Key Wealth Investment Brief

A Pause Without a Path

Key Takeaways:

• The Fed held rates steady, keeping the federal funds rate target range at 3.50% to 3.75%.
• Chair Powell offered minimal forward guidance on what comes next.
• Communication emphasized maximum optionality, leaving markets to rely more heavily on the incoming data.
• Dissents mattered more than usual, highlighting internal debate amid thin forward guidance.
• The bar for easing remains high, and rate cuts under Chair Powell are far from assured.
• For markets, this was a reminder that restrictive policy can persist without additional hikes – or cuts.

The Decision: Hold Steady, Say Less

The Federal Reserve left the policy interest rate unchanged, as expected, maintaining a modestly restrictive stance while offering little new insight into the path ahead. The decision itself was straightforward; the communication surrounding it was not. This was a pause defined less by reassurance and more by restraint.

Maximum Optionality, Minimal Guidance – Markets Left to Read Between the Lines

The Fed appears intent on preserving maximum flexibility. By avoiding forward guidance or validation of market expectations, policymakers declined to narrow the range of possible outcomes. This approach keeps all options on the table – but shifts the burden of interpretation squarely onto markets.

Dissents Take Center Stage

With limited commentary from Chair Powell, the dissents carried added weight. They underscored a Committee that is not fully aligned on the balance of risks and highlighted ongoing debate about the appropriate policy path. In a meeting short on guidance, the dissents spoke louder than prepared remarks. Although, based on recent voting trends, it was not a surprise that Fed Governors Miran and Waller were the two dissenting votes, favoring a rate cut.

A Chair in "No-Comment" Mode

Chair Powell spent much of the press conference declining to elaborate on timing, sequencing, or conditions for future action. Rather than characterizing recent data or offering directional clues, Powell emphasized data dependence without interpretation. The press conference was notable less for what was said than for what was deliberately withheld.

The Bar for Easing Remains High

Notably absent was any effort to prepare markets for rate cuts. Powell offered no discussion of easing prerequisites, no acknowledgement that progress toward the inflation goal was sufficient, and no hint of sequencing toward normalization. Historically, when the Fed is approaching a pivot, the signaling process begins well in advance. That process has not begun.

While the statement was updated to reflect evolving economic conditions, Powell was careful to frame those changes as descriptive rather than directional. The revisions did not introduce language pointing toward normalization or rate cuts, underscoring the Committee’s desire to remain flexible rather than telegraph the next move.

An Increasingly Plausible Outcome: No Cuts Under Powell

Taken together, today’s messaging reinforces an outcome the market may be underappreciating: that rate cuts are not guaranteed while Chair Powell remains at the helm. Powell’s leadership has consistently favored patience and risk management over preemptive easing. Absent a material deterioration in economic or financial conditions, maintaining restrictive policy for longer remains firmly on the table.

Why Silence Was the Signal

This was not a dovish pause, nor an overtly hawkish one. It was a neutral decision delivered with deliberate restraint. By saying less, the Fed signaled caution, resolve, and an unwillingness to narrow the policy path prematurely.

Powell’s handling of questions related to the Lisa Cook hearing highlighted a broader tension between transparency and institutional risk management. Powell’s decision to avoid excessive commentary may frustrate observers, but it also reflects a judgement that public debate over internal matters can erode confidence in the Fed’s independence. In that sense, silence was not avoidance – it was risk control. When he did address the question, he was pointed and succinct, saying, “That case is perhaps the most important legal case in the Fed’s 113-year history and as I thought about it, I thought it might be hard to explain why I didn’t attend…I thought it was an appropriate thing [to attend] and I did it.”

What This Means for Markets and Investors

With the Fed declining to provide guardrails, markets are left to interpret the path of policy through incoming data rather than Fed signaling. For the front end of the yield curve, this reinforces a higher-for-longer bias – not because further hikes are expected, but because the Fed showed little urgency to move toward additional rate cuts. As a result, rate volatility is likely to remain elevated, with expectations adjusting meeting by meeting.

For Investors, the takeaway is less about direction and more about duration. Restrictive policy can persist without hikes – and without cuts. Carry remains attractive, but conviction around the timing of normalization remains low until the Fed begins to offer clearer signals.

In this environment, positioning matters as much as forecasting. With the policy path intentionally left open, investors may benefit from maintaining diversification, emphasizing high-quality exposures, and preserving flexibility while awaiting further clarity from incoming data and eventual Fed signaling.  Until the Committee begins to narrow the range of future paths, discipline – rather than aggressive duration or directional bets – is likely to remain the most reliable approach.

