The US stock market has enjoyed nearly uninterrupted growth since the end of the pandemic, with all-time high after all-time high coming and going. Despite a wobble last April after Trump's Liberation Day tariffs, the S&P 500 and Nasdaq 100 are up 14% and 16% year over year. However, in recent months, the growth has slowed if not stopped, as the US stock market struggles to find new catalysts for growth amid sticky inflation and ongoing geopolitical and domestic uncertainty.
As the first quarter of 2026 comes to an end, the latest jobs report brings mixed news for equities just as Fed Chair Jerome Powell is coming to the end of his term. Meanwhile, overheated sectors appear to be calming and trade negotiations might soon bear fruit. In this context, current US stock prices could be attractive for investors looking toward the long term. In this piece, we'll examine all these factors and more to explore equities' movements over the year ahead.
Jobs strong ahead of Fed shake-up
This morning's employment figures delivered an unexpected jolt to equity markets, with January data from the Bureau of Labor Statistics revealing that unemployment has dropped to 4.3%, and 130,000 new jobs have been created. While this robust labour market performance signals underlying economic resilience that could fuel sustainable stock appreciation over time, the immediate market reaction reflects growing concern about the Federal Reserve's near-term policy trajectory. The stronger-than-expected jobs report has effectively pushed back expectations for monetary easing, with the CME FedWatch tool now predicting that we'll have to wait until at least June for a rate cut, and even then, the probability is only 48%. For equity investors who had been anticipating the tailwinds that typically accompany loosening monetary conditions, this represents a recalibration of timelines rather than a fundamental setback. The durability of employment growth, after all, tends to correlate with consumer spending power and corporate revenue stability, both of which are critical for long-term stock performance.
The equation becomes considerably more complex, however, with President Trump's widely anticipated nomination of Kevin Warsh to succeed Jerome Powell as Federal Reserve Chair. Warsh's historically dovish policy preferences suggest an eventual pivot toward more aggressive rate reduction once he assumes office, with a recent Reuters survey of economists forecasting cuts to commence in earnest shortly after his confirmation. This dovish outlook initially appears bullish for equity valuations, as lower interest rates typically compress discount rates and enhance the present value of future earnings. Yet this potential silver lining carries a notable caveat that prudent investors cannot ignore. Inflation already accelerated to 2.9% year over year last month, drifting further from the Fed's stated 2% target and raising questions about the sustainability of aggressive easing. If Warsh pursues overly ambitious rate cuts in an environment where inflation remains elevated, nominal stock gains could prove illusory once adjusted for the erosion of purchasing power.
Trade winds and wide nets
Beyond monetary policy dynamics, two structural shifts merit close investor attention as we head toward the end of Q1 2026. First, tariff policy continues to evolve from last spring's highly disruptive implementation phase, when Liberation Day measures triggered a sharp sell-off from February to April that tested investors' resolve. With the move to the negotiation table, we're seeing a more stable and predictable framework that markets can price with greater confidence. Recent bilateral trade agreements have established 15% tariff rates with major economic partners, including the European Union, Japan and South Korea, while a 12-month arrangement with China provides some temporary certainty and a basis for a permanent solution. These diplomatic developments notwithstanding, the cumulative impact on American consumers and corporations remains substantial.
Effective tariff rates have climbed dramatically from roughly 2% at the outset of 2025 to an estimated 14.3% after accounting for consumer behavioural adjustments, according to calculations from the Yale Budget Lab. This represents a meaningful headwind to corporate profit margins, particularly for retailers and manufacturers dependent on imported components or finished goods. Second, and perhaps more encouragingly for those seeking sustainable bull market conditions, equity market leadership is broadening across sectors, which historically precedes extended periods of appreciation. NVIDIA's six-month consolidation around current levels, combined with eight of eleven S&P 500 sectors reaching fresh all-time highs in recent weeks, suggests the AI-driven concentration that dominated 2023 and 2024 is giving way to healthier, more diversified participation across industries and market caps. If ongoing trade negotiations continue yielding constructive bilateral outcomes that reduce uncertainty and foster mutually beneficial trading between US and global companies, and current sectoral rotation persists, present valuations across the broader market may well prove attractive entry points for patient, long-term investors willing to look past inevitable near-term volatility and focus on fundamental business quality.
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