The Month Ahead: January 2026

Strong earnings meet the bond market vigilantes.

The first half of January was defined by the "January Effect" optimism; the second half will be defined by a brutal reality check from the bond market. With the 10-Year Treasury Yield (TNX) spiking to 4.23%—a four-month high—equity valuations are facing their stiffest test since September. The catalyst isn't just economic data; it's the political signal that President Trump favors the hawkish Kevin Warsh for Fed Chair, potentially upending the "easy money" narrative.

The central tension for the remainder of January is clear: Can accelerating AI fundamentals, evidenced by Taiwan Semiconductor ($TSM) surging 4.4% on blowout earnings, overpower the valuation compression caused by rising rates? We are entering the thick of earnings season with the S&P 500 (GSPC) trading at elevated valuations. In a 4.25%+ yield world, perfection is priced in, but the cost of capital is rising.

What December Taught Us

December closed with the S&P 500 (GSPC) cementing a strong year, driven by the belief that inflation was conquered. The December CPI print of 2.6% (lowest since March 2021) seemed to validate the "soft landing" thesis. However, the lesson from late December was complacency: markets priced in aggressive rate cuts that the data—and now the political landscape—are rapidly pricing out.

Winners & Losers

  • Outperformers: Micron Technology ($MU) and the broader semiconductor complex (+7.8% reaction) proved the AI capex cycle has legs.
  • Underperformers: Utilities and Rate-Sensitives. Constellation Energy ($CEG) slumped 10% on policy fears, highlighting the sector's vulnerability to both rates and regulatory shifts.

The Lesson: Macro policy risk is back. The "Fed Put" is not guaranteed under a new administration potentially prioritizing hard money.

Catalyst Calendar

Week 3: Jan 19-23 (Earnings & Inauguration)

  • Jan 20: Presidential Inauguration. Markets will parse the speech for trade and fiscal policy specifics.
  • Jan 20 (Tue): Earnings from Netflix ($NFLX) and United Airlines ($UAL).
  • Jan 22 (Thu): Earnings from Intel ($INTC) and Procter & Gamble ($PG).
  • Jan 22 (Thu): US Q4 GDP (Advance Estimate). Forecasts suggest a robust 4.3% growth rate.

Week 4: Jan 26-30 (Big Tech & Fed Prep)

  • Jan 27-29: Peak earnings volume. Focus shifts to Mega Cap tech guidance.
  • Jan 30: PCE Inflation data (Fed's preferred metric).

Synthesis: The final two weeks of January are the most dangerous. We have the "Inauguration Volatility" overlapping with a GDP print that could push yields even higher if it confirms the 4.3% growth estimate.

Sector & Factor Setup

The rotation is violent and swift. Momentum is clearly residing in Semiconductors and Hardware, while defensive proxies are being liquidated.

Momentum Favors

  • Semiconductors: Micron ($MU) +7.8% and Broadcom ($AVGO) +2.5% show institutional appetite for AI exposure is undiminished.
  • Crypto Equities: With Bitcoin near $95,000, proxies remain bid.

Mean Reversion Candidates

  • Utilities: The 10% drop in Constellation Energy ($CEG) looks like capitulation, but policy risk remains a falling knife.
  • Real Estate: Highly sensitive to the 10Y move above 4.20%.

Factor View: "Growth at Any Price" is out; "Growth with Cash Flow" is in. The market is punishing leverage (Utilities) and rewarding balance sheet fortress (Tech).

Flows & Positioning

Institutional positioning is stretched but not exhausted. The "pain trade" has shifted from FOMO (Fear Of Missing Out) to fear of duration.

  • Systematic/CTA: Trend followers are caught in a bind. Long equity signals remain, but the breakdown in bonds (short price, long yield) is triggering volatility control mechanisms that may force equity selling.
  • Hedge Fund: Net leverage remains high, but rotation out of software into hardware is evident in the Micron ($MU) flows.
  • Retail: Still chasing. Crypto flows remain robust with Bitcoin holding $95k, signaling risk appetite hasn't fully soured yet.

Implication: If the 10-Year Yield breaks 4.30%, expect systematic funds to de-lever equities to manage portfolio volatility targets.

The Risk Landscape

Primary Risk: The "Warsh Tantrum"

The bond market is violently repricing the probability of Kevin Warsh replacing Powell. Warsh is viewed as a monetary hawk who may prioritize price stability over full employment. If Trump confirms this nomination, the 10-Year yield could test 4.50% rapidly, compressing S&P 500 multiples.

Secondary Risks: Grid Policy Shock. The 10% drop in Constellation Energy ($CEG) and 8% drop in Vistra ($VST) shows that the Trump administration's plan to "shake up" the electricity grid is a live grenade for the AI-energy thesis.

Hedging: With VIX (VIX) relatively muted at 15.86 (+0.13%), put protection is still cheap. Skew is rising, suggesting smart money is bidding up downside protection while keeping long exposure.