January 2026 Market Update

Christopher Bowlby - Jan 12, 2026

Markets don’t reset just because the calendar flips. January opens with equities near highs, leadership still narrow, and investors trying to price a world where “good” results may no longer be enough.

Markets don’t reset neatly at the start of the year. Expectations carry over.

We enter January with equities near highs and volatility still subdued. On the surface, that looks like confidence. Underneath, the setup is tighter: leadership remains concentrated, valuations leave less room for disappointment, and inflation data and earnings results arrive in the same window.

This note lays out what the market is pricing in, what could change that quickly, and the key signals we will be watching as results come in.

 

Earnings season: constructive setup, high bar

Earnings season starts with unusually good “pre-conditions.” Consensus expects roughly 8% year-over-year earnings growth with mid-to-high single-digit revenue growth, which is a healthy combination for a market that is already priced for stability.

What matters is not just the level of expectations, but the direction they moved during the quarter. Typically, analysts begin optimistic and spend the next three months trimming forecasts. This time, estimates edged higher into year-end, and corporate guidance skewed more positive than usual. That is a subtle but important tell: management teams are not behaving like they are bracing for an imminent demand shock.

The tension is that we are heading into these prints from all-time highs. In that environment, “good” results often maintain the level, but they do not always add fuel. To extend the rally, the market usually needs some combination of: (1) beats, (2) durable guidance, and (3) a narrative that the next quarter is de-risked, not just the last one.

This is why the first week of reports matters. It will not decide the year, but it will set the tone for whether investors treat this run as something that can broaden, or something that still depends on a narrow group delivering close to flawless execution.

 

Leadership Is Narrow, and Breadth Is the Tell

A market can reach new highs in two very different ways.

In the healthy version, a wide set of industries participates, cyclicals and defensives both contribute, and the index rises because a large share of companies are compounding earnings at the same time. In the fragile version, the index still rises, but the work is being done by a small cluster of dominant names that investors treat as “can’t-miss” exposures to the next decade.

Right now, we are closer to the second version than the first.

The concentration issue is not just an abstract index statistic. It changes the market’s behaviour. When a small group of large companies carries an outsized share of index performance, the market becomes less forgiving of any wobble in that group. A normal earnings miss becomes a macro event. A modest guidance cut becomes a market-wide mood shift. Even if the median company delivers a reasonable quarter, the index can still feel heavy if the leaders do not extend the narrative.

This is why breadth matters more than the headlines.

If the rally is built on a narrow leadership cohort, the most important question this season is whether participation is spreading. You can see that through three simple lenses:

  • Equal-weight vs. cap-weight performance: If the equal-weight version of the index is keeping pace, it suggests the average stock is participating, not just the largest ones. If it lags persistently, it tells you leadership is still doing most of the lifting.
  • Advance-decline dynamics: A market that is rising on expanding participation tends to show more consistent strength in the number of stocks advancing versus declining, even on volatile days.
  • Trend participation: Watching how many stocks are holding longer-term uptrends (often proxied by measures like the 200-day moving average) provides a grounded check on whether this is a broad market or a top-heavy one.

None of these indicators needs to be perfect. But they do need to improve if the market is going to extend without becoming increasingly brittle.

The practical implication for earnings season is straightforward: the market does not just need “good results.” It needs confirmation that strength is not trapped inside the same handful of names. If leadership remains narrow, any disappointment in the largest companies can overwhelm solid results elsewhere. If breadth improves, the market becomes harder to break, because there are more places for capital to hide and more earnings engines to support the index.

That is the real tension sitting underneath the optimism. The setup can look constructive. The estimates can be achievable. But the leadership structure determines how much damage a small crack can cause.

 

Valuation: Expensive for a Reason, Still Vulnerable

At the index level, the S&P 500 is trading above the old “normal” valuation range that many investors anchor to. On the surface, that looks like straightforward overvaluation.

But part of what is different today is not sentiment. It is composition.

The index is far more concentrated in mega-cap technology and other asset-light compounders than it was in past decades. These businesses typically carry stronger balance sheets, higher and more resilient margins, and longer-duration growth profiles than the median public company. When a larger share of the index is dominated by companies like that, the blended multiple naturally sits higher. In other words, the S&P’s premium is not just investors paying up. It is investors paying up for a different earnings stream.

That said, valuation still matters because it defines the margin for error.

The clean way to see that is through the earnings yield. At today’s levels, the index’s earnings yield (roughly the inverse of the P/E) sits uncomfortably close to what investors can earn in long-duration government bonds. When that spread compresses, the equity risk premium shrinks, and stocks become more sensitive to any disruption in the story. The market does not need to be “wrong” about the long-term prospects of the largest companies for prices to become vulnerable. It simply needs a period where execution is a little less clean, inflation is a little less cooperative, or rates stay higher for longer.

