The information and opinions included in this document are for background purposes only, are not intended to be full or complete, and should not be viewed as an indication of future results. The information sources used in this letter are WSJ.com, Jeremy Siegel, Ph.D. (Jeremysiegel.com), Goldman Sachs, J.P. Morgan, Empirical Research Partners, Value Line, BlackRock, Ned Davis Research, First Trust, Citi research, and Nuveen.
IMPORTANT DISCLOSURE
Past performance may not be indicative of future results.
Different types of investments and wealth management strategies involve varying degrees of risk, and there can be no assurance that their future performance will be profitable, equal to any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.
The statements made in this newsletter are, to the best of our ability and knowledge, accurate as of the date they were originally made. But due to various factors, including changing market conditions and/or applicable laws, the content may in the future no longer be reflective of current opinions or positions.
Any forward-looking statements, information, and opinions including descriptions of anticipated market changes and expectations of future activity contained in this newsletter are based upon reasonable estimates and assumptions. However, they are inherently uncertain, and actual events or results may differ materially from those reflected in the newsletter.
Nothing in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice. Please remember to contact Signet Financial Management, LLC, if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and/or services. No portion of the newsletter content should be construed as legal, tax, or accounting advice.
A copy of Signet Financial Management, LLC’s current written disclosure statements discussing our advisory services, fees, investment advisory personnel, and operations are available upon request.
Federal Reserve gains room to lower rates as inflation outlook improves
US economics, inflation, jobs and the Fed
The U.S. inflation outlook improved at the start of 2026 according to Value Line. This was reflected in the January Consumer Price Index (CPI) report, which showed easing in the pace of price growth at the consumer level. Specifically, the CPI and the core CPI, which excludes the food and energy components, increased 0.2% and 0.3%, respectively, on a month-to-month basis. From a one-year perspective, the CPI and core CPI rose 2.4% and 2.5%, respectively. The core CPI reading was at its lowest level since 2021 and suggests that increased tariffs are not having as big an impact on the price of goods as many economists feared.
On the inflation subject Professor Siegel notes:
“The most encouraging data point may not be the headline CPI itself, but real wages. Year-over-year real weekly earnings were reported up 1.9%, the strongest gain since the pandemic. Hourly real earnings are running around 1.2%, in line with recent history, but that near-2% annual gain in weekly pay tells us purchasing power is improving in a meaningful way. These wage gains — combined with inflation consistently undershooting expectations — can shift consumer psychology. Importantly, we are seeing one of the largest differences between expected inflation and actual inflation. As consumers realize prices are not rising nearly as fast as feared, that gap becomes a tailwind for spending. From a monetary perspective, this is precisely the environment that gives the Federal Reserve (Fed) room to continue lowering rates. Money supply growth has stabilized while inflation is trending toward the Fed’s 2% objective without a deterioration in employment.”
The market is expecting more than one interest rate reduction this year. The more benign January CPI report, along with lukewarm job growth over the last 12 months, may give the central bank more wiggle room to further cut the benchmark short-term interest rate. President Trump’s appointee to lead the Federal Reserve, Kevin Warsh, would likely welcome such support for moves lower. However, the US economy might not even need further monetary boosts. After a weak start to 2025, the gross domestic product (GDP) advanced over the final nine months of last year, although last quarter was impacted by the government shutdown.
Global economy
Disappointing US and Japan releases reduced JP Morgan (JPM)’s 4Q25 global GDP growth estimate to 2.7% annual rate recently. But 4Q25 final private sector demand grew at a healthy pace in both of these economies and nearly everywhere outside of China. In the US, a sharp drop in public sector spending reflecting the government shutdown held GDP growth down to a 1.4% annual rate. A fading of this drag is expected to boost growth this quarter. While the 2.4% annual rise in private sector final demand best describes US growth momentum at present, monitoring sharply divergent private demand components is key to gauging the path ahead. While tech spending surged last year, US business spending on non-tech capex and stock building slumped in the second half of 2025. Consumer spending grew a solid 2.4% annual rate despite a stall in real income. JPM’s central thesis is that a move towards more balanced growth is now taking hold, and a cooling in consumer spending is accompanied by a pickup in job growth and non-tech business spending.
