Making Sense: January Market Update

First Citizens Wealth

Making Sense

Market Update | January 2026

Recorded on January 29, 2026

Amy: Hi. I'm Amy Thomas. I'm a strategist here at First Citizens Bank. Today is Thursday, January 29, 2026, and I want to welcome you to the first market update for this year.

Each month, our Chief Investment Officer Brent Ciliano and Senior Director of Market and Economic Research Phil Neuhart take a deep dive into what's happening in the markets and the economy. As always, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only. This should not be considered as tax, legal or investment advice.

Brent: Well, thank you, Amy, and good afternoon, everyone. Hope all of you are well. Phil, it's hard to believe—2026. And we're already 1 month into 2026 and what an event-filled month it has been.

We have a lot to cover today, so why don't we jump right in? And we're going to start off like we normally do on the economic front, and we're going to talk about US growth. We're going to talk about the expectations around growth. Certainly, we'll get into everything consumer spending, the labor market, inflation and monetary policy. We'll also talk a little bit about tariffs.

And then we'll get into a market update because it is January, Phil. We're going to summarize what happened last year, and then we'll dive into equity fundamentals and valuations, and we'll talk a little bit about AI and whatnot, and we'll certainly get into some fixed income.

So why don't we jump right in?

Phil: Yeah, so let's look at the economy in the broadest sense first. So here we're showing US gross domestic product. If you remember going back to first quarter 2025, Brent, we actually had negative GDP.

That was really a bit of a distortion driven by net exports, right? So companies saw tariffs coming and they front loaded. So when you have negative net exports dramatically, that pulls down GDP. We've really seen a recovery since then. Look at second quarter, third quarter—fourth quarter, we're waiting on that data. This estimate is from the Atlanta Fed GDP Nowcast, as they call it.

If you look at sell-side analysts, they're a little bit lower. But either way, we are expecting growth in the fourth quarter and then kind of steady state as you move into 2026—sort of that 2% growth level. Good, not great, but certainly an environment in which markets can perform as we've seen historically.

Also, estimates have improved in recent months. If you look at where we were 90 days ago in terms of 2026 expectations, you can see GDP, consumer spending, private investment, industrial production. All of those numbers have been revised higher over the last 90 days.

This good to see, and we are sensing that. Chair Powell, who just this week we had a Fed meeting. He cited that it does appear there's a little bit more strength on net in the economy.

Brent: Yeah. And certainly one of the reasons, Phil, that forecasters are more optimistic about this year is one of the biggest components of real GDP, which is consumption. What we're looking at here, the dark blue line is nominal spending. The gold line is real spending.

I think the one thing that's remarkable, not only is real spending at 2.6%, and if you think about that being roughly 68% of real GDP, you can see why forecasters are so optimistic about growth this year. But the thing that strikes me when I look at this chart, if you go all the way back to January of 2023, if you drew a regression line through that gold line, it's been remarkably consistent.

So spending across the board on a real basis has been a significant driver of growth but has been remarkably consistent across the board. And one of the reasons for that, if we think about the wealth effect that's been going on, what we're looking at here is years of spending that Americans have within their equity portfolio. So normal numerator is stocks, ETFs, mutual funds, pension entitlements, et cetera, et cetera—divided by nominal spending. And you can see, we're effectively at the highest level ever.

Americans have about 4.4 years of spending built into their equity portfolios. And you might say, "Well, Brent, I kind of see this higher bar to the left," and that's a little bit of a distortion of the pandemic that we had, where the numerator really fell and spending really cratered, which makes that number look higher.

But you can compare that. If you go back to the two other little peaks, go back to 1999 or go back to 2007, which were remarkable equity years, we had significantly less years of spending built up. So it's just amazing what equity wealth has actually accumulated over the last decade.

Phil: In economics, we call this a wealth effect. And you combine this with the value of homes going up so much, particularly over the last 5 years, you do find that when people feel wealthier, they spend more—even if their W2 didn't change. Wealth does have a real impact on spending.

Brent: So if we take a look at—you know, you and I love to look at alternative data, whether that's TSA checkpoints or OpenTable. What we're looking at here is hotel rooms. And on the left, we're looking at three categories within hotels, which is luxury and then the next one is upscale or upper midscale, and then you have the midscale or economy. On the left, what you can see is, by and large, coming down from the levels that we had back in 2021 or 2022, they've all come down a bit.

