Rotation The Has Been Underway. The Case for Thoughtful Diversification Grows Stronger

• International developed equities led January with +5.8% returns, followed by US small-caps (+5.5%) and emerging markets (+5.1%), while the S&P 500 Equal Weight Index (+3.4%) outpaced its market cap-weighted counterpart (+1.5%)
• Consumer confidence fell to 84.5 in January, the lowest level since May 2014, while the Fed held rates at 3.50-3.75% with Core PCE inflation at 2.8%, above the 2% target
• Mid-cap and small-cap earnings growth is projected at 19% and 14% respectively for 2026, with the 'Magnificent Seven' contribution to S&P 500 earnings expected to decline from 44% to 34% in 2026 as the other 493 stocks increase their share to 56%

Market Summary: Rotation and Diversification Strengthen in Early 2026

Key Market Performance (January 2026)

Despite volatility from bond market stress, tariff tensions, and inflation concerns, equities finished January higher with the S&P 500 reaching new all-time highs. Market leadership broadened significantly:

• International developed equities: +5.8%
• U.S. small-caps: +5.5%
• Emerging markets: +5.1%
• S&P 500 Equal Weight: +3.4% (outperforming market-cap weighted +1.5%)

Commodities rallied strongly: silver +17.1%, crude oil +15.0%, gold +12.3%. Bonds showed modest gains, with municipal bonds +0.7% and high yield +0.6%.

Federal Reserve Developments

The Fed held rates steady at 3.50-3.75% (10-2 vote) after three consecutive 25 bps cuts in 2025. Core PCE inflation remains elevated at 2.8%, above the 2% target. Markets price in over 90% probability of another hold in March.

Major development: President Trump selected Kevin Warsh to succeed Jerome Powell as Fed Chair. Warsh, viewed as hawkish, triggered a dollar rally (+0.7%) and sharp sell-offs in gold (-10%) and silver (-29%) on January 30th, though structural drivers for debasement assets remain intact.

Economic Indicators

Consumer confidence plunged to 84.5, the lowest since May 2014. However, Q3 GDP growth reached 4.4%, with Q4 tracking around 5% per Atlanta Fed GDPNow. Unemployment declined to 4.4%.

Earnings Outlook

Mid-caps and small-caps show compelling valuations with projected 2026 EPS growth of 19% and 14%, respectively. The "Magnificent Seven's" earnings contribution is expected to decline from 44% to 34% by 2027, with the remaining 493 S&P 500 stocks rising to 66%.

Investment Implications

The market rotation away from mega-cap