The Quarter Ahead: Q1 2026

The pivot has a price: Patience.

Q1 2026 inherits a market priced for perfection but facing a reality check on timing. The central tension for the next three months is simple: Can corporate earnings growth accelerate enough to justify the S&P 500 at nearly 7,000 while the Federal Reserve remains on hold until June? With the 10-year yield pushing 4.24%, the valuation buffer is thinning. The soft landing narrative is intact, but the "easy money" phase of multiple expansion is over; now, fundamentals must do the heavy lifting.

What Q4 2025 Taught Us

The final quarter of 2025 was a lesson in momentum over macro. Despite sticky inflation signals, the S&P 500 rallied into year-end, driven by the assumption that rate cuts were imminent. However, the divergence under the hood was telling: while indices climbed, breadth narrowed until the final weeks.

Key Takeaways

  • Resilience is Double-Edged: Strong economic data supported earnings but killed the March rate cut thesis.
  • Financials are Leading: The rotation began late in the quarter and has accelerated, validated by JPMorgan Chase ($JPM) delivering $46.8 billion in revenue.
  • Yield Sensitivity Returns: Equities ignored yields at 4.0%, but at 4.24%, the correlation is flipping negative again.

Macro Landscape

Regime: Late-Cycle Expansion / Reflation

We are in a "No Landing" scenario that is morphing into a traditional late-cycle expansion. Growth remains above trend, but the cost of capital is refusing to drop.

Growth

The economy is defying gravity. With BlackRock ($BLK) reporting a record $14.04 trillion in AUM, capital formation remains robust. The upcoming Q4 GDP Advance print will be the final verdict on 2025's momentum, but real-time trackers suggest continued expansion.

Inflation & Central Banks

The Fed is in a bind. Markets are now pricing a ~50% chance of a cut in June, a significant repricing from the aggressive easing expected just months ago. The 2s10s yield curve has steepened to +65 basis points, signaling that the bond market expects growth and inflation to persist, not collapse.

Market Setup

Valuations

At 6,940, the S&P 500 (GSPC) leaves little room for error. Valuations are full, demanding not just earnings beats but guidance raises. The "beat and raise" cadence is required to hold these levels.

Technicals & Positioning

The VIX (VIX) at 15.86 suggests complacency is creeping back in. While not at extreme lows, it underprices the risk of a rate scare. Positioning has shifted: The "sell the news" reaction in Bank of America ($BAC) despite beating estimates suggests the bar is incredibly high.

Key Themes for Q1

Theme 1: The Cyclical Rotation

With the yield curve steepening (+65 bps), Financials and Industrials are outperforming Tech. Bank of America ($BAC) beating EPS estimates ($0.98 vs $0.96) reinforces this rotation. Money is moving from duration (Tech) to economic sensitivity (Banks, Real Estate).

Theme 2: AI Infrastructure 2.0

The trade is narrowing to pure infrastructure plays. Super Micro Computer ($SMCI) surging nearly 11% and Micron ($MU) up almost 8% indicates that while software creates debate, the hardware build-out is non-negotiable.

Theme 3: Real Estate Revival

Contrarian capital is flowing into Real Estate (+1.26% relative strength). As the curve steepens, the worst-case refinancing fears are receding for high-quality REITs, even if rates stay elevated.

Catalyst Calendar

January: Earnings Reality

  • Q4 Earnings Season: Peak reporting weeks will determine if the "E" in P/E can support 6,940.
  • PCE Inflation: The Fed's preferred metric will confirm if the disinflation stall is temporary.

February: The Data Void

  • Labor Market Data: Any cracks in employment would bring March cuts back onto the table (bullish for bonds, mixed for stocks).

March: The Pivot Point

  • FOMC Meeting: The dot plot update will be the critical event of the quarter. Will they validate the June pricing?

Synthesis: January is about micro (earnings), March is about macro (Fed). February is the volatility bridge between them.

Risk Framework

Primary Risk: The 4.50% Yield Breaker

If the 10-year Treasury yield breaks above 4.50%, the equity risk premium collapses. At 4.24% today, we are 26 basis points away from a level that historically triggers rapid multiple compression in the S&P 500.

Secondary Risks

  • Inflation Re-acceleration: If PCE surprises to the upside, June cut odds vanish, and we price in "hikes" again.
  • Geopolitical Flare-up: While tensions with Iran have eased, energy markets remain one headline away from a shock.