But what I think is interesting, of the three categories from effectively the spring of 2024, actually luxury hotels have actually seen their average daily room rate go up while sort of, you know, the upscale and mid have actually gone down. And when we look at the chart on the right and I look at that ratio of luxury to economy, you're seeing the widest dispersion that we've seen in quite a while between—so the wealthiest of wealthy people continue to spend, and prices related to the things that they're spending on continue to rise.

Phil: Yeah. We've talked a lot about the K-shaped recovery. We've shown in spending and income, et cetera. This is just another way to show it—that the higher-income quartiles and quintiles are spending more, and that's supporting hotel prices there, whereas lower-income folks are struggling and they are not using hotels as much, and you're seeing rates go down there.

So let's talk about the labor market as a whole. We've talked about spending. Well, what supports spending? Usually the labor market. The unemployment rate, we're still in kind of the mid-fours on unemployment rate. That has risen from the lows of a few years ago, but still is quite low historically. Usually, as you can see in the past, when it starts moving it moves up in a straight line. That has not been the case. We kind of just marched slowly higher, still in the mid-fours. If this deteriorates, of course, it's something we really have to watch. But what we've seen, and maybe even more powerful than the unemployment rate, is the employment-to-population ratio, right?

And if you look on the right side here, people—that's basically moving sideways. In other words, the percentage of those employed prime age, 25 to 54, as a percentage of the population is kind of moving sideways, right?

We know that the Baby Boom is retiring. We know that those coming out of college might be struggling, but that prime-age worker, it's basically where we have been. The quality of the job we can debate. But people are generally working. And immigration is part of the story here, as we as we flip ahead. Net gains in payroll growth have slowed dramatically.

This a big headline, something we watch closely and, you know, you used to think, "Okay, you need to gain, you know, 100,000 to 150,000 jobs just to keep unemployment from going up." You used to do that each month. Well, now that number is probably closer to 50,000, and the reason is if you have less immigration, you cannot hire someone who isn't there, right? So you just have fewer job gains.

The other thing that we have kept an eye on is the importance of healthcare and social assistance to job gains. Here, this a 12-month rolling sum, and you'll notice that basically—not basically—all of the job gains over the last 12 months on net have really been in healthcare. So one, you say, "Wow, that's really sector-specific. Other sectors are basically flatlining." And that's true. But also I think it speaks to a few things.

One, we saw a lot of turnover in healthcare around and after the pandemic. Two, we have the retiring and aging of the Baby Boom. Three, anecdotally, this what we're hearing from clients. So a couple years ago, 2022, really any sector, our clients said, "We cannot find workers." Now you don't hear that as much in all sectors, but you do still hear it in healthcare. You just cannot find enough workers.

Obviously, that can be regionally specific. But generally, that is the case. And that's what's been driving our labor market is really the healthcare sector.

Brent: Well, I think it's really interesting. I mean, I think we're going to continue to see, as you've said, this tug of war between, on one hand job creation and full employment and gainful employment.

And I think at this part of the cycle, you and I are going to be spending a lot of time looking at jobless claims and continuing claims and challenger job cuts and whatnot just to kind of make sure that we can continue to see whether or not that full employment picture starts to unravel because I think this going to be noisy for quite some time.

Phil: Exactly. And we've seen select announcements of layoffs. We have not yet seen those layoffs en masse that you would expect around a recession. If we do, this picture starts to change pretty quickly.

Brent: That's exactly right. And if we take a look, Phil, on the other side of the Fed's dual mandate of full employment versus what we're talking about now, which is price stability, let's take a look at inflation. On the lefthand side, let's look at CPI. The dark blue line is the yearly change in CPI, and you can see, since 2022 and the highs that we saw back then, you know, continued moderation in the rate of inflation.

The gold line is that 3-month annualized change. You can see certainly choppy and volatile, but moving down in line, and you can see where we are at about 2.7% for inflation. Now, we had certainly some noisy information with, you know, owner-equivalent rents and whatnot within the December print. But by and large, we are seeing CPI moderate lower.

What I think is interesting is, where are we likely to go from here? And if I look at the market pricing side on the righthand side where we're looking at inflation expectations from a market perspective. We're looking at, you know, the dark blue line here, which is sort of that 1-year inflation swap rate. We tend to use the swap rates because they're a good real-time gauge of where inflation expectations are. As well as the, gold line, which is a little bit longer term, which is 5-year inflation swap rates. You can see over the last handful of weeks, that's hockey-sticked up a bit. And now we're sitting at inflation rates expected at about 2.5%.

