Financial Markets Review

January opened the year with equity markets extending the constructive tone that has defined much of the post-Liberation Day environment. Major indices finished solidly higher for the month, with the S&P 500 gaining 1.37%, and the Nasdaq rising 0.95%. Most notable was the sharp resurgence in small cap stocks, as the Russell 2000 surged 5.31%, delivering its strongest monthly performance since late summer. The S&P 500 Equal-Weight also continued its climb to all-time highs, rising 3.40%. Collectively, these moves pointed to a modest broadening in market participation and provided incremental support to the view that market leadership may be gradually expanding beyond the narrow mega-cap cohort that has dominated returns in recent years.

The headline narrative throughout the month was the market’s remarkable ability to look through geopolitical volatility. The U.S. government’s capture of Venezuelan President Nicolas Maduro and subsequent control over Venezuelan oil exports, rising tensions with European and NATO allies tied to the administration’s Greenland acquisition proposal and tariff threats, and escalating unrest in Iran all produced episodic spikes in volatility. However, each episode ultimately proved short-lived from a market perspective. Investors consistently treated geopolitical pullbacks as buying opportunities, reinforcing the idea that liquidity conditions, earnings momentum, and positioning continue to outweigh headline risk in driving short-term price action.

On the economic front, incoming data painted a more nuanced picture. Durable goods orders showed strength, particularly in transportation, while core capital goods orders exceeded expectations, reinforcing the narrative that corporate investment remains intact. At the same time, inflation signals were mixed. Producer Price Index data came in hotter than expected on both headline and core measures. In isolation, the data did not meaningfully alter the policy trajectory, but it reinforced the idea that the disinflation process is likely to be uneven rather than linear.

Labor market data increasingly became the most closely watched macro variable as the month progressed. Consumer confidence fell to its lowest level in more than a decade, with particularly sharp deterioration in perceptions of labor market strength. The spread between respondents viewing jobs as plentiful versus hard to get narrowed to its lowest level in five years, highlighting rising household anxiety. However, hard labor market data has not fully confirmed that deterioration. Initial jobless claims remained relatively contained, while continuing claims undershot expectations. That said, forward-looking indicators softened meaningfully. The Job Openings and Labor Turnover Survey (JOLTS) showed job openings have fallen to their lowest level since 2020. Meanwhile, the Challenger Report announced that layoffs surged to levels not seen since the Global Financial Crisis era, with U.S. employers announcing 108,435 layoffs in January, a 205% increase from December. Taken together, the data suggests a labor market normalizing from historically tight levels rather than collapsing outright given, as the 4.4% unemployment rate remains historically low. However, the direction of travel is clearly toward slower hiring momentum.

The divergence between “hard” economic output data and sentiment measures became particularly striking. Fourth-quarter GDP tracking estimates pointed toward growth north of 5%, even as consumer confidence dropped to multi-year lows. This widening Main Street versus Wall Street divide has emerged as a recurring policy theme, reinforced by the administration’s affordability initiatives targeting credit card interest rates and institutional home ownership. While these proposals carry varying probabilities of implementation, they underscore a political backdrop increasingly focused on redistributing financial conditions toward households rather than corporations – a theme that could influence sector-level capital allocation over time.

Monetary policy developments added another layer of complexity. The Federal Reserve held rates steady during the January meeting, consistent with expectations. Market pricing for rate cuts moderated slightly but still reflects roughly two cuts by year-end. The nomination of former Fed Governor Kevin Warsh to succeed the current chair introduced new uncertainty around balance sheet policy and central bank independence. Warsh has previously argued for a materially smaller Fed balance sheet paired with lower policy rates to support small and medium-sized businesses, aligning with the administration’s broader emphasis on prioritizing Main Street over Wall Street.

One of the more notable developments during the month was the sudden deterioration in software sector sentiment tied to accelerating concerns around AI disruption. Software had already lagged in recent months but moved sharply lower alongside companies tied to data analytics and data services. Despite generally strong earnings, investors aggressively repriced software and service-oriented business models perceived as vulnerable to automation. The S&P North American software index experienced its largest monthly decline since the financial crisis era, driven by product launches from AI developers and increasing evidence that generative AI could compress margins across legal, consulting, and publishing verticals.

In response, capital rotated into consumer staples and cyclicals perceived as less exposed to AI disruption risk. On one trading day late in the month, the consumer staples sector rose roughly 2%, while information technology declined approximately 2%. According to SubuTrade on X, “this only happened in 2000-2001 dot-com bust & January 2025 (before Trump tariffs crash).”



Source: @SubuTrade posted on X, 2/3/2026

Tandem Strategy Update*

While this dynamic has been widely discussed, it is still striking how difficult it has been for companies outside of the Magnificent 7 to keep pace with the S&P 500 over the past three years. According to data from Capital IQ and First Trust Advisors, the percentage of S&P 500 constituents that outperformed the index in 2023, 2024 and 2025 fell to levels not seen since 1995. The only comparable period occurred during the peak of the late-1990s technology bubble – a period that ultimately preceded a decade of flat cumulative returns for the S&P 500.



The longer this dynamic persists, the greater the probability of a meaningful rotation back toward the companies that have lagged. In the years leading up to the Tech Bubble peak, single-stock dispersion reached historic extremes as technology shares surged while value-oriented and “old economy” businesses materially underperformed. Today, single-stock dispersion has returned to similarly elevated levels. While no two cycles are identical, the historical pattern is difficult to ignore. As Mark Twain is often credited with observing, history does not repeat itself, but it frequently rhymes. The growing parallels between the current environment and the late-1990s warrant close attention, particularly given the valuation and leadership concentration that has emerged across equity markets.

For Tandem, this environment should ultimately create conditions where our investment approach is once again favorably recognized by the market. At some point the market will appreciate those “old economy” companies that manage to consistently grow revenues, earnings, cash flows and dividends, if paid. While these companies may currently sit outside the primary leadership cohort, their fundamental trajectories remain intact. As relative valuations for many of these businesses continue to compress, the forward return profile is gradually becoming more compelling. This should position us to methodically add to existing core holdings and, where fundamentals and valuation align, initiate new positions.

Source: Source of all data is FactSet, unless otherwise noted.

*The transition level activity taken by Tandem is applicable to new manager-traded accounts and new money in manager-traded accounts, not the composite or firm-wide level. New manager-traded accounts and new money in manager-traded accounts are not automatically invested on the first day. Rather, they are transitioned into our strategy over a longer time period that is dependent upon market conditions, this process differs from Tandem’s model-provided strategies, where money is invested on the day the account opens. Strategy level activity is applicable to the composite and action is taken at the firm-wide level.

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This document was originally written/recorded in English. Tandem does not guarantee the accuracy, completeness, or reliability of any translated materials, and shall not be held responsible for any discrepancies, errors, or misinterpretations arising from the translation process.