Making Sense of a Choppy Start to 2026 – Part I

Six Things You Should Know

1. Equity Markets – were mixed this week with U.S. stocks (S&P 500) falling -0.19% while international stocks (EAFE) increased +1.86%.
2. Fixed Income Markets – generally ended down this week with investment grade bonds (AGG) remaining flat and high yield bonds (JNK) declining -0.42%.
3. Mineral Dependence – President Trump hosted 55 countries this week at a critical minerals summit, floating the idea of price floors and ramped up investment as the U.S. looks to become less reliant on China. Meanwhile Panama angered China after revoking access to CK Hutchinson, a Hong-Kong based company. China in response has threatened that Panama could face a “heavy political and economic price”.
4. Oil Rises – Oil prices rose this week in the lead up to a U.S./Iran sit down, with leaders from Tehran quick to note there will not be a quick resolution between the feuding nations. Meanwhile, oil transporters are expediting their shipping routes through the Strait of Hormuz as concerns of a shutdown impacts supply chain.
5. Cybersecurity Reminder- Scammers are increasingly using Remote Access Tools (RATs) along with phishing emails or texts to take control of devices like phones, tablets, and computers. Once installed, these tools can give cybercriminals access to sensitive information, including your Schwab accounts. These attacks can be hard to spot, so if something doesn’t feel right- like unusual account activity or suspicious messages- trust your instincts. If you sense suspicious activity, please call us immediately or report any concerns to Schwab at 800-515-2157. 
6. Key Insight – [VIDEO & ARTICLE] 2026 has brought no shortage of macro headlines and consequently whipsaws to the risk markets. In this two-part series, we walk through the big drivers in markets at the moment, what it means, and, even more importantly, what it doesn’t mean.

Insights for Investors

By Tim Mitrovich

A Choppy Start to 2026 

The start to the year has left many investors quite confused, and understandably so. There have been plenty of pleasant surprises from the market’s general lift at the beginning of the year to the pleasant surprises in the overall economy and long beleaguered manufacturing sector.  

On the general economic front, data released this month showed a huge lift in nonfarm productivity growth, with Q3 data rising 4.9% (Source: Yahoo Finance, 1/12/26), and then this week came the release of PMI data, which was full of good news, including a US Manufacturing print that came in at 52.6. As summarized by TrendMacro, “US manufacturing PMI is nothing short of a blowout upside shocker. Services PMI is a nice beat. It’s not unanimous worldwide, but the strongly weighted balance is toward the productivity supercycle we’ve been talking about.” (Source: TrendMacro, 2/4/26)

Another key takeaway from this week’s PMI data was highlighted by Fundstrat’s Tom Lee, who noted that when PMI crosses back above 50, that usually coincides with the mid-point of an economic cycle and not an end. (Source: Fundstrat, 2/3/26) 

While the current economic backdrop has generally been defined by positive news (more on that in a bit), we sit here year-to-date with an essentially flat S&P 500 and one that has been facing increasing downward pressure, which has retail and institutional investors both confused. 

Two important things to note before we get back to what’s been moving markets and making headlines as of late. First, we’ve long encouraged investors to look beyond just the S&P 500 in their allocations, and that has certainly been beneficial year-to-date. The equally weighted S&P 500 ETF (RSP), with greater value-stock exposure, is up over 4.5% (as of this writing), whereas the S&P 500 has only seen a 0.5% gain. Furthermore, international stocks are continuing their run of outperformance with international value stocks up over 8% year-to-date. (Source: Bloomberg, as of 2/4/26 market close)  

Second, there is still a lot of year left, and if history is any indicator, the outlook is still bright despite what many feel will be a volatile year. Tom Lee highlighted this week the “Rule of First 5 Days” and the January “Barometer,” both of which speak to the likelihood of market-strength for the overall year if either of those is positive from a return-perspective, which they both were this year. Of special note is that when both are positive, the equity market has historically resulted in a full-year return that has been up 92% of the time with an average return of 18%. In contrast, if those two indicators do not occur, the stock market has only been up 47% of the time with an average return of just 4%. (Source: Fundstrat, 2/3/26) 

Over the next two weeks, we will look at five themes driving markets this year, including some key insights/color on those topics from a few of our favorite analysts: Tom Lee (Fundstrat), Torsten Slok (Apollo), and the team Trend Macrolytics (aka TrendMacro). While the S&P 500 index whips back and forth within a range, the real story is the internal rotations going on within the index. 

