Comments based on information available as of 6:00 am CT on 1/23/2026
Growth: Riding The Coattails
Third-quarter gross domestic product (GDP) growth was revised upward to a very healthy 4.4% annualized rate. While not an official forecast, the Federal Reserve Bank of Atlanta’s GDPNow model indicates that fourth-quarter growth could be even higher. Yet, job growth remains weak. This is not unusual. Following the Global Financial Crisis, we saw a “jobless recovery” followed by a “jobless expansion.” Conversely, in the first quarter of 2025, payroll growth remained positive despite negative GDP growth caused by the tariff shock. The labor market often lags output growth; businesses can be cautious to hire early in an expansion and loath to fire early in a downturn. Jobs tend to follow output, so it would not be surprising to see job market gains begin to improve soon.
Inflation: Good Luck With That
Early earnings reports suggest companies are struggling to raise prices. Modest hikes might slide by, but consumers are generally balking. Many firms front-loaded inventory to beat tariffs, but those stockpiles are now depleting. Shoppers are unlikely to accept “inventory challenges” as an excuse to pay more. While some are less price-sensitive than others, most consumers are still mad about the level of current prices and won’t take kindly to further hikes.
Policy: Walk-Back Wednesday?
President Trump dialed down the tensions when he spoke in Davos, Switzerland, on Wednesday. After a tense weekend, he stated he would not use military force to take control of Greenland. The audience in Davos likely breathed a collective sigh of relief, and markets responded positively. Less charitable observers might call this “chickening out,” while a more favorable interpretation is that this is simply part of the “Art of the Deal.” Whatever the motivation, what matters is what didn’t happen. It is back to business as usual.
Looking Ahead: Small’s Big Moment
Small-cap stocks have outperformed large-caps every trading day for the last 14 days, marking the longest winning streak since 1996. After four years of consistent underperformance, many are understandably skeptical that this is anything more than a “flash-in-the-pan”. However, there are fundamental reasons to believe this trend could continue. Economic growth is strong and likely to remain so, and the Federal Reserve is on pause with a bias toward cutting rates. If small-caps cannot outperform against this specific backdrop, it is difficult to imagine an environment where they could.
