January 2026
US stock prices continued to rise during the fourth quarter, though gains were smaller and prices were more volatile than the prior quarter. The quarter began with stocks trending higher. This trend reversed on October 10 with the S&P 500 dropping 2.7% following comments from President Trump that he was considering imposing 100% tariffs on Chinese imports. Stocks began to rally back on October 13 after President Trump made positive comments on the US-China trade relationship. The rally accelerated on October 20 following the release of better-than-expected sales figures by Apple and Coca Cola. Further easing of trade tensions and solid earnings results extended the stock market rally, pushing the S&P 500 to record highs on October 24, 27, and 28. For the month of October overall, the S&P 500 returned 2.34%.
Stocks quickly came under pressure in November, with concerns about the high valuations of AI stocks contributing to S&P 500 declines of -1.9% from November 3 through 6 and -4.5% from November 12 through 20. On November 21, optimism that the Federal Reserve might lower interest rates at its December meeting triggered a market rally. The rally continued for several sessions, eventually erasing all the months’ prior losses. The S&P 500 posted a gain of 0.5% for November overall.
During December, stocks trended higher through the Federal Reserve meeting on December 10 with the S&P 500 achieving a record high on the 10th. Even though the Fed had reduced the fed funds rate by 0.25% as expected, stocks began to decline on December 11. On the 11th, Oracle reported lower than expected revenues and announced plans to spend more than expected on building out AI data centers. This reignited concerns about the valuation of AI stocks and triggered a decline of -2.6% in the S&P 500 from December 11 through 17. Stocks began to rally back on December 18, as the report of lower-than-expected inflation raised hopes that Federal Reserve might cut rates again in early 2026. The ‘Santa Claus’ rally continued, fittingly, through Christmas Eve, with the S&P 500 posting a gain of 1.3% for the month through the December 24 close. However, stocks declined for the remainder of the month. As of the December 31, close, the S&P 500 had returned 0.06% for the month of December overall, 2.65% for the fourth quarter, and 17.88% for 2025.
Although we remain optimistic about the stock markets’ long-term prospects, markets are likely to remain volatile near term. The rich valuations of many of the technology stocks that have led the market rally are built on expectations for growth in AI revenues that appear impossible to meet. Articles have highlighted the heavy debt loads that some companies are taking on to build out AI infrastructure that may go unused, contributing to market volatility and flat returns in November and December. Politics may also weigh on markets, as Republicans and Democrats resume their battle over budget priorities and President Trump continues to pressure the Federal Reserve to lower interest rates. The conflicts in Ukraine and Venezuela appear to be escalating as well. Finally, slowing job growth prompted the Federal Reserve to cut the Federal Funds rate three times in 2025. The Fed’s ability to support the labor market and stock market by cutting rates further is limited as the rate of price inflation remains above their long-term target of 2%.
It should be noted that some segments of the market are likely to hold up better than others. Stock valuations outside of the technology sector continue to be attractive. Market volatility also leads investors to rotate their portfolios toward stable stocks. For further details, please see below.
The Economy:
- Consumer spending remains strong, providing near-term support for the economy.
- Job growth has been sluggish for several months. The US unemployment rate has risen to 4.6%.
- Monetary policy overall remains supportive. There is no need for aggressive interest rate cuts.
- Corporate earnings growth for 2026 is currently expected to exceed 7%.
Investment Valuations & Rotation Toward Stability:
- Investors continue to reassess the valuations of technology shares. Many stocks outside this sector have attractive valuations. This is a great environment for active stock managers, particularly ones that look for stocks with reasonable valuations.
- In volatile markets, investors tend to rotate toward stocks that have provided more stable returns in the past. Stocks that possess economic moats tend to have more stable returns and often benefit in these environments.
This report has been generated from information that Arbor Financial believes to be reliable and accurate. We do not represent or warrant the accuracy or completeness of the information contained in this report. As such, all calculations, estimates, and opinions included in this report constitute our best judgment as of this date and may be subject to change. Past performance does not guarantee future results.
Peter has more than 25 years of experience in the financial industry as a researcher, strategist, and portfolio manager. As a portfolio manager at Arbor, Peter performs quantitative analysis on current and prospective portfolios.
Peter is a CFA charter holder. He earned his PhD in Economics as well as dual Bachelors of Science degrees in Computer Science and Pure Mathematics from the University of California, Santa Barbara.
Before joining Arbor, Peter was a Founding Member of institutional money manager OakBrook Investments and worked there for 22 years serving in a variety of roles including portfolio manager, Director of Research, and co-Chief Investment Officer. Prior to forming OakBrook, Peter worked at ANB Investment Management & Trust Company as a strategist, portfolio manager, and Head of Research.
Peter has lived in Lisle, Illinois since 1997. Outside of work he enjoys sports car racing and is an active member of the Autobahn Country Club in Joliet, Illinois and the Sports Car Club America (SCCA).