Calm before the storm?

Equity markets entered 2026 on firm footing, with January gains broadening beyond last year’s large-cap growth leaders into value, small caps and international stocks. Yet this strong start comes as investors face a rare combination of risks: a potential change at the Federal Reserve and the uncertainty of a midterm election year, a pairing that has historically produced double-digit drawdowns before markets recover. History suggests that new Fed chairs often see an early correction as investors test their policy approach, while midterm years typically bring volatility in the middle quarters before stocks rebound once political outcomes are clearer.

Despite these near-term headwinds, seasonal indicators such as the January Barometer and long-term return patterns after positive Januarys point to favorable odds for full-year gains in 2026. Within equities, recent performance highlights an ongoing rotation away from mega-cap growth and technology toward energy, materials, staples, industrials and other lagging areas including small caps and international markets.