This week, we will cover how the market spent the last couple of weeks (1) repricing discount-rate risk, and (2) debating whether new AI tools threaten legacy software economics.

1) Rates: the Fed pause, the Warsh nomination, and why curve shape mattered 

Equities entered the week with the Fed in focus. Reuters reported on January 29 that the Fed held rates steady—pausing an easing cycle that had supported stocks—and that futures pricing pushed the next cut toward June; the S&P 500 briefly cleared 7,000 intraday that day (Reuters, Jan 29, 2026: https://www.reuters.com/business/investors-bet-later-fed-cuts-support-markets-after-pause-2026-01-29/). 

Then the policy narrative became a leadership narrative. Reuters noted on February 3 that investors were increasingly betting on a steeper yield curve under expected incoming Fed Chair Kevin Warsh, because the market is weighing a mix of rate cuts and balance-sheet reductions—conditions that can keep long yields higher even if the front end eases (Reuters, Feb 3, 2026: https://www.reuters.com/business/finance/investors-ramp-up-bets-steeper-yield-curve-under-warsh-led-fed-2026-02-03/).

For equities, that matters because long rates are a direct input to valuation for long-duration growth stocks (e.g. tech stocks), while curve-steepening can be a relative tailwind for financials. 

Torsten Slok has been tracking the structural backdrop behind curve volatility. In his January 27 Daily Spark, he highlighted that about $10 trillion of U.S. government debt matures over the next year, and that foreign ownership of Treasuries has declined to about 25% of the total outstanding versus roughly 33% a decade ago (Apollo Academy, The Daily Spark, Jan 27, 2026: https://www.apolloacademy.com/the-daily-spark/).

Even without a directional call on yields, those constraints raise the odds of rate-driven equity multiple compression–in short, headwinds for stocks to work through.

As discussed briefly above, those headwinds are immutable. Trend Macrolytics recently emphasized the medium-term regime variable that can change the “neutral rate” debate: productivity. They cite capital-goods orders hitting a new all-time high and calling it evidence of a “new productivity supercycle” (TrendMacro, Media Appearances, Jan 26, 2026: https://trendmacro.com/media). 

Lastly, turbulence around a Fed Chair is nothing new nor anything to be feared. Tom Lee called out this week that there has been at least a 10% drawdown in the first year of a new Fed Chair for 10 of the last 13 new Fed Chairs (Source: Barclays, Bloomberg 2/3/26) 

A practical way to think about the week’s rate impulse is to separate two steepening scenarios. If the curve steepens because the market demands a higher term premium to absorb more duration, equity multiples typically compress (especially in growth). If it steepens because growth expectations are improving, cyclicals can offset the valuation headwind through higher earnings expectations. Slok’s emphasis on supply/demand mechanics is a reminder that both forces can operate at the same time. 

2) AI disruption risk hit software—while the AI capex boom kept compounding

The week’s most visible equity move was a global selloff in software and “information” businesses, as investors tried to price the risk that new AI tools could disintermediate workflows and compress pricing power. Reuters reported on February 4 that U.S. equities were pressured by a software and cloud selloff tied to fears that rapid AI advances could disrupt traditional software business models (Reuters, Feb 4, 2026: https://www.reuters.com/business/futures-muted-ai-jitters-batter-software-alphabet-adp-focus-2026-02-04/), and Reuters framed the prior session’s decline as traders fretting about AI-driven competition for software makers (Reuters, Feb 3, 2026: https://www.reuters.com/business/sp-nasdaq-futures-edge-up-earnings-deluge-takes-center-stage-2026-02-03/).

