US equities started the year strongly, with most major indexes advancing despite geopolitical and policy uncertainty. Smaller-cap stocks led performance, with the Russell 2000 significantly outperforming large-cap benchmarks, while value and equal-weighted strategies also fared better than growth-heavy indexes. Sector performance was influenced by shifting policy signals from President Trump, particularly around defense spending and housing. Economic data pointed to a cooling labor market: December job gains undershot expectations, prior months were revised lower, and job openings declined further. Manufacturing activity remained in contraction, while the services sector continued to expand, underscoring a mixed growth backdrop.
Signs of labor market softening supported modest gains in US Treasuries early in the week, though overall rate moves were limited. Municipal and investment-grade corporate bonds outperformed, helped by strong demand and manageable supply, while high yield credit strengthened as issuance resumed after the holidays. Markets increasingly priced in a more cautious Fed outlook as employment momentum slowed, even as inflation signals remained uneven across sectors.
European equities posted solid gains. The STOXX Europe 600 rose more than 2% in local currency terms, supported by optimism around economic resilience, earnings prospects, and a relatively supportive interest rate environment. Major indexes in Germany, France, Italy, and the UK all finished the week higher, reflecting broad-based strength across the region.