If I go out even longer, whether I look at 10-year or 30-year swaps or 10-year or 30-year inflation break-even rates, which are priced into, let's say, tips, they're also higher, right? So if I look at longer-term rates of inflation that are market-implied, you're more like 2.25% to 2.5%. So when we think about that, it's going to really kind of play into where monetary policy goes and where we think the terminal value of rates will likely be at the end of the cycle.

So another thing that we look at, which is financial conditions, and what's built into this is, you know, policy decisions, long-term treasuries, credit spreads, valuations, things along those lines are all built into this financial conditions index. And you can see we are very, very loose financial conditions as it relates to where we are now.

When I think about what the equity market has done, where we are, and we'll talk a little bit later on credit spreads, financial conditions are pretty loose, right? So when we think about that as a backdrop to where the Fed and monetary policy goes, it's certainly going to play into their decision-making.

Phil: That's right. So let's talk about the Fed for a moment. First of all, the Fed did meet this week. No change in the federal funds rate, so we are steady there.

Looking at the rest of the year, if you look at the Federal Reserve's own projections through the summary of economic projections that the board puts out—one more cut this year. Futures markets are pricing two cuts, but all in the back half of the year, under what would be a new Fed chair. So there's a lot of uncertainty there, but the short answer is bias lower, but not much lower.

And to your point, if inflation's running, call it 2.5%, and you say, "Okay, a natural rate about 1% on top of that." You're around 3.5%, which is pretty close to where the fed funds rate is right now.

Maybe one more cut and you're at neutral. So if one wants more cuts, really, of course, if we see economic deterioration, you're going to have a bunch of cuts, but nobody wants that. In a good period, it would be inflation surprising to the downside and moving closer to 2%, versus expectations that you outlined. That would be the bull case.

Something that remains on our clients' minds—I've been on the road a lot in January—but something that still comes up is tariffs. It really depends what industry that client is in. But for those who are exposed, we do hear it.

We often hear, and I think it is true, that tariffs have not been terribly disruptive. We had some market disruption. You saw some price increases in certain goods last year, but we always forget that one, consumers spend more on services than goods. And services are not as exposed.

But to say that there's not an impact, we just view as inaccurate. I mean, we're pacing about $360 billion in Treasury receipts through tariffs. That is the blue line here. That is material. And how is that paid for? Well, there's a few ways. One, of course, negotiate with your partner across the border. Two, the importer paying it themselves. That does happen. And then three, passing it on to the consumer. So we are—and by the way, if you look at corporate income taxes—tariff revenue and corporate income taxes are converging.

Brent: Yeah, it's pretty incredible.

Phil: When you think about all dollars paid in corporate income tax, it's not that much above what's being paid in tariffs. So this is material. We think that this remains a story, even if it's not the only story as maybe many thought after Liberation Day last spring.

Brent: Absolutely. And if you think about what we've talked about in the past, I mean, you have a $2 trillion fiscal deficit gap that has to be made up. And when you're talking about, to your point, something that's as significant as aggregate corporate tax receipts, that is a material filling in of the gap.

Phil: Correct. But it's getting paid for somehow, right?

Brent: Yes.

Phil: These are dollars being paid.

Brent: So to that point, let's jump into the market section, and let's kind of get into it and let's talk about—before we get into where the equity market might be going, let's talk about what happened last year. Let's look at the set of bars on the far right, which was last year.

Gold bar is international stocks, developed and developing. Dark blue line, US stocks. And then the light blue bars are fixed income, both taxable and municipal. And no matter what bar you look at, it was a good year for a globally diversified portfolio. And it is interesting, Phil, that for the first time since 2017—and, again, in an up year—international stocks outperformed US stocks by almost double.

And we talked about this last time that what I think was interesting is that when I take this back to our global portfolios and our global multi-assets, going all the way up until 2025, we had sort of a max underweight to international, right, of about 5%.

When we go through our process and looked at valuations, we had actually altered that coming into 2025 and gone from a max underweight to about a 2% overweight. So sometimes it's better to be lucky than good, but we are able to capture a lot of that in our portfolios. And we think that, potentially, as we look forward, where we should see a little bit more balance within equity asset classes across the board. And we think the international story is probably at the beginning stages of a recovery.

Phil: And, you know, while we're mentioning international, we probably here should take just a quick second to talk about the dollar. We saw dollar weakness last year. We've seen further weakness this year. That has been a real topic. Would you mind just touching on that for a moment?

