Week In Review 

US equities posted broad gains for the week, with the S&P 500, Dow, and Nasdaq all advancing, though the rally was most pronounced in Small Caps, as the Russell 2000 outperformed. The tone was constructive, supported by a pro-cyclical rotation and a broadening of market leadership beyond the largest index names. While the S&P 500 trailed other major indices, the equal-weighted S&P 500 and small-cap benchmarks saw outsized moves, reflecting renewed risk appetite and optimism around fiscal stimulus and cyclical recovery themes.

Leadership trends favored Value over Growth, with Consumer Discretionary and Materials sectors leading, while Information Technology and Utilities lagged. Developed markets, particularly Japan, outperformed, while Emerging Markets were held back by weakness in China and India. Notably, the rally was not concentrated in mega-cap tech, as sector rotation and breadth improved. This shift was also evident in the outperformance of cyclical sectors and the relative underperformance of the S&P 500’s largest constituents, highlighting a move away from index concentration.

Macro data painted a mixed picture. December nonfarm payrolls came in slightly below expectations, but the unemployment rate ticked lower and average hourly earnings rose modestly, suggesting tentative labor market stabilization. ISM Services surprised to the upside, reaching its highest level since October 2024, with strength in business activity, new orders, and employment, while prices paid declined. In contrast, ISM Manufacturing remained in contraction for a tenth consecutive month, and the ratio of job vacancies to unemployed workers fell to its lowest since early 2021. Consumer sentiment improved for a second month, reaching its highest level since September, though inflation expectations remain elevated.

Rates ended the week mixed, as the labor market’s resilience and firmer wage data tempered expectations for near-term Fed easing. Market pricing for 2026 rate cuts moderated, with just over two quarter-point cuts now expected by year-end, down from earlier levels. Despite dovish commentary from Fed officials and the Treasury Secretary advocating for more aggressive cuts, the market remains cautious, reflecting both improved economic data and uncertainty around the Fed’s leadership transition.

Policy and geopolitical developments were active but had limited market impact. The Supreme Court did not release its anticipated ruling on presidential tariff powers under the IEEPA, with the next possible decision date set for the coming week. A ruling could lower the US effective tariff rate and potentially trigger refunds of previously collected tariffs, though the process is expected to be complex and drawn out. Meanwhile, geopolitical tensions flared in Venezuela, Iran, and Russia, but markets largely looked through these risks, consistent with the historical pattern of limited macro impact from such events.

Sector and thematic highlights included continued strength in retail flows, upbeat sentiment around AI and semiconductors, and a focus on affordability initiatives. Retail investors remained active, driving significant market volume, while AI-related headlines out of CES were positive, with companies highlighting robust demand and capital spending. In housing, President Trump announced a directive for Fannie Mae and Freddie Mac to purchase $200 billion in mortgages, aiming to drive mortgage rates lower and support affordability. This move is part of a broader push to address housing costs, though analysts remain cautious about the near-term impact given the complexity of implementation and the relatively small share of institutional ownership in the single-family rental market.

Looking ahead, the market will focus on the start of bank earnings season, with expectations for continued positive trends in capital markets and credit, but also scrutiny on expense growth and loan outlooks. The Supreme Court’s IEEPA decision, further consumer sector updates, and ongoing policy developments will also be in focus. While equity valuations appear stretched and positioning remains elevated, consumer sentiment and Main Street confidence are more muted. This backdrop suggests that, although some market segments may be vulnerable to shifts in positioning or policy, the absence of exuberant sentiment among households reduces the risk of a classic late-cycle market excess.

Key events to watch next week
FactSet estimates in parenthases unless otherwise noted.

Monday: none
Tuesday: US CPI (m/m: 0.3% | y/y: 2.7%), US Core CPI (m/m: 0.3% | y/y: 2.7%), US NFIB Small Business Optimism (99.5), US New Home Sales (Oct SAAR: 740k)
Wednesday: US PPI (m/m: 0.3% | y/y: 2.7%), US Core PPI (m/m: 0.2% | y/y: 2.6%), US Retail Sales (m/m: 0.4%), US Existing Home Sales (SAAR: 4.2M)
Thursday: US Initial Claims (208k), US Continuing Claims (1,918k), US Philadelphia Fed Index (-5.0), US NY Empire State Mfg Index (1.0)
Friday: US Industrial Production (m/m: 0.2%), US Capacity Utilization (76%), US NAHB Housing Market Index (40)

Past performance does not guarantee future results, which may vary.
Source: FactSet, MidWestOne Private Wealth.
All returns presented are total returns, which include the reinvestment of income and dividends.
For style performance, Large, Mid, and Small for US Equity refer to the Russell 1000, Russell Midcap, and Russell 2000 indices, respectively. Value refers to companies with lower price-to-book ratios and lower expected growth values, and Growth refers to higher price-to-book ratios and higher forecasted growth values. Real Estate refers to the DJ Equity REIT Total Return Index. Commodities refer to the Bloomberg Commodity Index. US Dollar refers to the value of the United States dollar relative to a broad basket of trade-weighted foreign currencies. Developed: MSCI EAFE; Morgan Stanley Capital International Index that is designed to measure the performance of the developed stock markets of Europe, Australasia, and the Far East. Emerging: MSCI Emerging Markets; Morgan Stanley Capital International Index designed to measure the performance of the emerging stock index of China, Brazil, India, and other emerging market countries.
Diversification does not protect an investor from market risk and does not ensure profit.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Views and opinions expressed are current as of the date of this publication and may be subject to change, they should not be construed as investment advice.