This year JPM sees two themes emerging. The first is that the tech boom has legs, as reflected in Asian exports, US spending on equipment and software, and global tech output. That non-tech production stalled last quarter is no surprise given weak demand for stock building and a step down in global auto sales. But secondly, global durable goods activity appears to have picked up outside of Asia at year-end.
JPM believes a normalization in business sentiment from last year’s trade war shock is the underlying catalyst for a cyclical lift in business spending and hiring. It is thus encouraging that the flash future output PMI (Purchasing Managers’ Index) moved up to its highest level in over a year this month.
Stock market
Meanwhile, fourth-quarter earnings season has been a productive one for Corporate America. With more than 75% of the S&P 500 companies having reported results, profit growth averaged 13% according to Value Line. If this continues to hold true, it would mark the fifth consecutive quarter of double-digit growth.
The markets took notice of healthy earnings and although some of the Mega Caps were punished for extraordinary capex plans, the broader market is perceived to benefit from new technologies and hopefully friendlier business environment. The recent market leadership rotation with Value and Small companies outperforming is a testament to that (see the graph below).
S&P index ETFs Alpha YTD
Presents S&P size-style index ETFs cumulative alpha. Benchmark is S&P 1500 ETF (SPTM).
Professor Siegel agrees:
“In fact, what I see unfolding is continued healthy market rotation. The anxiety is concentrated in select AI-linked leaders and industries perceived as vulnerable to disruption. Meanwhile, large portions of the non-Magnificent 7 market trade at reasonable multiples and has potential to be beneficiaries — not victims — of AI adoption. Productivity gains will not accrue solely to tech providers; they will lift margins across industrials, healthcare, financials, and consumer sectors. That’s where the valuation support lies…
Technological change will continue to disrupt industries, and some business models will be impaired. But productivity growth is ultimately deflationary and wealth-enhancing. We may even see the long-discussed four-day workweek become viable over time as output per hour accelerates. That is not a recessionary signal, that is a prosperity signal. Anxiety is part of every technological transition. But the data tell us the economy is stabilizing, inflation is receding, and real incomes are rising. That is not a backdrop for derailing a bull market. It is a backdrop for its expansion.”
The information and opinions included in this document are for background purposes only, are not intended to be full or complete, and should not be viewed as an indication of future results. The information sources used in this letter are WSJ.com, Jeremy Siegel, Ph.D. (Jeremysiegel.com), Goldman Sachs, J.P. Morgan, Empirical Research Partners, Value Line, BlackRock, Ned Davis Research, First Trust, Citi research, and Nuveen.
IMPORTANT DISCLOSURE
Past performance may not be indicative of future results.
Different types of investments and wealth management strategies involve varying degrees of risk, and there can be no assurance that their future performance will be profitable, equal to any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.
The statements made in this newsletter are, to the best of our ability and knowledge, accurate as of the date they were originally made. But due to various factors, including changing market conditions and/or applicable laws, the content may in the future no longer be reflective of current opinions or positions.
Any forward-looking statements, information, and opinions including descriptions of anticipated market changes and expectations of future activity contained in this newsletter are based upon reasonable estimates and assumptions. However, they are inherently uncertain, and actual events or results may differ materially from those reflected in the newsletter.
Nothing in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice. Please remember to contact Signet Financial Management, LLC, if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and/or services. No portion of the newsletter content should be construed as legal, tax, or accounting advice.
A copy of Signet Financial Management, LLC’s current written disclosure statements discussing our advisory services, fees, investment advisory personnel, and operations are available upon request.
LET'S GET ACQUAINTED