Brent: Yeah. So if I disaggregate the contribution to that return of that 32%, when I combine the decline in the dollar and the contribution from multiple expansion—more than 80% of the returns came from a decline in the dollar and multiple expansion.

We need to see that change a little bit in this year and subsequent years to where the earnings growth component of that and dividends contribute more towards the returns. And we think that we're starting to see that already. It's early, but starting to see that in 2026.

Phil: And hopefully the move in the dollar, I think you agree, is more normalization from what was a really expensive dollar when you think about coming into last year. More of a normalization and not a true unwind, which is kind of where we lean.

Brent: Absolutely.

Phil: We are not in the Sell America camp.

Brent: Absolutely not. So let's take a look at, you know, that was last year and previous years. So let's talk about this year. And again, we are barely a month into this year, but let's talk about what it looks like. And what you can see here is small-cap stocks, mid-cap stocks and equal-weighted S&P 500 are doing better than the cap-weighted S&P 500 and what has previously been the biggest contributors to S&P 500 return, which is the Magnificent Seven stocks. What's actually not on this chart, if I drew another line on here that was total international stocks, they're up about 7% through January.

So again, that rotation to down in cap, international and more breadth and contribution of the residual 493 stocks within the S&P 500 is absolutely a great sign to see as we continue in this equity market rally.

Phil: Yeah. Something, a topic we've talked about a lot for quite some time, is the topic of broadening. We have not thought that the only game in town can be the Magnificent Seven. So seeing that broadening is good. And by the way, in portfolios we're overweight small cap. So have been positioned, for some broadening.

Brent: And when we take it back to the fundamental side of what's going on in US equity markets, we're early in earnings season, right? We've got an awful lot of technology companies that will be reporting this week, and a significant amount of the S&P 500 will be reporting. But let's talk about where we expect our earnings growth to be in 2025, which is about 12.4%.

Updating this on the fly, we're looking at the fourth quarter sitting actually about 8.2%. But again, we've only had a little bit less than 20% of companies report to date through the fourth quarter. We're about 75% of companies are beating on earnings. That's come down a little bit from the 80%, but by and large a significant amount of companies are beating expectations.

The expectations for full year sitting at 14.7%, which is incredibly robust. When we showed this last time, it was about 14.9%. But again, it's come down a skosh, but by and large earnings growth expectations for this year is incredibly robust, especially relative to that long-term average of 7.6%.

What I think is even more remarkable is when we look at the graph on the right. When I look at estimated next 12 months operating margins for S&P 500 companies. So we're not talking about previous or trailing 12-months. What bottom-up CFOs, CEOs are expecting for operating margins sitting at 19%. You and I have seen that number come up significantly every time we present this. This the highest level ever recorded, right? When I think about earnings growth, earnings per share, revenue per share, operating margins—US companies are firing on all cylinders across the board.

And a question that you and I get a lot was about valuations and what's going on. Are US stocks so expensive? What we've talked about over and over is the contribution and the fundamental contribution, earnings growth, dividends to the S&P 500's returns. So what we're looking at here is we're looking at the last 4 years of S&P 500's return and a decomposition between earnings growth and the PE ratio or the multiple, right? And you know, gold is earnings and the blue is the multiple.

And what you can see, look at last year, right? More than 70% of the S&P 500's returns came from the fundamental side—earnings growth, dividends. But what I think is most interesting, Phil, is look at the expectations for this year. It's supposed to get even better. So the contribution of earnings and dividends to the expected return this year is even higher than last year.

So again, earnings continues to drive the story as it relates to what's going on in the equity market.

Phil: Yeah. As we flip ahead, the concept of—is this just valuation, just the market becoming more expensive? The market is expensive. There's no question, right?

Brent: No doubt. Tenth decile of valuations.

Phil: But also fundamentals have helped to justify that. And we know that we're getting pulled up by the top firms. So the largest firms, something we showed in our outlook, are more expensive versus their own history than the other 490. But if you look here, the top 10 firms, look at their operating margin compared to everyone else. So you say, "Well, these companies are expensive." Well, they're expensive because they have unbelievably high margins.

By the way, valuation is the one thing in the marketplace you can't predict. So of course valuation can contract, but if this earnings season is any indication, fundamentals do remain in place for those biggest companies. And by the way, if you look at the other 490, well below the top 10, but has actually been improving. Look at that. If you look at earnings growth expected for 2026, the 490 have higher earnings growth expectations versus 2025, whereas the Magnificent Seven are—still remarkable earnings growth—but kind of in line with 2025. So this broadening trend we actually see in the fundamentals as well.

