Monthly Economic Insights

A resilient and hopeful economic outlook that is clear-eyed about risk

The global economy and financial markets entered the year on relatively solid footing. Yet the recent outbreak of war in the Middle East is a reminder that today’s environment remains fragile. 

Geopolitical shocks can quickly influence energy prices, inflation expectations, and investor sentiment, even when underlying fundamentals remain intact.

We hope for a swift resolution and recognize the human toll of conflict. While our role is to assess economic implications, those impacts pale in comparison to the suffering experienced on the ground.

For now, markets appear to expect a contained disruption. Despite sharp increases in crude oil prices, longer-dated futures remain well below current levels, suggesting investors do not anticipate a prolonged spike. 

Market behavior has also been relatively orderly. Equities have declined modestly, and the 10-year Treasury yield remains within its recent range. In short, the response has followed a familiar pattern: volatility rises, but the system remains intact so far.

Fundamentals still matter
For investors, the focus remains on companies demonstrating strong fundamentals: revenue and earnings growth, and disciplined capital allocation, at reasonable valuations.

The earnings backdrop is still supportive. S&P 500 earnings are expected to grow just under 12% year over year, marking a potential sixth consecutive quarter of double-digit growth. While estimates have edged slightly lower, that is typical heading into reporting season.

Valuations, however, warrant attention. Forward price-to-earnings ratios near 21x are above historical averages but not extreme given current profitability. Still, elevated valuations reinforce the importance of continued earnings growth. Over time, markets follow fundamentals, but in the short term, they are driven by shifting expectations.

Growth slows, but remains positive
Recent GDP data was softer than expected. Fourth-quarter growth was revised down to 0.7%, with full-year 2025 growth at 2.1%, a moderation from 2024 but still near long-term trend levels.

The primary drag came from government spending, which declined sharply, reducing overall GDP by roughly 1 percentage point. That dynamic may reverse in the coming quarters, with early estimates suggesting first-quarter growth could approach 2.7%.

Inflation remains the key challenge
Inflation continues to be the central concern. The GDP price index rose to 3.8%, while CPI stands at 2.4% year over year and Core PCE at 3.1%. Importantly, these readings predate the latest rise in energy prices, meaning inflation could trend higher in the near term.

A calm surface, with active undercurrents
Despite heavy headlines, the S&P 500 has traded within one of the narrowest ranges to start a year on record. That stability, however, masks meaningful internal movement.

More than 20% of stocks are up or down by more than 20% this year. Most sectors have lagged the broader index, while energy has surged nearly 30%, driven by higher oil prices.

Bottom Line
Looking ahead, three forces will be critical to watch:

Energy prices
Interest rates and credit conditions
The U.S. dollar
All three have been trending higher and could pressure growth if sustained.

Even so, the foundation remains intact. Economic growth continues, corporate earnings are expanding, and markets remain functional.

In environments like this—resilient, yet fragile—discipline matters most. Stay diversified. Stay focused on fundamentals. And maintain a long-term perspective.

Invest well. Be well.

— Rusty Vanneman, CFA^®, CMT^®, Chief Investment Officer (CIO), FNBO Wealth

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