Market Review 12th January 2026

Everything you need to know, Simplified!

Summary

• The US Department of Justice (DOJ) launches criminal investigation into the US Federal Reserve (Fed) Chair Jerome Powell over US$2.5bn renovation of the Fed’s headquarters

• Fed Chair Jerome Powell fires back saying the Fed won’t be swayed by “political pressure or intimidation”

• Gold hits fresh high as investor pile into safe havens among ongoing geopolitical upheaval

• More broadly, global economic outlook for 2026 is constructive but nuanced, with resilient growth led by the US, while Europe and the UK face more subdued prospects due to differing fiscal and productivity dynamics

• Inflation trends diverge: the UK shows strong disinflation momentum, but US inflation risks remain if monetary policy is eased too soon

• US corporate earnings continue to outperform, with expectations for further growth in 2026, though future margin expansion may depend on AI-driven efficiencies

• High equity market valuations require sustained earnings growth, economic durability and productivity gains from artificial intelligence (AI) to be justified; future returns may be more muted or spread across sectors

• Both UK and US stock markets reached record highs last week, with the FTSE 100 surpassing 10,000 and the S&P 500 nearing 7,000

• US unemployment fell to 4.4%, but job growth slowed, leading markets to expect Fed rate cuts later in 2026 rather than early in the year

• Key upcoming events: US inflation data (Tuesday), UK GDP figures (Thursday) and a possible US Supreme Court ruling on tariffs, all of which could influence market direction.

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Market Review

DOJ takes aim at Fed chief

Before we get to our 2026 lookahead, this year is picking up where 2025 left off as the US administration piles the pressure on Fed chair Jerome Powell. The Fed has been served grand jury subpoenas in relation to the testimony that chairman Jermone Powell gave to congress over the renovation of historic buildings.

Powell fired back in a video statement last night saying: “this is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions - or whether instead monetary policy will be directed by political pressure or intimidation”.

If the DOJ were to pursue criminal action against Powell, markets would likely interpret it as political pressure on the central bank, directly raising concerns about Fed independence. We’ve already seen that reflected in price action this morning: gold has moved higher as investors hedge risk and potential policy uncertainty, while the US dollar has moved lower as investors reassess the credibility of US monetary governance and the potential for a more politicised policy path. Even if any legal move ultimately proves limited, perceived threats to Fed autonomy tend to lift risk premiums, push inflation expectations higher and increase volatility across markets.

Looking ahead, the global backdrop remains broadly constructive, though increasingly nuanced. Growth remains resilient, supported above all by the US, where fiscal expansion, strong corporate earnings and continued AI-related investment continue to underpin activity. Beneath the surface, however, growth is uneven, with interest-rate-sensitive sectors, workers and lower-income consumers showing greater strain. Outside the US, growth is more subdued. Europe could benefit from low inflation and growing fiscal support, while the UK faces a drag of fiscal tightening alongside productivity concerns. Overall, we expect another year of modest global growth with the US at the centre.

Inflation dynamics are also evolving. While we see strong disinflation momentum in the UK, risks in the US are higher, particularly if policy is eased into an economy still operating above trend.

Corporate earnings continue to go from strength to strength, driven once more by the world’s largest economy. 2025 saw four consecutive quarters of earnings ahead of analyst expectations. We expect continued earnings growth this year although expectations are high - particularly in the most expensive areas – and room for further margin expansion is increasingly limited without considerable AI efficiencies. Altogether we are optimistic about absolute global corporate profitability this year.

High valuations are not inherently a predictor of downturns, but they have historically exhibited predictive power over longer-term returns. For current valuation multiples to be justified, three conditions must hold: earnings growth needs to persist and expectations validated; the economy must remain durable and, over time, AI-driven productivity gains must materialise. If these dynamics hold, equity markets can continue to perform well, though future returns may be more muted or more evenly distributed across sectors.

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Last week

Record highs

Both UK and US equities pushed into record territory last week, underlining the strong start to 2026. In London, the FTSE 100 broke above the 10,000 level for the first time, closing just over the milestone on Monday 5 January, a major psychological barrier for the index. In the US, the S&P 500 also notched fresh all-time highs, ending the week at record levels and finishing very close to 7,000, a level that now looks firmly in sight if the rally continues.

US unemployment

The US unemployment rate unexpectedly fell to 4.4% from a revised downward 4.5% in November and slightly below market expectations of 4.5%. Despite the fall in the headline rate, the US labour market continues to show signs of weakness with the number of jobs added at 50,000, less than a downwardly revised 56,000 in November and below forecasts of 60,000.

The US unemployment data made it less likely that the Fed will cut interest rates quickly in 2026. Even though job growth has slowed, the unemployment rate did not rise as much as some people expected. This suggests the labour market is still holding up, so the Fed has less pressure to reduce rates soon. As a result, the market has slightly reduced their expectations for early rate cuts and is now leaning more towards cuts happening later in 2026 rather than at the start of the year, while still broadly expecting about two rate cuts over 2026.

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The week ahead

Tuesday: US Inflation

Our thoughts: Tuesday’s US inflation data will be the key macro event for markets, with investors looking for confirmation that price pressures are continuing to cool. Current expectations are for inflation to remain around 2.7% year-on-year in December, with monthly inflation seen rising modestly. Softer than expected numbers would strengthen the case for Fed rate cuts this year and likely support risk assets, while any upside surprise, particularly in core inflation, could push back easing expectations and lift bond yields and the US dollar.

Thursday: UK GDP data for November

Our thoughts: The UK’s monthly GDP figures will provide an important read on whether growth is stabilising heading into 2026. Expectations are for flat-to-slightly negative growth (around 0.0% to -0.1% month on month) for November, reinforcing the picture of a sluggish economy. For markets, a weak number would add to the argument for further Bank of England rate cuts this year, while a stronger print could reduce near-term easing pressure and support the Pound.

Possibly this week: US Tariffs Ruling

Our thoughts: Markets are watching closely for the US Supreme Court’s ruling on the legality of US tariffs which is widely expected soon and could be delivered as early as this week. The Trump Administration used an Emergency Economic Powers Act to levy tariffs on Imports. This pending Court decision is seen as important because it could either validate or limit the government’s power to impose broad tariffs without Congressional approval. The Court will first decide if the Tariffs are legal or not. If it rules they are illegal, the government will have to pay all or part of the tariffs so far.``

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