Brent: Incredibly healthy.

Phil: So let's talk about the AI trade, these biggest names, et cetera. One, hyperscaler CapEx is remarkably high. We just over the last 24 hours had more earnings releases from the biggest tech names, and this a trend that is continuing.

By the way, something we have said and we do believe is that when we start to see companies worried about excess capacity in data centers, maybe reducing their spending, that is the time that we perk up our ears. For now, though, this continues to move higher. What are we watching? We're watching in 2026. Fundamentals have to start to show the benefit from AI.

Brent: Yeah. Return on invested capital is going to be number one.

Phil: That's right. So what we want to hear is not just how much are you spending on data centers, but where is it having an impact, for example in the big names, on revenue, right? And does that start to leak elsewhere? To that point of those benefits broadening out of the largest companies, let's look at it as some survey data.

So on the left side, this the share of US companies over 250 employees—let's just say smallish and up. What are they reporting in terms artificial intelligence use in business? So what you'll notice is the blue line, this is plan to use AI. That has continued to march higher if you kind of look at the trend line.

What's interesting is currently using AI, very sharp move higher, and then has kind of dipped, moved sideways. And I think what that shows is with the new technology, everyone gets very excited, but then it starts to become—is the rubber hitting the road? We think the rubber will hit the road, and we saw this in in the Internet era as well in the 1990s, these things take longer than is usually estimated.

So if you think back 3 years ago, some of the claims of where we were going to be in 3 years—we're not there today. And that, by the way, is anyone who's been in the market or just alive knows that that's usually how it goes.

But to that point, if you look at over the last 12 months, how has your firm's use of AI affected labor productivity? This the right side. The highest bar, first of all, virtually no one has decreased. The highest bar here is no change, and then about a quarter are saying there is impact. Our instinct, and tell me if you disagree, is that you start to see that increase in productivity, those latter two bars on the right side start to move higher.

Not that it's going to be 75% in a year, but I wouldn't be surprised to see that 25% become 40% and so on. And by the way, if we don't see that, that's a real problem.

Brent: That's a huge problem.

Phil: We have to start to see—and look at small caps outperforming. We have to start to see the productivity gains from AI benefiting, yes, the biggest companies, but also smaller companies.

Brent: Yeah, I mean, that's the fundamental underpinning to the broadening out of the residual 493, right? And if we—so I do agree with you, to answer your question. And if we want to put it into a baseball analogy, I would argue we're probably still getting our beer and hot dogs at the stand before the game even started, let alone being in, you know, mid to late innings.

So I think what is interesting, Phil, is we have a lot of clients talking about the AI story, but also talking about the other side of it, which is energy and energy usage. I did think there was one data point that did come out of some of the earnings releases is that energy was one of only four sectors that showed a year-over-year decrease in earnings, and they were the only sector that year over year saw a decrease in revenues year over year.

So you have to be very careful as it relates to what this AI story is, and will energy be the right thing? What will energy actually be? What will we actually need? So right now, I think we're still in the very early innings of understanding how this broader AI capital spend will benefit companies and how that will translate into earnings.

Phil: Yeah. Look, it has to feed into productivity, which productivity is an economic way to say something financial, which is margin expansion. And as we showed previously, margins have been moving higher. If that is to be sustained, AI productivity has to come through.

Brent: So let's talk about another question that you and I get all the time, which is "Brent, Phil, where are mortgage rates going? What's kind of going on here?" And what we're showing is the change in a 30-year, conforming fixed rate mortgages, in two ways.

The gold line is the change since September of 2024, when the Fed first started cutting rates. At that time, back in September of 2024, roughly 3 months later the mortgage rates went from about 6.3% up to about 7.3%.

Phil: And the Fed had cut, 1%—100 basis points—and consensus would be, "Well, rates have to fall."

Brent: That's right, because aren't they related?

Phil: And rates moved the opposite direction.

Brent: Exactly. And so the dark blue line is where we are now since September of 2025. Mortgage rates have fallen back down, but what I think is truly incredible, if I look at the seven 25-basis-point cuts that we've had since September of 2024, again, like you said, the first cut was 50—you know, mortgage rates have basically stayed the same.

We went from 6.3% back in September of 2024. Guess where we are today? 6.32%. So by and large, you have to understand that mortgage rates are more correlated to, I think, the 10-year Treasury than they are fed funds, but understand that the Fed is not controlling 30-year mortgages.

