The markets spent last week bouncing between two narratives – the uncertain direction of U.S. trade policy following the Supreme Court’s decision to strike down the Trump tariffs and the ongoing AI doom trade.
The stock market overall still looks fairly strong, although gains aren’t coming from the areas that investors are used to. Fear levels continue to slowly creep higher as the market tries to figure out who ultimately benefits from the emergence of AI and which businesses and sectors are most at risk.
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Market Moves
Weekly Market Snapshot:
- S&P 500: -0.4% – the broader market looks better than the major averages would suggest, but it’s clear that the market is growing more nervous.
- Nasdaq 100: -0.3% – tech was one of the big losers of the week; even a blowout earnings report from NVIDIA isn’t enough to sooth the market’s nerves.
- Russell 2000: -1.3% – this is classic risk-off behavior where investors shy away from the smaller, more vulnerable companies in times of uncertainty.
- VIX: 19.8 – volatility has been slowly but steadily ticking higher throughout 2026, not yet enough that it’s triggering a fear signal but more than enough to show that these are becoming more tense times.
- Gold: +3.4% – gold prices lock in their 7th straight monthly gain; safe haven trades maintain their appeal amid geopolitical and technological uncertainty.
- 10-Year Treasury Yield: 3.96% – this yield broke below 4% for the first time since November as investors seek out safety due to AI fears gripping the market.
Drivers:
The markets spent most of 2025 pricing in the upside of AI. Now it’s starting to price in the downside. There’s a lot of gloom and doom out there right now, but in reality, we still don’t know where the equilibrium will be. Some sectors, such as software, are being priced like the world is ending. But these rotations are part of the process. Concerns about the state of global trade and inflation are real factors that are likely to hang over the markets for a while. But corporate earnings still look good and that’ll add long-term support for stocks as long as that can sustain.
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Economic Highlights
A couple of the notable themes that stood out this week:
Where Do We Stand With Tariffs?
The decision by the Supreme Court to strike down most of the Trump tariffs was considered likely, but the ending impact is still unclear.1 The decision to immediately implement a global tariff of 10%, which was soon raised to 15%, shows that this issue isn’t likely to go away anytime soon.
The real implication might be the United States’ relationship with its global trade partners. Many countries are already diversifying away from their dollar exposure by increasing trade with other partners. China has been a beneficiary of such shifts, but Russia, India, and Brazil have also strengthened their non-U.S. trade relationships over the past year.
The Supreme Court decision should help to ease some pricing and inflation pressure in the near-term, but the Trump administration is still very clearly focused on efforts to reshore American business, whether that’s through tariffs or some other means. That’s likely going to keep inflationary pressures elevated.
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Another Inflation Reading Shows Price Pressures Aren’t Slowing Down
The January producer price inflation report was released on Friday and it shows that inflation is still sticky and stubborn. It rose by a higher-than-expected 0.5% month-over-month, bringing the annualized rate to 2.9%. The core PPI rate came in at 3.4%.2
Source: U.S. Bureau of Labor Statistics.
When the more popular CPI inflation measure dropped unexpectedly in January, the markets reacted as if this number would finally begin to approach the Fed’s 2% target. Since then, we’ve gotten a PCE report that ticked up to its highest level in nearly two years. And this report, which shows producer prices still on the rise and often trickles down into consumer prices.
If you look at the Fed Funds market, it’s still pricing in two rate cuts later this year as it has for months. The rhetoric, however, is shifting. Jerome Powell has indicated in recent speeches that he’s in no hurry to cut rates as long as inflation is problematic. Governors Williams and Goolsbee have also indicated a preference to keep rates where they are.
Equities have long responded positively to lower rates and have to some degree been pricing in the expectation of rate cuts to stocks. Without that, they may begin losing a tailwind as we head further into 2026.
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Home Prices Rise But Mortgage Demand Slumps; Is the Housing Market Facing a Reckoning?
The Case-Shiller Home Price Index showed a modest 1.4% year-over-year increase in December.3 That’s not a surprising finding since we know that home values have been increasing for a while. But the current imbalance in supply and demand is increasing the risk that one of the two may soon have to give.
Home prices have actually declined in most months recently. But that’s a common phenomena that’s occurred in the second half of the past several years.
Source: Standard & Poor’s.
But this could also be a product of declining demand. The 30-year mortgage rate just fell below 6% for the first time since 2022.4 The MBA Mortgage Index just slipped to its lowest level since January.5 Pending home sales numbers have been depressed.
This points to a real concern with affordability. Rates are coming down, but we’re still not seeing an increase in mortgage applications. Houses are for sales, but potential homebuyers still aren’t biting. The likeliest way to bring this back into balance would be for a significant correction in home prices. Not a major financial crisis correction, but one where home prices come back in line with what people can afford.
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The Week Ahead
A few themes to watch next week:
In Summary
The markets remain very choppy as investors try to figure out the implications of AI on the global economy. Rallies in both gold and Treasuries suggest that there is some money being taken off the table. The disappointing post-earnings performance from NVIDIA stock could mean that the tech trade has run out of gas and the rotation into other market sectors will continue. Either way, tensions appear to be high at the moment and next week’s series of economic numbers could go a long way towards calming fears.
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