The narrative gained force because it was tied to fresh capability releases from Anthropic. Nvidia CEO Jensen Huang dismissed the idea that AI will replace software tools as “illogical,” even as the selloff deepened (Reuters, Feb 4, 2026: https://www.reuters.com/business/nvidias-huang-dismisses-fears-ai-will-replace-software-tools-stock-selloff-2026-02-04/). 

However, in our opinion, the market may not have been pricing in “AI replaces software,” rather “AI changes the economics faster than incumbents can defend.” 

This matters for global equities because it widens the set of industries facing near-term margin questions (from software licenses to IT services and data providers) in addition to concerns around those industries increasing spending and debt levels. 

Slok’s Daily Spark outlined the details around this later point in a piece discussing that the AI cycle is still fundamentally a capex-and-financing super-cycle. On January 30, he wrote that hyper-scaler capex has tripled since 2023, and that forecasts point to more than $2.7 trillion of cumulative AI-related spending from 2025-2029. He also noted that Oracle, Meta, Google, and Amazon issued roughly $90 billion in bonds in late 2025, turning the AI buildout into a financing event that could reshape investment-grade credit indices (Apollo Academy, The Daily Spark, Jan 30, 2026: https://www.apolloacademy.com/the-daily-spark/). 

Trend Macrolytics’ public commentary points in the same direction—capex orders as the precursor to growth and productivity (TrendMacro, Media Appearances, Jan 26, 2026: https://trendmacro.com/media).

Taken together, Slok and Trend Macro imply higher dispersion: the market will reward clear AI beneficiaries while punishing business models that look easier to commoditize. 

One investor takeaway is to classify AI exposure by where the economics sit. First are the balance-sheet-sponsors of the buildout (hyper-scalers and their suppliers), where the question is capex payback and financing capacity. Second are workflow-owners (SaaS, data, and services firms), where the question is whether AI turns features into commodities. Third are enablers (security, governance, specialized infrastructure) that may benefit as adoption spreads. This week’s software drawdown suggests the market is rapidly repricing bucket two, even as bucket one’s spending trajectory remains huge (Apollo Academy, The Daily Spark, Jan 30, 2026: https://www.apolloacademy.com/the-daily-spark/).

In Closing 

The old market adage is that “markets hate uncertainty.” While I am not sure when an investor can actually be truly certain, there is some truth to it. While what the new Fed Chair will bring and whether the tech sector’s AI spending will payoff remain uncertain for the moment, history strongly suggests the former is nothing out of the ordinary nor something to worry about, and the latter has just as much of a chance to enter in a new super-cycle as it does to end the incredible growth-run that tech has been on for well over a decade now. 

Investing success doesn’t require certainty; it requires conviction and courage. 

Next week, we will take a look at three more market drivers, many of which complement/offset some of the above “worries,” including (1) liquidity and the related uptick in metals volatility, (2) the key takeaways from earnings season, and (3) macro data that supports a constructive economic outlook. 

As always, we are always here to help you and those you care about. 

Have a great weekend, 

Tim and the team at TEN Capital

Data, Just the Data

• U.S. ISM Manufacturing Index – unexpectedly rose to 52.6 in the first month of the year from 47.9 in December. The reading showed that economic activity in the manufacturing sector expanded for the first time in a year.

• Euro Area Retail Sales – fell 0.5% in December following three consecutive months of expansion. Year-over-year sales slowed to 1.3%.

• U.S. Jobless Claims – initial claims rose by 22,000 last week to a total of 231,000, well above expectations of 212,000. Continuing claims also increased by 25,000 to 1,844,000.

• U.K. Manufacturing PMI – improved to a reading of 51.8 for the 5th consecutive month of expansion. The latest figure signals the fastest pace of expansion since August 2024.