based employers added only 22,000 jobs in January, with Revelio Labs reporting that the U.S. economy lost 13,200 jobs. Concerningly, announcements continued their elevated pace from 2025 with the January 2026 release showing the largest total job cuts since January 2009, while the BLS’s most recent Job Openings and Labor Turnover Survey report from December showed that job openings declined sharply to 6.5 million in the final month of 2025, the lowest figure since September 2020. With 7.5 million Americans unemployed as of December, we now have 1.15 job hunters for each opening, the highest ratio since March 2021. We continue to believe that the pace of job gains in the U.S. is around 20,000 per month, a mere rounding error in a labor market of 171 million people.
The economy and markets remain in a delicate balance, offering both hopeful and concerning data points on which to guide our investment decisions. We continue to urge investors to remain focused on the intermediate to long term rather than chasing immediate gains and embrace diversification to capitalize on the continued broadening of the market into Small and Mid-Cap stocks.
Wall Street Wrap
U.S. manufacturing activity rebounds, but labor risks remain: The Purchasing Managers’ Index (PMI) jumped to 52.6 in January, up sharply from December’s 47.9 and above the 50 threshold that separates expansion from contraction, marking the first month of expansion since February 2025 and the highest reading since February 2022—not so coincidentally the month before the Fed began raising interest rates in March 2022. Key internal components like (57.1) and production (55.9) also moved into expansion, and the backlog of orders climbed in a sign that demand and output momentum has recently improved.
However, much of this strength appears tied to post-holiday restocking and tactical buying ahead of anticipated price increases from tariffs. “Although these are positive signs for the start of the year, they are tempered by commentary citing that January is a reorder month after the holidays, and some buying appears to be to get ahead of expected price increases due to ongoing tariff issues,” said Susan Spence, chair of the ISM Manufacturing Business Survey Committee.
Despite headline gains, the remained below 50 (48.1), suggesting that manufacturing firms are still cutting jobs or not hiring enough to grow payrolls. Meanwhile, prices paid held steady at 59, up slightly from 58.5 in December.
Services continue to expand: The registered 53.8 in January, marking the 19th consecutive month above the 50 threshold that signals expansion in the U.S. services sector. Business activity was particularly strong, with the business activity index near multi-year highs, while new orders faltered to 53.1 from 56.5 but stayed above 50. The employment subindex also edged just above 50, indicating modest job growth in services for the second straight month, a positive shift after softer readings in parts of 2025.
Although the headline PMI remained stable in January, registering 53.8 for the second month in a row, some underlying elements reflected mixed signals. Inventories and backlogs of orders stayed in contraction, which can reflect cautious ordering ahead or clearing of excess stock, while the new orders pace moderated from the prior month. Most notably, prices paid by services firms remained elevated at 66.6, suggesting stubborn cost pressures that could feed into consumer price inflation if they persist.
Consumer sentiment ticks up but remains weak historically: The University of Michigan’s Index of edged higher, with the preliminary February 2026 reading at 57.3, up modestly from January’s 56.4 and marking the highest level in several months, though it’s still 20 percent below its level a year ago and well under historical averages. Consumers continue to cite high prices and concerns about the labor market among their most pressing concerns.
The current conditions index rose to 58.3 from 55.4, while expectations fell slightly from 57 to 56.6. This suggests that while near-term sentiment may be stabilizing, many consumers remain wary of longer-term economic growth and labor market resilience.
Inflation expectations, a key forward-looking component of the Michigan survey, showed mixed results. Year-ahead fell sharply to about 3.5 percent, the lowest in over a year, while long-run inflation expectations (five to 10 years) ticked up to 3.4 percent in a sign that consumers still expect inflation to remain above pre-pandemic levels in the coming years. This shapes the concerns of the Federal Reserve, which worries that if consumers expect inflation to be a permanent feature of the U.S. economy, it could become a reality.
The latest data underscores a bifurcated economy in which higher-income consumers and larger corporations continue to gain from the stock market and tighter labor markets, while lower- and middle-income consumers are squeezed by stagnant wages and inflation.
“Sentiment surged for consumers with the largest stock portfolios, while it stagnated and remained at dismal levels for consumers without stock holdings. While views of the economy converged across population subgroups last spring amid announcements of the new tariff regimes, the 10 or so months thereafter have been characterized by a sharp divergence between higher-wealth, higher-income consumers and their lower-wealth, lower-income counterparts,” said Surveys of Consumers Director Joanne Hsu, noting that sentiment for the largest stockholders is currently nearly 50 percent higher than in May 2025, when national sentiment reached a trough. By comparison, sentiment for non-stockholders fell 6 percent during this period.
Should consumer confidence dampen further from already subdued levels, the implications for the broader economy could be significant as reduced household consumption weighs on economic growth and threatens to deepen existing economic divides.
Challenger job cut announcements point to labor market weakness: Increased labor cut announcements continued into the first month of 2026, with Challenger data showing that 108,435 cuts were announced in January, a 118 percent increase from 49,795 the same month in 2025. This marks the highest total for any January since 2009 during the Great Financial Crisis, when there were 241,749 cuts announced. On the other side of the equation, the firm recorded only 5,306 planned hires in the first month of 2026, the lowest total for any month going back to 2009, when Challenger began tracking hirings.
These increased labor cut announcements came after U.S.-based employers cut 1,206,374 jobs in 2025, the eighth-highest annual cull recorded in data stemming back to 1989. We also note that there were 259,948 cuts in Q4 2025 alone, the highest fourth-quarter cuts since 2008, showing that employment was treading worse as we exited 2025 and entered the new year.
The Week Ahead
Tuesday: On Tuesday, the National Federation of Independent Business is scheduled to release its full Small Business Economic Trends report for January. December’s report indicated that rose for the second consecutive month, with the Optimism Index increasing by 0.5 points to 99.5. We’ll be watching to see if this trend continues.
Separately, the U.S. Census Bureau will release its U.S. Advance Monthly Retail Sales report for December at 8:30 am EST after being previously delayed by the government shutdown, providing a comprehensive look at the holiday shopping season’s final performance. The current consensus for month-over-month growth is currently 0.4 percent to 0.5 percent. The prior report showed that retail and food services sales reached $735.9 billion in November, a 0.6 percent increase from October, a significant rebound from the revised 0.1 percent decline seen in October.
Wednesday: The BLS will release the January 2026 Employment Situation report, originally scheduled for Friday, February 6, but delayed by five days due to a brief partial government shutdown. In terms of non-farm payrolls, forecasters expect an addition of 69,000 jobs, a slight increase from the 50,000 jobs added in December, while the consensus forecast for the unemployment rate is that it will hold steady at 4.4 percent.
Friday: The U.S. government will release the Consumer Price Index () report for January, a critical gauge of inflation for the month. This release was originally scheduled for earlier in the week but was also pushed back due to the partial government shutdown. We will be watching to see if inflation continues to cool toward the Fed’s 2 percent target.