Key Takeaways:

“There are weeks when decades happen …”

While the year is less than a month old, there have already been several major geopolitical events. And while several were de-escalated last week, many carry profound consequences with long-lasting impacts:

• The removal of a sitting leader of a foreign country
• The specter of new military action in Iran
• Renewed ambitions for territorial expansion (Greenland)
• Renewed hostilities with major trading partners and the potential unraveling of NATO
• Major trading partners pivoting back to China
• Heightened attacks on the Federal Reserve’s independence
• Global bond yields (that were previously suppressed for many years) breaking higher

To complicate matters, another U.S. government shutdown may occur as early as this Saturday, January 31. Betting market Kalshi pegged the chance of a government shutdown at approximately 80% as of late in the day on January 25, 2026.

Through the turmoil, maintaining discipline and diversification remains crucial.

The Federal Reserve (Fed) will meet this week. No change to the fed funds rate is expected.

The Federal Open Market Committee (FOMC) meets this week. Fed Chair Jerome Powell will discuss the results of the meeting at the press conference on Wednesday, January 28. The current fed funds rate is the target range of 3.50% to 3.75%. No change in interest rates is expected at this week’s meeting.

Rick Rieder, currently BlackRock’s Chief Investment Officer of Global Fixed Income, has seen his odds rise in betting markets as traders continue to speculate on Trump’s choice for the next Fed Chair. As of late on January 25, betting market Kalshi showed Rieder with a 50% chance to be nominated as Fed Chair, Kevin Warsh at 29%, and Christopher Waller at 9%.

Despite numerous uncertainties, the near-term outlook for corporate earnings remains favorable.

U.S. economic growth remains robust. The Atlanta Fed GDPNow real GDP estimate for Q4:2025 is tracking above 5.0%. Consumer spending remains resilient, and artificial intelligence (AI) spending continues to provide a positive tailwind for economic growth.

A robust economy continues to support strong corporate earnings. Fiscal year 2026 earnings for the S&P 500 are expected to grow 14.7% year-over-year, according to FactSet. Strong earnings generally lead to higher stock prices over the intermediate to long term.

Japanese Prime Minister Takaichi has called snap elections for February 8, 2026. Takaichi wishes to pursue fiscal expansion (essentially lower taxes and higher spending).

Japan has been dealing with persistent inflation, and Japanese consumers expect inflation to continue, according to data from Bloomberg, the International Monetary Fund (IMF), and the Bank of Japan.

Inflation, combined with the prime minister’s plan for fiscal expansion, has put upward pressure on Japanese bond yields. After hovering around 0.00% for much of the past decade, the Japanese 10-year bond yield recently crested 2.00%. The Japanese yen has also weakened significantly versus the global currency basket in recent years.

Japan’s equity market is at a record high. Japan’s stock market currently comprises approximately 23% of MSCI’s international developed market index (EAFE). Japanese profit margins are at record highs, according to data from Bloomberg, MSCI, and the Bank of Japan; however, rising bond yields could threaten the equity market rally.

Bottom line – implications of nationalism and how to invest now.

The implications of a new world order (a.k.a. nationalism) include:

• Structurally higher deficits, inflation, and interest rates
• Diminished central bank independence (a.k.a. fiscal dominance)
• Potential headwinds for U.S.-based financial assets
• Increased geopolitical instability and volatility

Investors, therefore, must fully embrace the concept of diversification by asset class, by country, and by sector, style, and security. We especially favor “the forgotten 493” of the S&P 500, international markets, real assets, and utilizing alternative strategies (“new tools”), where appropriate.

Equity Takeaways:

Stocks rose in early Monday trading. The S&P 500 rose approximately 0.5%, to 6952, with the tech-heavy NASDAQ up a similar amount. Small-caps rose approximately 0.3%. International shares were broadly higher.

After a shallow pullback earlier in the week, the S&P 500 spent the week recovering after bouncing off the important 50-day moving average. This type of price action continues to look healthy to us.

Several large technology-sector companies will report earnings this week. With a little more than 10% of S&P 500 constituents having already reported for Q4:2025, the trend higher in earnings remains relentless. Earnings higher = stocks higher is a mantra we continue to repeat.

Momentum factor stocks peaked relative to the S&P 500 last August (surprisingly). Relative to the S&P 500, momentum stocks are in a well-defined downtrend. Last year, the momentum basket contained a significant amount of technology exposure, which peaked over the summer. Momentum-based indices rebalance periodically.