This is where valuation and concentration intersect.

If the premium multiple is being justified largely by a small group of index leaders, then the index-level valuation becomes less forgiving to the details that matter most for those leaders: guidance quality, capex discipline, cash flow conversion, and the timeline from investment to monetization. A market with a higher structural multiple can still be a healthy market. It just cannot afford a broad perception shift in the companies carrying the weight.

The takeaway is not that equities are “too expensive to own.” The takeaway is that the market is priced for clean execution, and the burden of proof sits disproportionately with a narrow group of companies that have earned a premium and now have to keep earning it.

 

This quarter is really a technology earnings season, with a market attached to it

The unusual feature of this setup is not the headline earnings growth rate. It is where the optimism is coming from.

The upward estimate revisions and the higher share of positive guidance have been disproportionately driven by technology and the companies most directly linked to the AI buildout. That is not inherently a problem. It is simply the reality of how the index is constructed today.

The implication is that the “market’s” earnings season is not evenly distributed. A small group of companies will carry a disproportionate share of the narrative, the price action, and the index-level outcome.

That is fine when delivery stays clean. It becomes more fragile when expectations are both elevated and narrowly held, because the market’s tolerance for ambiguity gets smaller.

This is why this season is not just about earnings growth. It is about the quality of earnings:

  • Not just revenue growth, but durable revenue growth that is repeatable without constant price concessions.
  • Not just AI exposure, but AI monetization that is visible in product mix, margins, and customer behavior.
  • Not just capex spend, but a credible bridge from spend to free cash flow, even if the bridge takes time.

When leadership is narrow, the market does not need many “misses” to change the tone. It needs one or two companies to introduce uncertainty around timing, margins, or balance-sheet pressure, and the rest of the index starts trading like an accessory.

 

The AI story is real. The timing is messy.

The AI buildout is not theoretical. The spending is enormous, and it is already reshaping corporate investment budgets.

What the market is increasingly doing, however, is treating long-dated AI contract headlines and multi-year buildout plans as if they are near-term earnings certainty. That is where the disconnect can emerge.

A multi-year infrastructure cycle always contains a timing gap:

  • Cash costs show up early.
  • Buildouts take time, and they rarely run in a straight line.
  • Utilization ramps unevenly, often in steps rather than smoothly.
  • Revenue recognition follows delivery, not headlines.

This matters because markets do not re-rate companies on the existence of demand alone. They re-rate companies on the credibility of conversion: how consistently demand becomes delivered capacity, how delivered capacity becomes revenue, and how revenue becomes cash flow.

The early phase of a cycle rewards possibility. The middle phase rewards execution. And the later phase rewards discipline.

We are moving from the first phase toward the second.

 

Bookings are not earnings, and contracts are not cash flow

Long-duration contracts can be economically meaningful. They only become earnings when the physical world cooperates: data centres get built, power gets secured, equipment arrives, and capacity is delivered on schedule.

Recent guidance adjustments in the infrastructure layer have reinforced the point. They were not a referendum on demand. They were a reminder that timing and execution control the accounting reality, even when customer appetite is strong.

This is also why financing language matters more now.

In a capex-heavy cycle, leverage amplifies timing risk. If projects slip, cash burn lasts longer. If cash burn lasts longer, the market starts doing the math on funding needs. And once funding becomes the question, valuation can reprice quickly.

The companies with balance sheet flexibility can absorb delays, renegotiate terms, and keep building. The ones without flexibility tend to get judged more harshly, not because the narrative is wrong, but because the timeline is no longer fully under their control.

That is the key filter this earnings season: not whether AI demand exists, but whether the translation from demand to delivered earnings is happening on a timeline that supports current expectations.

 

Inflation collides with earnings in the same week, and the Fed’s credibility is part of the pricing

This is where macro matters, because inflation is the discount rate governor, and the discount rate is what turns “good earnings” into either “good enough” or “still not enough” when multiples are already elevated.

A market priced tightly does not just need earnings to hold up. It needs inflation to cooperate enough that rates do not re-price higher, and it needs the central bank narrative to remain stable enough that investors can trust the reaction function.

Even if inflation looks “fine” on a year-over-year basis, the monthly cadence matters because it tells the market whether disinflation is still progressing, or simply pausing above target. A 0.3% month is not catastrophic, but it is sticky enough to keep the “higher for longer” conversation alive, and that is exactly the conversation that compresses valuation when leadership is narrow and expectations are high.

