Markets in January opened the year on a strong footing, with risk assets extending the late 2025 rebound despite an unsettled macro and economic backdrop. Equity markets advanced modestly, supported by resilient earnings expectations and tentative optimism that monetary policy easing will continue through 2026. However, investor conviction remained fragile, with gains punctuated by bouts of volatility as markets became wary of geopolitical volatility and some weaker economic data.
Geopolitical risks re-emerged dramatically in the month, with US action in Venezuela, escalation towards Europe over Greenland and a buildup of military strength around Iran, following nationwide protests there. While these have had a limited direct impact on markets so far, there is a growing underscore of reduced trust towards the US, particularly from European governments and investors. A weakening dollar and search for diversification away from the US are likely to be long term trends.
Cyclical sectors lagged as investors questioned the durability economic momentum, while defensive sectors saw renewed interest. European equities were resilient, underpinned by ongoing fiscal support linked to defence, infrastructure, and energy transition spending. Emerging markets made modest gains, helped by a softer US dollar and still-undemanding valuations.
Economic data released during the month reinforced the picture of slowing but still-positive growth. Labour markets continue to weaken, with job creation slowing further and wage pressures easing at the margin. Consumer sentiment improved slightly, though spending data suggest households remain cautious, constrained by the cumulative impact of higher interest rates and elevated living costs. Forward-looking indicators point to limited momentum, underscoring the risk that growth remains vulnerable.
Inflation trends continued to move in the right direction with goods inflation largely normalised across major economies. Services inflation, however, remains sticky, particularly in the US and parts of Europe, keeping central banks wary of easing too soon. While markets increasingly expect further rate cuts over the course of 2026, policymakers have emphasised the need for patience and data-dependence, tempering expectations of rapid or aggressive easing.
Fiscal dynamics remain a key focus for investors. In the US, concerns around debt sustainability and persistent deficits continue to weigh on longer-dated bond markets. Treasury yields were volatile through January, reflecting a combination of heavy issuance, uncertainty around fiscal negotiations, and shifting expectations for the pace of monetary easing. The dramatic rally in gold and silver prices is closely linked to the sustainability of government spending, combined with sticky inflation and looseness of monetary policy.
As 2026 begins, valuations, particularly in US equities, offer little margin for disappointment, while the global economy appears to be losing momentum rather than re-accelerating. While the absence of new shocks may allow markets to grind higher, the balance of risks still tilts toward caution. Sustained progress will likely depend on continued disinflation, credible fiscal policy improvements, and the ability of policymakers to navigate a slowing economy without undermining confidence.
This article was written by Will Dickson, Chief Investment Officer at P1 Investment Services