Investor sentiment is bullish, but not to extreme levels. The American Association of Individual Investor (AAII) Sentiment Survey (a reading of bullishness versus bearishness) reached 10.5 last week. Readings over 25.0 tend to indicate extreme levels of optimism (a contrary indicator).

Fixed-Income Takeaways:

Treasury yields were essentially unchanged last week. Geopolitical tensions and the “sell America” trade pushed yields higher early in the week; 10-year Treasury yields peaked around 4.31% early before reversing lower late in the week to close at 4.23%.

In early Monday trading, Treasury yields were falling slightly. Overall, 2-year Treasuries were yielding 3.59%, 5-year Treasuries 3.81%, 10-year Treasuries 4.20%, and 30-year Treasuries 4.79%. The slope of the 2-year / 10-year Treasury curve has reached its highest level since 2022.

Corporate bonds continue to see excess demand relative to supply. Spreads did not budge last week even amidst volatility in the Treasury market. Fixed income investors should guard against complacency and continue to focus on quality issues.

Key Takeaways:

The “low-to-hire / low-to-fire” labor market continues. Inflation remains sticky due to upward pressure on durable goods prices. Economic growth remains solid.

The “low-to-hire / low-to-fire” dynamic continues as continuing claims for unemployment insurance remain elevated, suggesting that those who are unemployed continue to have a difficult time finding work, according to data from the Department of Labor. At the same time, initial claims fell near cycle lows (198,000), implying that layoffs are not widespread.

While the rate of inflation with Services has moderated, Goods inflation (durable goods) has been rising, according to the Bureau of Labor Statistics. The former may be related to declining immigration (less upward pressure on housing prices), while the latter may be related to tariffs.

Americans remain concerned about inflation. A recent CBS News poll showed 76% of respondents did not believe their income was keeping up with inflation. On a cumulative basis, from December 2020 to 2025, wages have risen 30.2% and the Consumer Price Index (CPI) has risen 26.1%, according to data from the Federal Reserve Bank of St. Louis. Items such as hospital care, shelter, food, and electricity, however, have all risen at least as much as wages, if not more.

Economic growth remains solid in aggregate. The Atlanta Federal Reserve’s GDPNow estimate for Q4:2025 real GDP growth is tracking slightly above 5.0%. Lower imports are causing some noise within the data, but even after stripping out the noise, the underlying trend has GDP tracking towards 3.0% growth, a strong number.

Kevin Hassett is no longer the leading candidate to replace Jerome Powell as Federal Reserve (Fed) Chair.

Remarks from President Trump last Friday seemed to indicate that Kevin Hassett is no longer in the running for the Fed Chair job. Kevin Warsh is now considered the strong frontrunner, according to Kalshi.

Historically, Kevin Warsh has been critical of the Fed, and he is known to both the Republicans and the President, implying he would be easier to confirm than Hassett. Warsh has leaned hawkish in the past, even though his current views are considered dovish – his hawkish tendencies could become relevant if the economy overheats in the second half of 2026 and/or early 2027.

Greenland is just another example – the global world order is changing before our eyes.

President Trump’s comments on Greenland highlight an important shift in global geopolitics, as we described in our 2026 Outlook. On a global basis, rising nationalistic sentiment may lead to higher interest rates, higher inflation, and slower growth, all else equal. Pressure on global investors to diversify away from US assets could also put upward pressure on US rates and downward pressure on the dollar. The recent trade pact between Canada and China could be a sign of things to come as traditional US allies seek alternative trading partners.

President Trump has threatened new European Union tariffs related to the Greenland situation. These proposed tariffs contain many unknowns. Are the new tariffs additive to already existing policies? What are the conditions for the tariffs to be removed? Does the President have the authority to implement tariffs in this fashion? How will the European Union retaliate?

Three portfolio themes we are emphasizing in 2026 – the bottom line.

As a recap, Key Wealth’s three main themes for 2026 are below. With the Greenland news pushing the US dollar lower versus the global currency basket, investors are once again reminded of the benefits of diversification.

1) Business expansion should continue (no recession in 2026), supporting top-line growth; earnings will likely be supported by productivity; stock prices will be supported by margins; valuations remain high.

2) Artificial intelligence (AI) investing becomes more discerning, and exuberant expectations leave little room for error if expectations fall short: underweight mega-cap and overweight the “forgotten 493”; slight tilt to mid/small caps; emphasize quality.

