We employ two distinctive dynamic market exposure models in our strategies: one tailored for growth-focused investors seeking aggressive opportunities and another designed for those with a more defensive approach, prioritizing capital preservation. *For illustrative purposes only.
The US equity market was modestly higher in January, with the S&P 500 gaining 1.4%, the Dow advancing 1.8%, and the Nasdaq lagging slightly, inching up 1.0%. While large‑cap indexes were near record levels, mid-caps and small caps outperformed for the month: the S&P Midcap 400 index and Russell 2000 index (small cap) delivered impressive returns of 4.1% and 5.4%, respectively. Meanwhile, the US equity market has been notably choppy this month, with sharp swings driven by policy headlines, geopolitical tensions, and earnings volatility from tech companies such as Microsoft. While investors see valuation expansion of big tech companies backed by solid earnings growth, they are also concerned about higher-than-anticipated capital spending and energy constraints for AI buildout. On the policy side, the Fed kept the federal funds rate unchanged in January, signaling the committee’s growing confidence in the labor market and the economy’s resilience, as well as the easing of upside inflation risks. We believe that real GDP will keep growing near its potential in 2026, but the surprisingly strong Q3 2025 GDP growth rate (4.4%) is unlikely to be sustained, as it was partly driven by net exports, which reversed the tariff-related import surge that weighed on GDP earlier in the year. Looking ahead, we continue to see downside risks, including stretched equity valuations, weakening consumer sentiment, geopolitical tension, and trade policy uncertainties. On the other hand, our modestly sanguine outlook rests on the Fed’s easing policy, strong fiscal stimulus, still-solid corporate earnings, and potential moderation of tariff-related drag. With this backdrop, we are cautiously optimistic about the US equity market and have maintained equity exposure of 73% in our defensive, tailored approach.
Geopolitical Development: Political tensions around Greenland and Venezuela have intensified geopolitical risk for the US market in January, particularly affecting trade, defense, and energy sectors. In the middle of the month, President Trump threatened higher tariffs on eight European countries, proposing 10% tariffs starting from February and rising to 25% in June. However, President Trump announced at Davos the “framework for a future deal,” in which the planned tariffs were suspended, and military action to acquire Greenland was ruled out. Equity markets rebounded after the announcement, as investors welcomed the de-escalation as a sign that imminent trade wars were averted. Earlier this month, the US sharply escalated its stance toward Venezuela by carrying out a dramatic strike against the country on January 3. While it is too early to forecast the long-term impact - given ongoing uncertainty around significant investment for oil production growth - we view Venezuela’s political transition as a modest tailwind for US oil and gas companies such as Chevron, ExxonMobil, and ConocoPhillips. US refining companies, including VLO, would also benefit from potential higher crude production in Venezuela.
Corporate Earnings: As the US market entered 2026, investors continued to emphasize that corporate earnings, rather than valuation expansion, are the primary driver behind the recent equity rally. A resilient economy and the Fed's easing policy have supported earnings and profit margins. This earnings environment seems to reassure investors that elevated valuations might be sustainable, provided profit margins continue to grow at near-double-digit levels. Recently, earnings momentum has broadened across the market, with cyclical sectors such as industrials and materials benefiting from construction and investments in AI data center expansion and energy transition, as well as higher defense spending driven by geopolitical tensions. The consumer staples sector was also boosted by the One Big Beautiful Bill Act's tax cuts and solid consumer spending. Looking forward, we anticipate that AI-driven productivity gains will help to bolster earnings growth. On the other hand, we would like to keep in mind that the narrowness of leadership could leave the market vulnerable to a single company's earnings miss. As of January 23, 13% of S&P 500 companies have reported Q4 2025 earnings, among which 75% of the companies have reported a positive EPS surprise, and 69% of them have reported a positive revenue surprise.
Fed Policy: As widely anticipated, the Fed kept the federal funds rate unchanged in January at 3.50% to 3.75%, with two dissents who preferred another 25-bps cut. In the policy statement, Chairman Powell adopted a more hawkish stance, signaling the committee’s growing confidence in the labor market and the economy’s resilience, and in the easing of upside inflation risks. The statement noted that the labor market showed “some signs of stabilization” and removed the sentence in the previous statement that “downside risks to employment rose in recent months.” Solid economic growth in the second half of 2025 has contributed to the Fed’s pause. Real US GDP grew 4.4% in the third quarter, supported by strong consumer spending and decent net exports. In the meantime, inflation remains elevated but shows little sign of accelerating. The personal consumption expenditure deflator increased by 0.2% in both October and November, slightly below expectations. The FOMC continues to bet that any future tariff-related inflation will be temporary. Our base case anticipates two possible rate cuts in 2026 and a gradual path of monetary easing through 2027.
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As of 1/31/25. Data provided by Bloomberg, NorthCoast Asset Management, Federal Reserve History.
The NorthCoast Navigator is a market barometer displaying NorthCoast's current U.S. and international equity exposure and outlook. This aggregate metric is determined by multiple data points across four broad market-moving dimensions: Technical, Sentiment, Macroeconomic, and Valuation. The daily result determines equity exposure in our tactical strategies.
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