Key Points
- The U.S. economy remains somewhat “bifurcated,” with higher-income households driving most consumer spending. Key indicators like the Purchasing Managers’ Index (PMI) suggest broadening economic growth.
- Mid- and small-cap stocks have outperformed large caps so far this year. Large-cap tech stocks (“Magnificent Seven”) are facing challenges, partly due to concerns about artificial intelligence.
- Broader economic growth could benefit both lower-income households and mid-/small-cap stocks.
Market Update
Financial markets are off to a strong start this year, with global stock markets continuing their upward trends. International markets have sustained their robust performance from 2025, aided by a weakening USD. For U.S. investors, a weaker USD means more dollars are required to purchase foreign currency, which can enhance returns on international holdings when translated back to USD.
Global Performance
Japan’s Nikkei Index, included in most developed international stock market indices, is up over 12% year-to-date (YTD) and over 14% YTD when adjusted for currency translation effects. Emerging markets are also performing strongly, with major indices in Taiwan and South Korea up double digits. Notably, the Korea Stock Exchange Index (KOSPI) has returned over 30% YTD.
U.S. Stock Market
Domestically, stock markets have advanced, with performance concentrated in small- and mid-cap stocks. Both U.S. Mid Cap and Small Cap indices are up more than 7% YTD, whereas U.S. Large Cap stocks—which previously benefited from a decade-long bull market—have posted relatively lackluster results. Media coverage has recently highlighted concerns about artificial intelligence, which has pressured performance among the so-called “Magnificent Seven” tech giants (Nvidia, Meta, Alphabet, Microsoft, Amazon, Apple and Tesla).
Interest Rates and Inflation
U.S. interest rates have continued to trend lower, supporting performance across all bond asset classes. Since September of 2024, the Federal Reserve has continued to lower its short-term interest rate target from a peak of 5.5% to the current level of 3.75%. Despite U.S. inflation (as measured by CPI) remaining above the long-term target of 2%, inflation data has declined from the peak seen in 2022.
Potential New Stock Market Trends
Recent years have seen a bifurcation in the U.S. economy, with higher-income households (above $100,000) historically accounting for over 60% of consumer spending—a key component in GDP calculations. This has led to what media outlets describe as a “K-shaped” economy: the wealthy see continued improvements, while lower-income households face ongoing inflationary pressures.
This economic divergence has also affected financial markets, with U.S. large-cap stocks consistently outperforming mid- and small-cap stocks. However, at RKL’s Annual Update, it was noted that potential economic tailwinds could broaden growth in 2026, benefitting a wider array of market participants (“all ships rising” rather than just the “Magnificent Seven”).
Early Indicators
High-frequency economic data, such as the U.S. PMI, suggest a possible broadening of the economic recovery. The PMI has remained above the 50% expansion threshold, indicating increasing customer demand and a positive outlook for broader growth. As the PMI has improved, earnings projections for smaller companies (as reflected by positive revisions in the S&P 600 Index for small-cap stocks) have also increased since late 2025 and into 2026.