3) Diversification returned in 2025 yet is still underappreciated. Bonds, international markets, and real assets can all play a role in portfolio diversification. Alternative strategies remain attractive where appropriate.

Equity Takeaways:

Stocks fell in early Tuesday trading. The S&P 500 dipped approximately 1.1%, to 6863, while the tech-heavy Nasdaq fell approximately 1.4%. Small caps dropped 0.7%. International shares also fell.

Last week, the S&P 500 churned near all-time highs. Today’s pullback has pushed the market back toward its 50-day moving average. The 50-day moving average has recently acted as important support – a break below this level would be notable.

Forward earnings expectations for the S&P 500 have accelerated in recent weeks. Earnings growth and margins are both expected to show continued strength in 2026. As we’ve said many times in the past, earnings higher = stocks higher.

Since late October 2025, large technology companies (the “Magnificent 7”) have gone sideways, while the remaining 493 constituents in the S&P 500 have rallied. A rotation is occurring underneath the surface of the market. One example, defensive growth stocks, such as health care, have outperformed technology shares since last July.

A broader look at relative performance shows international stocks once again outperforming their US brethren year-to-date (YTD). Emerging market equities have risen 5.8% YTD through January 16, 2026, with non-US developed markets up 3.7% YTD. The S&P 500 has risen 1.4% YTD. Cyclicals and value stocks are leading the market; more evidence that our broadening thesis is coming to fruition. Gold continues its strong performance, up 5.7% YTD.

Small caps have been underperforming large caps for many years. Over that timeframe, we have seen multiple failed relative rally attempts. Recent price action is notable in that small caps recently set a new 65-day high relative to large caps, followed by a higher low in this ratio (a bottoming pattern). Small caps are up 8.0% YTD through January 16, 2026.

Despite their recent strong performance, non-US stocks are inexpensive relative to US large cap stocks. US small caps are also relatively inexpensive compared to large caps. Valuations should not be used as short-term timing tools but are certainly a factor in long-term relative performance.

Fixed-Income Takeaways:

Treasury yields drifted higher last week. Inflation data came in strongly enough to dampen expectations for further near-term rate cuts. In addition, news that Kevin Hassett is no longer being considered for the Fed Chair role pushed yields higher, as Hassett was considered one of the more dovish candidates. The Fed is not expected to cut the fed funds rate at their meeting later this month. The current fed funds rate is the target range of 3.50% to 3.75%.

Early on Tuesday, Treasury yields were moving higher on geopolitical headlines surrounding Greenland. The US dollar fell approximately 0.9% versus the global currency basket, and long-term Treasury yields were rising by 5–7 basis points. Overall, 2-year Treasuries were yielding 3.59%, 5-year Treasuries 3.83%, 10-year Treasuries 4.27%, and 30-year Treasuries 4.90%.

Credit spreads tightened last week even as Treasury yields rose. Heavy new issuance continues, but the market has been able to absorb this new supply without a problem. Spreads remain very narrow relative to historic levels.

Key Takeaways:

We begin by summarizing three longer-term themes of our Key Wealth 2026 Outlook:

1. The rise of nationalism and “state capitalism,” and the related retreat from globalization.
2. Advancements in artificial intelligence: the promises, challenges, and unknowns.
3. The democratization of private markets and changes in market structure.

2026 Outlook: The Rise of Nationalism

Quoting our 2026 outlook:

“The transition from globalization toward nationalism presents considerable implications for investors. One consequence is that inflation and real interest rates are expected to remain structurally higher as companies prioritize resilience over efficiency.

“Furthermore, elevated costs are often accompanied by increased fiscal stimulus and monetary accommodation, even at the expense of central bank independence. This is a topic that we addressed several times in 2025 and will likely do so again in 2026.”

Lastly, increased nationalism has the potential to create “possible headwinds for U.S.-based assets, and greater geopolitical instability. As a result, building resilient portfolios is increasingly important in this environment.”

Federal Reserve (Fed) Chair Jerome Powell is the subject of a criminal investigation by the Department of Justice.

Powell has not been charged but is facing a criminal investigation over his testimony last summer about the Federal Reserve’s building renovations, according to The Wall Street Journal.

Powell released a statement strongly refuting the investigation, saying, “This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions — or whether instead monetary policy will be directed by political pressure or intimidation.” … “Public service sometimes requires standing firm in the face of threats. I will continue to do the job the Senate confirmed me to do, with integrity and a commitment to serving the American people.”