Phil: Look, Alan Greenspan, a pretty smart fellow, called this the Great Conundrum. The Fed controls overnight rates, and we run into this. And in fact, just last week, I was speaking to an individual. We run into this all the time on the road, which is "I want mortgage rates to go lower, so I want the Fed to cut." Well, the Fed can cut and mortgage rates can move higher because it's about the shape of the yield curve.

Let's say the Fed is cutting for the wrong reasons, and that's viewed as inflationary, you'd expect longer rates to rise, not fall. So that is why you need the Fed to follow a dual mandate in a real process and be smart in terms of why they are cutting and not just assume that things like longer term rates are going to fall. Now, of course, if rates are tied to something like SOFR, short-term rates, then, yes, it is tied to the Fed, but not everything.

Brent: That's right. So let's keep talking about fixed income a little bit. Let's talk about credit spreads. You know, basically looking at the dark blue line here, which is investment-grade credits. The gold line is high-yield credits or sub-investment grade credits.

And you can see, I mean, since the highs in this cycle in the summer of 2022, spreads continued to compress, right? And we think about when yields are falling, what happens? Bond prices are going up.

So the returns in both investment-grade bonds and high-yield bonds have been remarkably good. And we are—if I were to take this cycle all the way back, both investment-grade and sub investment-grade credit spreads are near all-time lows.

And interestingly enough, when we look at bond volatility, especially in corporate credits, you think it was just like equities and, you know, highly volatile. Quite remarkably, volatility within corporate bonds has been remarkably sanguine.

And if you think about what might happen this year, we do expect that volatility across both equities and corporate bonds will likely pick up this year as we face geopolitical risks, midterm elections and other things that might come along the path. So we expect this year might be a little bit more volatile in credit spreads than we have in previous years.

So let's talk about the other side. Let's talk about sovereign debt here. What we're looking at is sovereign bond yields. And the fact that when we look at some of these lines, and you can see here the one line that I want to highlight here is the gold line. I think that's a gold line or an orange line. I can't remember.

Phil: It's orange.

Brent: Okay. So that's, JGBs and Japanese bond sovereign yields. You can see that while much of the developed world has been relatively moderate in the move of their 10-year yields, Japanese bonds have seen an incredible move, right?

So I mean, you're talking about a 1-year move of about, like, from 1% to 2.3%. So again, you can see significant volatility in sovereign bond spreads and yields. And again, we expect sovereign bonds to be a little bit more volatile in 2026 than we have in previous years.

Phil: I think also the Japan experience is a reminder for the rest of the developed world that fiscal matters, deficits matter, and while—

Brent: Demographics matter.

Phil: Demographics matter, and Japan obviously is an exception in all of those, but when you look at the US, we have an aging population, we have exploding deficits. It is a reminder that, to use a term from the 90s, the bond vigilantes will come out. And we have to think about these things.

So let's talk about our S&P 500 price target. We set this initially in November. When we set our base case to 7,200, that was up about 8% and the market has continued to rally.

We came into this year, if you look at our price target as of beginning of this year would be more mid-single digits, and we're up a couple percent. So up about 3% from here. To be clear, we do not think that we just march smoothly like we did back half of last year to that price target. We think that much like what we saw first half of last year, there's a lot of good news priced in. And seeing a little bit of volatility would not be that surprising.

That said, if the good news continues to play out, I'd look towards our bull case, which is up another 12% from here. Obviously, recessionary-type scenario in which earnings fall, et cetera, is the bear case, down about 25%.

We do have asymmetry between the bear and the bull case, more downside to the bear than upside to the bull. That is by design, and the reason is there's lot of good news priced in. The S&P 500 has rallied over 100% since 2022.

So we've come a long ways. Does not mean we don't think this can be an up year. We think it can be. It may just not be the sort of year we saw over the last 3 calendar years, which were truly exceptional.

Brent: And let's remind listeners, and we've shown this slide before, the average intrayear volatility and drawdown within the S&P 500 is averaged about negative 15%. Mean, median observation's been about negative 10% to a negative 11%. So drawdowns are a normal part of market volatility.

If you don't have uncertainty in market volatility, you can't get paid an equity risk premium. So it's really important to understand that it's not a free lunch. You're taking risk, and you hope to be compensated for that risk.