Layer on the political theatre around Chair Powell and President Trump, and you get an additional source of uncertainty that markets do not love, not because it changes next month’s CPI, but because it injects noise into the credibility premium that sits underneath long-term rates. When investors start debating whether a new Chair is coming, or whether policy independence will be tested more directly, the risk is not an immediate policy mistake, the risk is that term premium and volatility rise at the margin, and equity multiples become more sensitive to each data point.

The next FOMC meeting is January 27 to 28, and in this setup, the market will care less about the decision itself and more about the framing, specifically whether the committee reinforces patience on cuts, pushes back on easing expectations, or signals that inflation progress is back on track.

For Canadian investors who own both Canadian and U.S. equities, this matters twice, first through U.S. discount rates that drive global equity valuations, and second through the currency channel, because shifts in Fed expectations can move the U.S. dollar quickly, which can either cushion or compound the experience of holding U.S. assets from Canada.

 

Venezuela oil is a long game, not a near-term inflation valve

Energy headlines have gotten louder again, including renewed focus on Venezuela and the prospect of future supply returning to global markets.

The key word is future.

Even in an optimistic scenario, Venezuelan production does not come back like a switch. It comes back like a rehabilitation project: years of underinvestment, degraded infrastructure, operational complexity, and a country that has been viewed as structurally difficult for outside capital for a long time. Meaningful production recovery would require large, sustained capex, credible operating conditions, and time.

So if energy markets move on the headlines, it is worth remembering the physical reality: barrels are slow. Capacity takes time, money, and execution.

That same principle is showing up elsewhere in markets right now. Narratives can move in days. Infrastructure moves in quarters and years.

 

What to watch so this does not turn into noise

This season will generate endless headlines. Most will be unusable.

The useful signals are more specific:

In the market leaders

  • Is language shifting from “accelerate” to “optimize,” “discipline,” or “efficiency”?
  • Is AI monetization framed as current revenue or longer-dated optionality?
  • Any mentions of power constraints, permitting delays, grid access, or capacity bottlenecks?
  • What happens to free cash flow while capex stays high?

In the infrastructure layer

  1. Are backlogs converting into starts, and starts converting into billing?
  2. Is financing tightening for the debt-funded builders, or is capital still abundant and cheap?
  3. Are customers concentrated in a way that makes delays contagious across the chain?

In the rest of the market

  • Is strength spreading beyond tech into more cyclical and defensive sectors?
  • Are margins being squeezed by services inflation, wages, insurance, or financing costs?
  • What do management teams say about the consumer in plain language, not just slide-deck language?

 

 

Upcoming events that will shape the next two weeks

A short calendar helps keep the signal clear:

  • U.S. CPI (Jan 13): the inflation print that sets the tone for rates and equity multiples.
  • World Economic Forum, Davos (Jan 19–23): useful mainly as a narrative temperature check across policy, AI, energy, and geopolitics.
  • FOMC meeting (Jan 27–28): the decision matters less than the framing, especially with markets increasingly sensitive to leadership and communication risk.
  • Bank of Canada (Jan 28): important for Canadian rate expectations, the currency, and domestic confidence as Canada and the U.S. cycle diverge.
  • Ongoing geopolitical / energy developments: most likely to function as intermittent volatility rather than a single decisive macro event.

 

 

Bottom line: this is a confirmation season

The setup going into Q4 earnings is constructive. Estimates rose into quarter-end instead of falling. Guidance was better than average. Revenue growth expectations are healthy.

But the market is expensive, leadership is narrow, and the dominant narrative is capex-heavy with real-world timing risk. That combination matters because it reduces the margin for error. At these levels, the market is not paying for “pretty good.” It is paying for clean delivery and credible forward commentary.

So this earnings season is not about excitement. It is about confirmation.

Confirmation that the largest companies can keep compounding without needing multiple expansion to do the work. Confirmation that AI spending is translating into revenue, backlog conversion, and usable cash flow, not just long-dated commitments. Confirmation that inflation continues to cool enough to keep the discount-rate backdrop stable.

If leadership delivers clean numbers and clean commentary, and inflation does not re-accelerate, the rally can keep earning its multiple. In that scenario, the rest of the market does not need to be spectacular, it just needs to avoid breaking.

If the leaders wobble, if AI timelines slip more visibly, or if inflation forces rates higher, the market does not have much cushion. At this altitude, small cracks feel larger because the downside path is simpler than the upside path.

That is why markets feel nervous before anyone reports.

Not because the setup is poor.

Because the setup is priced as if nothing is allowed to go wrong.