Possible motivation for this action is unclear, but there is risk that the independence of the Federal Reserve is again called into question. In such an environment, possible market implications are a weaker U.S. dollar and/or higher long-term interest rates.

Bottom line: remain diversified and don’t panic if market volatility increases.

The labor market is cooling but not collapsing. The Fed is unlikely to cut rates later in January.

December nonfarm payroll employment data was released last week. The “low to hire, low to fire” dynamic continued with U.S. employers adding 50,000 jobs in December, below the 73,000 forecast. In addition, jobs added in November and October were revised lower to a gain of 56,000 and a decline of 173,000, respectively, mostly due to a decline in the government sector. On the other hand, the unemployment rate improved from 4.6% to 4.4%, and wage growth showed a year-over-year gain of 3.8%, remaining steady.

The 3-month average of nonfarm payroll employment growth is negative, but October’s job losses were largely due to Department of Government Efficiency (DOGE) job cuts. Many federal employees were offered several months of continued pay if they resigned. October was the month they officially lost their jobs. Once this month is removed from the 3-month average, growth will likely reverse higher; however, the true strength of the labor market is unclear.

Market participants are pricing in almost no chance of a rate cut at the Fed’s upcoming meeting on January 28, 2026; betting website Kalshi is pricing only a 5% chance of a 25 basis-point cut (0.25%) at this meeting. The current fed funds rate is the target range of 3.50% to 3.75%.

2026 Outlook: Three portfolio themes we are emphasizing in 2026 – the bottom line.

1. The business expansion should continue (no recession in 2026), supporting top-line growth; earnings will likely be supported by productivity; stock prices will be supported by margins; valuations remain high.
2. Artificial intelligence (AI) investing becomes more discerning, and exuberant expectations leave little room for error if expectations fall short: underweight mega cap and overweight the “forgotten 493;” slight tilt to mid/small caps; emphasize quality.
3. Diversification returned in 2025 yet is still underappreciated. Bonds, international markets, and real assets can all play a role in portfolio diversification. Alternative strategies remain attractive where appropriate.

Equity Takeaways:

Stocks dipped slightly in early Monday trading. The S&P 500 was down approximately 0.1%, to 6956, with the tech-heavy Nasdaq down a similar amount. Small caps fell approximately 0.5%. International shares were generally higher as the dollar weakened. Gold rallied, continuing its strong momentum.

The S&P 500 is off to a good start in 2026. In December, the market experienced some backing and filling. Buying reignited once the calendar turned. Breadth is improving, and the S&P 500 hit a new 65-day high last week. Price action remains very constructive.

Earnings growth continues to power higher, supporting higher stock prices. At approximately 22x, the price/earnings (P/E) ratio of the S&P 500 remains elevated, but as long as earnings continue growing, the stock market will likely do well. Earnings higher = stocks higher.

Through Friday, January 9, U.S. small caps have already risen 5.3% year-to-date (YTD). International stocks have also done well, with developed non-U.S. markets rising 2.9% YTD and emerging markets rising 4.4% YTD. Gold is up 4.0% YTD, continuing its momentum from 2025, when it rose more than 60%.

Cyclical sectors have led the market advance, with materials, consumer discretionary, industrials, and energy as the top four performing sectors YTD. Interestingly, the technology sector has risen just 0.1% YTD, compared to the S&P 500’s 1.8% gain.

Fixed-Income Takeaways:

The broader context around the Powell subpoena relates to Federal Reserve independence. Loss of Fed independence would likely result in a steeper yield curve, with long-term rates rising relative to short-term rates, all else equal. Uncertainty around monetary policy has risen.

In early Monday trading, the overall bond market reaction to the Powell subpoena news was muted. Yields were 2-3 basis points higher across the curve, with 2-year Treasuries yielding 3.54%, 5-year Treasuries 3.77%, 10-year Treasuries 4.19%, and 30-year Treasuries 4.85%.

Even before the Powell news, a January rate cut was considered highly unlikely, and it now seems even more unlikely. In general, market participants are expecting approximately 50 basis points of rate cuts by December 2026, according to data from Bloomberg. The current fed funds rate is the target range of 3.50% to 3.75%.

Credit spreads moved tighter last week in conjunction with higher equity prices. Investment-grade (IG) supply was approximately $90 billion last week, one of the highest weekly volumes on record. Deals continue pricing into strong demand.