Quarterly Market Outlook: January 2026

By Liz Levy, CFA, Managing Director of Investment Research 

When trying to think about what our Outlook could possibly be in early January, I reread what I wrote last quarter, much of which remains true. I said, among other things, that “trying to discern what is coming next in financial markets always feels like more of an art than a science, but right now feels more fraught than other times. Part of that is political.” If anything, that’s even more true this quarter.  

Last quarter’s politics were mostly domestic, as the government was shut down, and investors were flying blind at a key decision-making time without the economic data the government provides. Early in this quarter, the politics seem to be international, as the world wonders what it means for the oil markets, democracy, and the international rules-based order for the U.S. to “run” Venezuela. Meanwhile, questions persist about the sustainability of the artificial intelligence capital spending boom and its impact on the domestic and global economies. Discussion of the domestic “K-shaped economy,” where those with resources are increasingly thriving and those without are increasingly struggling, have jumped from financial and economic articles to common lexicon. And yet, again, we open a new quarter with the stock market near its all-time highest level. 

We will get into more details below, but we want to highlight how we are positioning our clients’ portfolios for these uncertain markets. We continue to manage portfolios with a “barbell” strategy, with concentration at both ends of the risk spectrum, and a moderately defensive overall positioning. Our intention is to build portfolios that will participate with the market should it keep rising but will also provide some shelter from the storm should it not. This is consistent with what we have been saying for the last few quarters—we are continuing to focus on building resilient portfolios crafted for the long term, comprised of high-quality companies that meet our social and environmental standards, while being mindful of both potential economic threats and opportunities. 

Taking Stock 

Before we investigate our potential paths forward, let’s look at what has happened. The overall U.S. stock market, measured by the S&P 500, was up 2.4% in the fourth quarter and was up 16.4% for the full year. Looking under the hood, there was a moderate mid-quarter pullback as momentum stocks, including the “Magnificent Seven” tech-related stocks that have been leading the market, faltered on growing concerns about the sustainability of AI capital spending. For the quarter, those stocks were split, with some outperforming and some even falling. However, for the full year, the AI and tech-related sectors of Information Technology and Communications Services, as well as large-cap growth, led the pack for the third year in a row. Tech alone is now a greater percentage of the S&P 500 than it was in the 2000 Tech bubble, and Tech and Communication Services together ended the year at 45% of the S&P 500 benchmark index. The stock market remains bullish, finishing the year with the S&P 500 near an all-time high again. The cyclically adjusted price-earnings ratio, called the “Shiller PE ratio,” ended at an even higher valuation than the elevated level we had noted at the end of the third quarter, approaching its high-water mark of the dot-com boom.  

On the debt side of the market, the Fed cut rates twice in the fourth quarter, following the first cut in September made largely for fears of a weakening labor market. The Fed Funds rate ended the year at 3.5% to 3.75%. The outlook for further cuts is more mixed, with some Fed members indicating a preference to wait for more data and some wanting to move faster. Treasury yields fell for the full year, with the 10-year yield falling for the first time in the post-COVID era. Mortgage rates also fell for the first time post-C0VID, spurring hopes for a thaw in the frozen housing market. The dollar declined 8% for the year, erasing the gains of 2024.  

What’s Next? 

Part of the reason it is even more challenging than usual to predict the future is that there are a number of dichotomies present right now. December’s payroll report was generally weak, while the household unemployment data painted a brighter picture, with the unemployment rate even falling. As we discussed last quarter, the massive, brutal budget reconciliation bill passed last summer contains a lot of business-friendly incentives meant to spur domestic investment. However, businesses need confidence to make investments, and the OECD’s U.S. Business Confidence Indicator remained in the pessimistic zone for the full year, ending the year slightly lower than where it began. The Conference Board’s Consumer Confidence Index also fell in December and finished the year lower than it started. And while the buildout of the AI ecosystem is an undeniable megatrend unfurling in real time, the level of investment is increasingly being questioned, with the word “bubble” frequently popping up in relation to AI’s growth.  

If these points sound familiar, it’s because we mentioned them all last quarter as well. While the rate cuts that happened removed a sliver of uncertainty, the combined efforts of time, holidays, and lack of data due to the government shutdown meant that not much actually happened or changed in the fourth quarter, especially compared to the dramatic stock moves in the two preceding quarters. 

Which brings us to January.  

I don’t have a nuanced take on what has occurred in Venezuela, and even if I did, it would surely be out of date by the time you read this. What I do have are questions about the long-term implications of the moment we are in—questions that may not be answered for years. First is the geopolitical uncertainty of wondering what is next, and what else is now permissible. Within days, warnings about Cuba and Mexico were flying across social media, and somehow, unbelievably, administration officials are talking about invading (or buying) Greenland again. So, what about the other former Soviet republics? And what about Taiwan? What would a Chinese invasion of Taiwan mean for the global semiconductor supply?   

From a very high level, it would seem like the risk premium of global investments may need to increase, which essentially means investors would need to be paid more to make any investment, since all investments would be riskier than before, no matter where they are located. Similarly, another of my fears is that Americans—including normal citizens and politicians, as well as the investment community—may find that we have underappreciated the benefits we have derived from the dollar being the world’s reserve currency. The U.S. helped create the post-WWII rules-based international order and created a starring role for ourselves and our currency. I fear that other nations may decide, even after we hopefully mend our shredded democracy, that the full faith and credit of the U.S. government that backs Treasuries may mean far less than it used to. Other nations may choose to diversify their holdings to decrease the number of Treasuries they own, or demand far higher rates to compensate them for the risk of our government going rogue again. In either case, paying the interest on our massive national debt would be far more painful than was contemplated when we took on the debt.  

In the meantime, though, the path of least resistance for the stock market seems to be upward. Things could stay pretty good—there are data centers to be built, AI models to be trained, factories to be constructed, high-end consumer goods to be bought. This is why we are taking the barbell approach described above, with concentration at both ends of the risk spectrum, but an overall moderately defensive tilt. We will maintain our vigilance, challenging both our own assumptions and conventional market wisdom. Our aim is to build portfolios that can both benefit if markets rise but still offer protection if they don’t—focused, as always, on quality companies that reflect the social and environmental values we—and our clients—care about.  

What hasn’t changed is our grounding in the values that guide every investment decision we make: our commitment to equity, justice, and sustainability. Even in uncertain times, we remain focused on using your financial assets to drive positive change—through proxy voting, shareholder advocacy, and impact investing. I’m proud of the work we’re doing together now more than ever. 

Get in touch to learn more about how Clean Yield’s investment approach can help you achieve your long-term financial goals in alignment with your values.

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Liz Levy is responsible for researching publicly traded equities and managing client portfolios, having joined Clean Yield in June 2024. She brings more than 20 years of experience in Sustainable Investing. She is a Chartered Financial Analyst and is passionate about aligning investment portfolios with values, with deep experience in managing divested, fossil fuel-free, and clean energy investments.