Economic Update: Week of January 26, 2026

NEW THIS WEEK

Growth

The U.S. economy grew by a stronger than expected 4.4% saar in 3Q25. Consumers continued to power the economy forward, with spending up 3.5%. Business fixed investment rose 3.2% as spending on equipment and IP products was partially offset by weaker spending on structures, while inventories were a modest drag. Residential fixed investment remained weak, contracting by 7.1%. Elsewhere, a 2.2% rise in government spending, a 9.6% spike in exports and a 4.4% decline in imports all helped support growth. While the government shutdown likely weighed on activity in 4Q25, fiscal stimulus should boost growth in early 2026.

Jobs

The results of the December jobs report were mixed. Job growth remained sluggish with the U.S. economy adding 50k jobs. Downward revisions were sobering, removing 76k jobs from the prior two months. On a more positive note, the unemployment rate fell by 16bps to 4.4% after spiking in November. Total private wages rose 0.3% m/m and 3.8% y/y, but wages for private production and non-supervisory workers (~80% of private payrolls) slowed to 3.6% y/y from 3.8%, suggesting that most of this month’s wage growth came from supervisory or high-skilled roles. On balance, this report showed a labor market with little momentum heading into 2026. Still, with labor demand and supply both weakening, labor market slack is not growing worse. Payroll growth could accelerate alongside economic growth as fiscal stimulus kicks in in early 2026.

NEW THIS WEEK

Profits

The 4Q25 earnings season is in full swing. With 13.1% of market cap reporting, consensus is currently estimating EPS will grow by 7.3% y/y. Looking at the three main sources of EPS growth, sales, margins and shares are expected to contribute 6.2, 1.9 and -0.8 percentage points, respectively. From a sector perspective, tech is doing the heavy lifting this quarter, on track to drive 86% of the y/y EPS growth. On the other hand, the consumer and health care sectors are struggling as rising costs hurt profitability.

Inflation

The December CPI report showed that inflation came in largely as expected with headline and core CPI up 2.7% and 2.6% y/y, respectively. However, the reversal of shutdown-driven data quirks that biased inflation lower last month was milder than expected. Food prices rose at their fastest monthly pace since 2022 while declines in gasoline and fuel oil were offset by a spike in utility gas services prices. Core goods prices were flat on the month, largely driven by weakness in autos, while travel -related categories boosted core services inflation. Rent and owners’ equivalent rent, categories that will remain distorted until April 2026, both rose 0.3% m/m, consistent with their pre-shutdown pace. This report did little to change the outlook for monetary policy, and fiscal stimulus and delayed tariff pass‑through could cause inflation to reaccelerate in 1H26.

Rates

At its last meeting of the year, the Federal Reserve voted to cut the federal funds rate by 25bps to a target range of 3.50% – 3.75%. Three voting members dissented, with Miran voting in favor of a 50bps cut while Schmid and Goolsbee voted to hold rates steady. However, four nonvoting members of the FOMC who may rotate into voting seats next year submitted projections in favor of no December rate cut. Notably, the tweak in the statement stating “in considering the extent and timing of additional adjustments” to policy rates suggests a January reduction is unlikely, while the moderate changes to the committee’s economic projections leaned hawkish. The median interest rate outlook maintained just one cut for next year and in 2027. While the Fed still has an easing bias, it may be less active in adjusting policy in 2026.

Risks

• Delayed tariff pass-through and fiscal stimulus could put upward pressure on inflation.
• A divided Federal Reserve could deliver fewer rate cuts than markets currently expect.
• Elevated geopolitical tensions could spark bouts of volatility.

Investment Themes

• Solid fundamentals should allow U.S. markets to continue to grind higher.
• Fiscal stimulus, dollar weakness and regional catalysts should support strong international performance.
• Private markets can offer investors more ways to access the AI theme.

This weekly update provides a snapshot of changes in the economy and markets and their implications for investors.

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Originally Posted January 26, 2026 – Economic Update

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