Phil: And to that point, something we're emphasizing this year and have been emphasizing for several years now is balance in portfolios. So as you just mentioned, Brent, equities are a volatile asset class. They are truly a long-term asset class. Diversification among equities, we've been talking about overweight in small cap, international exposure, et cetera, is good, but also balance outside of equities.

Fixed income is still a viable asset class. You have the aggregate bond yielding 4.4%. Municipal bonds, 3.5%, depending on your tax bracket, materially higher in terms of tax-equivalent yield. We do think that unlike, say, 5 years ago, 2020, 2021, fixed income is just much more attractive because there's yield. And by the way, fixed income, as you showed earlier, performed very well in 2025.

So think about balance in portfolios, have a plan, stick to that plan if and when we see volatility. A question we get often, particularly with all of the geopolitical headlines this year, is "Why should I invest in stocks? Why should I hold stocks with so much news headlines?" Well, the answer is here and is a little bit of a reminder that the stock market is a cold beast, right? And the market is much more concerned with corporate fundamentals than geopolitical risk.

And if you look at all sorts of geopolitical events, I mean, we're talking all the way back to World War 2. If you look in this first data column, the third column here, the time to bottom, right, is about 15 days, about 3 weeks.

Brent: Days. Not months, not quarters. Days.

Phil: Right. The time to recover your previous level is another basically 3 weeks, 16 days. So we are talking unbelievably fast. By the way, the average drawdown is single digits. Whether you're looking at median or average, 6% to what, 7.6%. And then look out 3, 6, 12 months, from the bottom you generally have a pretty sharp recovery.

So it's not that geopolitical doesn't matter. The market is going to look through geopolitical that does not necessarily impact earnings. There are geopolitical risks out there that we actually think would impact earnings, right? We could have a whole other webinar on that. But the truth is, much of what we're seeing—what impact does that have, for example, on the Magnificent Seven, right?

The answer is have a plan, stick to that plan. Yes, we read headlines. Yes, they pull at our heartstrings. But the market reaction, as we've seen, by the way, so far year to date, which the S&P is up 2%, and equal weight's up even more. The market will often look through this. Do not try to trade a portfolio on geopolitical headlines.

Brent: Yeah. I couldn't have said it better, Phil, so thank you for that. So Amy, why don't we—I see a lot of questions building up in the queue, and I can see a lot of good questions. So why don't we move over to Q&A?

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Amy: Well, thank you guys for taking some time and looking at markets and the economy with us. Hope you guys had a good winter break and got to spend some time with your families, but it's good to have you back with us.

Brent: Yeah. Likewise, Amy.

Amy: I want to jump in. A big question we've been getting from clients is no surprise around geopolitical concerns. And I know you've already touched on that, but maybe just give everybody a little bit of a sense of what you're thinking.

Brent: Yeah. I mean, as Phil and I highlighted, I mean, showing all the events that have transpired since World War 2, there's been an onslaught of nothing but geopolitical noise and things that get in the way of being a thoughtful long-term investor, right? I think as we kind of nicely show that you shouldn't drive your investment decisions on the noise or news of the day, right? That just tends to get in the way, and they tend to be very short-lived.

I think certainly in 2026, we're going to continue to see headlines and news, whether it's a potential government shutdown or whether it's midterm elections. You should just expect to hear more.

As Phil and I talked about very, I think, nicely was valuations continue to dominate the returns of equity markets. And I think as we showed in that decomposition graph, that market participants are expecting that the contribution from earnings versus multiple expansion or paying more for that same dollar of earnings will actually get higher this year, not lower.

So I think by and large, stick to the fundamental underpinnings, focus on that, trying to the extent that you can, Amy, tune out the noise of the day. And I think Phil said it nicely is, have a long-term plan. Understand why you're invested. Be diversified in portfolios. I think having a plan and a global multi-asset portfolio that's thoughtfully diversified should help you weather the storm as it relates to the noise of the day.

Amy: Words to live by. Phil, I know a big question you've been getting a lot on the road is around gold. We're seeing it go off the charts. What are you saying to people when they have that question?

Phil: Yeah. It's a great question. I'll kind of speak to gold and why I think it has risen and then I'll pass it to Brent. Usually, I handle this on the road, but we have our CIO here, so I'd love to hear what he says from a portfolio perspective.

So a couple things. First, fundamentally, gold is a very volatile asset class. I'll let you dig into that. But if you bought gold in the early 80s, you were down for decades and broke even in late 2007.

