Global markets looked past the noise in January. Despite heightened geopolitical tensions and shifting policies, risk appetite improved alongside stronger global growth expectations. Global equities rose 3% on the month, with emerging markets up an impressive 8%—South Korea, Taiwan, and Latin America led early gains. Bonds lagged as investors rotated toward risk: U.S. front‑end rates sold off as expectations for the next Fed cut were pushed out, while Japanese long bonds had their worst start to a year since 1994 amid rising fiscal concerns. The U.S. dollar (DXY) fell 1.4%, while gold hit another all‑time high and other commodities rallied.

U.S. policies—foreign and domestic—dominated headlines, spanning tariff threats, rising tensions in the Middle East, Latin America, and Europe, and measures targeting cost‑of‑living concerns. Even so, markets benefited from stronger growth expectations and solid activity, with the Atlanta Fed GDPNow pointing to 4.2% 4Q25 GDP growth. Labor data were mixed: the economy added 50k jobs in December, while October and November payrolls were revised down by 76k, pulling the three‑month average to ‑22k. Despite sluggish job growth, the unemployment rate fell ~20 bps to 4.4%, easing fears of rising slack amid weak labor supply. Looking ahead, payroll growth could accelerate with fiscal stimulus in early 2026, buying the Fed time to assess policy impacts and potentially stay on pause through 1H26. The FOMC held rates at 4.25–4.50% in January after three cuts in 2025. Chair Powell signaled no urgency to move, noting policy could stay restrictive if growth remains firm and inflation elevated. Policymakers want more progress on 12‑month core inflation (2.8% y/y in December); elevated CPI argues for caution. Upside inflation risks include potential changes to trade and immigration policy, geopolitical disruptions, and robust consumer spending. Further rate cuts hinge on sustained inflation progress.

The question of Fed independence resurfaced after a Department of Justice investigation into the Fed and its Chair for misleading Congress. Kevin Warsh was nominated as the next Fed Chair, viewed as experienced, with a preference for a smaller balance sheet and a tighter focus on monetary policy. Historically seen as hawkish on price risks, he has recently argued for rate cuts due to productivity‑suppressing price rises—suggesting a potentially more dovish tilt. Even so, the committee—seven governors and five regional presidents—is expected to maintain its independent assessment. With limited personnel changes likely in 2026–2027, the administration’s ability to reshape the committee is constrained. And even if a smaller balance sheet is preferred, structural and regulatory constraints—including high bank excess reserves and the need for ample reserves to avoid liquidity stress—may  limit rapid balance‑sheet shrinkage.

Japan was also in the spotlight amid sharp moves in yields and FX. Prime Minister Takaichi, buoyed by high poll ratings, aims to secure an LDP majority in the Lower House. She pledged a two‑year sales‑tax break on food costing roughly JPY 5 trillion per year (0.8% of GDP), with funding details unclear—worrying bond investors. Meanwhile, the BoJ held the policy rate at 0.75% in January after December’s hike, with one dissent favoring 1.00% on achieved price stability and upside inflation risks. Forward guidance remained to “continue to raise the policy interest rate” as conditions improve, without a timeline or terminal rate.

Japan’s fiscal stance and BoJ path have global ramifications for global fixed income. JGB 10‑year yields rose 17 bps to 2.23% on election‑linked fiscal concerns. Investors should focus on fiscal discipline across developed markets and be mindful of duration at the long end in countries with with fiscal concerns, such as the U.S. and Japan. U.S. Treasury yields rose across the curve, with the 10‑year up 9 bps to 4.26%—pressured by geopolitics, Fed independence questions, resilient activity, and Warsh’s nomination. Credit rallied with narrower IG and HY spreads as fundamentals held up and inflows stayed strong, delivering 0.9% (Global IG) and 1.0% (Global HY) total returns in January. While further spread tightening or scope for yields to fall dramatically *barring a recession) looks limited, carry in fixed income is still attractive. Investors should lean towards higher grade and higher quality bonds as a prudent approach to mitigate rising default risk. 

Within equities, one word dominated markets in January: broadening. Concerns over U.S. equity concentration and execution risk around large capital‑expenditure plans weighed on sentiment. Yet corporate fundamentals were solid: with the fourth‑quarter earnings season halfway through, positive surprises were roughly 9% above consensus, helping the S&P 500 put up a 1% gain. Under the surface, leadership rotated. Investors continued to diversify away from U.S. large‑cap AI early winners: the Magnificent Seven posted roughly 0% returns (versus about 2% for the rest of the S&P). Meanwhile, worries that agentic AI could disrupt well‑established SaaS models weighed on software, even as the AI theme itself broadened—moving beyond mega‑cap platforms toward physical applications like robotics and autonomous vehicles, and into “enabling” companies across industry, utilities, and materials. Factor breadth increased too: U.S. Value rose 4.6%, reinforcing the case for maintaining sufficient Value exposure to balance Growth.

Global equity markets advanced in January, with non-U.S. markets outperforming as investors embraced global diversification. Japan’s Topix rose 5%, helped by a weaker yen. European equities gained as investors digested solid activity: industrial production beat consensus and fiscal data showed sharp acceleration in Germany. Emerging markets outperformed developed markets by 7%—a magnitude not seen since 2001. Asia led, with the Asia Pacific ex‑Japan Index up 7.6%, lifted by China’s revaluation and the technology dominance of South Korea and Taiwan; Korea’s KOSPI Composite delivered an impressive 24.0% return in January. EM, Japan’s Topix, and materials stocks saw large positive revisions to 2026 EPS. Equity leadership is broadening by geography, sector, and factor, and investors should stay exposed to structural trends like AI infrastructure, rising military spending, and an intensified focus on shareholder value.

The backdrop for risk assets remains constructive, buoyed by solid growth and supportive monetary and fiscal policy. Importantly, the equity rally so far has been mainly driven by earnings, rather than valuation expansion.  However, after three years of strong market returns, elevated valuations in certain markets, including US equities and non investment grade corporate bonds, may be vulnerable to negative shocks if risks materialize. Diversification and discipline should continue to be a guiding principle for investors, both in asset selection and portfolio construction. Investors should embrace breadth, keep a quality bias, and pair regional diversification with resilient diversifiers like infrastructure and gold to compound through a choppier 2026.