Monthly Economic Insights

Steady markets continue, with interesting signals beneath the surface

As we move through the back half of Q1, the economy is still sending a key signal that growth remains resilient.

While Real GDP rose just 1.4% in Q4, underlying private-sector momentum remains solid. Consumer spending grew at a healthy 2.4% pace, and business investment stayed firm. 

The main drag came from a sharp drop in government spending. Without it, growth would have been closer to 2.8%.  At the same time though, inflation continues to prove sticky, with the GDP price index rising 3.6% annualized. Persistent price pressures may complicate the Fed’s future path regarding short-term interest rates.

Strong fundamentals, muted index performance

Corporate profits remain a bright spot, with S&P 500 earnings growth in the Q4 expected to come in around the low to mid-teens, a pace that continues the pattern of better-than-expected results.

And yet, the S&P 500 has been flat to slightly positive so far this year. That disconnect tells us something important: investors are no longer paying indiscriminately for yesterday’s winners.

A big part of that story has been a rotation away from the largest tech names that dominated returns in recent years. The “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla) have experienced meaningful weakness this year, contributing to the sense that the index is going nowhere, even as many individual stocks are doing just fine.

As of this writing, US small caps are up nearly 7%, value stocks are up by over 7%, and non-US stocks are up over 8% (with emerging market stocks up nearly 11%). The bigger message: broadening is back.

Why the economy still has support

Several forces continue to reinforce growth:

• Consumer spending has been strongest at the higher end of income and wealth, and the “wealth effect” remains a tailwind when household balance sheets are sturdy.
• Business investment, especially tech capex, remains a real driver. Even amid valuation debates, companies are still investing heavily in modernization and efficiency, including AI-related infrastructure.
• History shows the second year of a presidential cycle can be supportive, and current tax-policy expectations are that the so-called One Big Beautiful Bill Act may raise real GDP by about 0.6% this year.

Artificial intelligence results continue to unfold

Artificial intelligence is central to today’s narrative because it is expected to raise productivity, margins, and long-term growth. But still, one has to gauge how much is hype?

A timely Kansas City Fed paper from this month notes that while U.S. productivity has improved since late 2022, the gains haven’t yet been broad-based. Although AI adoption correlates with faster productivity growth across industries, it accounts for only a small share of the aggregate shift so far.

That sets up another point worth mentioning: Amara’s Law, which states we tend to overestimate the short-term impact of new technology and underestimate the long-term impact. The investment implication is straightforward: AI may absolutely change the economy, but valuations and cycles still matter in the journey from promise to profits.

Takeaways

We believe that the best approach in today’s market is to remain true to core principles:

• Stay invested. The economy is growing, and earnings are still expanding.
• Stay diversified. Early 2026 is already rewarding broader exposure beyond the biggest names.
• Stay disciplined. Market rotations and volatility are normal and often healthy, particularly during midterm election years and periods of Fed leadership transition

Invest well, be well.

Read or download the full 2026 Wealth Outlook here. You can also check out the latest episode of The Vault podcast featuring Rusty Vanneman, CIO, FNBO Wealth.

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

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