So first of all, it's a very volatile asset class. But why is it rising? I think it's very interesting, and there's a lot going on there. One, if you just look at recent years: inflation, right, so it sounds a lot like the late 1970s, early 1980s, lower growth, higher elevated geopolitical risk by really any measure than where we were a few years ago, whether you think Russia-Ukraine, et cetera.

And then finally, there are some fundamental reasons that have to do with retail tools to access gold that are increasing demand for gold outside of outstripping supply. So that is also boosting it, think, outside of just geopolitical and inflation concerns.

Brent: Yeah. I mean, think about it this way. Anytime you have any type of asset or asset class that does incredibly well, whether it's digital currencies when we are thinking about Bitcoin or gold, there's always this sort of FOMO, fear of missing out, sort of mentality.

So you know, we can certainly talk about the volatility profile of gold and sometimes taking decades for it to recover. But from our portfolio construction perspective, understand that commodities and broad commodities, whether that's base and ferrous metals, agriculture, precious metals, are absolutely part of our opportunity set when we build portfolios.

I think for us, you know, we want to make sure that we have a fundamental narrative to why we put something in the portfolio. And if you think about gold, unlike other commodities where you don't really have a dividend, rent, royalty, discounted present value of future cash flows, it's incredibly hard to value something that basically just sits in a vault.

The contribution of gold to industrial applications or jewelry is a fraction of the total amount of mined gold. And then even from a fundamental perspective, if I think about the marginal cost of production, if I think about what we do have in portfolios, which are gold miners, are part of what we specifically do in the portfolio construction set that are naturally built into small and mid-cap stocks and even some in large-cap stocks. We do have exposure on that side.

But when I think about the marginal cost of production, which is still in the 2,000s, not 5,000s, you know, from a fundamental perspective it's hard to want to jump into something that is near all-time highs.

As we've shown and can show in the past when you look at Bloomberg or any chart of gold, yes, to a point in time, understand it's an incredibly volatile asset class, and we want to make sure that we understand the fundamental aspects of including an asset class, its volatility profile and importantly the role it serves inside of the global multi-asset portfolio.

And for all those reasons and from a fundamental perspective, it's not a very attractive asset class for us right now, despite it hitting 5,000 and above, right? It's just something that we think is potentially closer to a top than it is a midpoint or a bottom.

Amy: So Brent, we're about a month into 2026 and I know a question that you're getting from clients and around the market is around valuations. And I know you already touched on it, but would you go into a little more detail on that?

Brent: Yeah, I think we had a great slide, slides, in our last webinar, right? Certainly, we showed that US stocks, and Phil touched upon this, are undoubtedly expensive, right, from a valuation perspective when I look at valuation deciles. We are now in the tenth decile of most expensive valuations for US stocks. But we've talked about time and time again, valuation over the short to intermediate term is a very, very bad gauge of future equity returns.

And we had shown in a chart, I think it was actually the last slide of the previous deck, where once we hit the tenth decile valuations in the S&P 500 that you had significant runs in excess of 100% two other times. I think one was in 1995, the other one was in 2016 where we hit the most expensive decile in valuations, and US stocks ran up more than 100% from those points, right?

We hit that tenth decile valuation in September 2025, and we're only 20 to 30-ish percent up from there. So again, valuations, very, very bad guide for the short to intermediate term. Good for the long term when you look at decades of investing, but by and large we certainly think that the fundamentals and the underpinning of stocks is something that you should focus on, not necessarily the valuations.

Phil: And I think it highlights the importance of something we're seeing so far year to date, which is broadening. It is true that if only a few companies are pulling us higher, that may not be sustainable. But if a lot of the benefits of why those companies have such high margins, AI being the most obvious, feed into the rest of the economy and mid-cap and small-cap stocks, that can really help to boost outside the largest 10 companies.

Amy: Yeah. I thought the chart where you're highlighting the small cap was very helpful this month, so thank you for doing that. And thank you for answering questions as always.

Thank you all for joining us. And we also thank you for trusting us to bring you this information, and we will see you again next month.

Authors

Brent Ciliano CFA | SVP, Chief Investment Officer

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Brent.Ciliano@FirstCitizens.com | 919-716-2650

Phillip Neuhart | SVP, Director of Market & Economic Research

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

Blake Taylor | VP, Market & Economic Research Analyst

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Blake.Taylor@FirstCitizens.com | 919-716-7964

Jack Pettit | Research Analyst

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

John.Pettit@FirstCitizens.com | 919-986-3667

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