Last Week
The theme thus far in 2026 has been a rotation out of popular, expensive stocks into value sectors that have long underperformed. That narrative was once again in evidence as more stocks advanced than declined, led by strength in the Utility, Telecommunications, Energy, and Basic Materials sectors, while Technology, Financials, and Consumer Services stocks suffered. Nevertheless, the broadly followed market-cap-based indices all finished in the red, with the Nasdaq Composite sliding 2.1%, the S&P 500 losing 1.4%, and the Russell 2000 slipping 0.8%. The equally weighted S&P 500 ETF (RSP) has gained 5.6% YTD while the S&P 500 ETF (SPY) is flat. Small-cap value stocks are faring the best with a 10% plus return in 2026. The danger zone is any business that AI could disrupt. Most recently, it has been software and insurance companies that the market has punished, regardless of their actual earnings results. We think these sharp sell-offs could be creating compelling entry points into some shares.
The economic data featured good news on both inflation and employment. The Consumer Price Index rose just 0.2% month over month in January, below the +0.3% consensus estimate and moderating from the +0.3% increase in December. Meanwhile, U.S. nonfarm payrolls rose by 130,000 in January, well above the +70,000-consensus forecast and sharply higher than December’s revised gain of 48,000.
The dollar resumed its decline, moving back down towards a 5-year low, while gold rallied back over $5,000 as yields on the 10-year Treasury dropped 15 basis points to its lowest level of the year at 4.06%. We continue to hold gold as a hedge against further dollar weakness. We have also recently increased the allocation to international developed markets using VEA in our ETF model.
On the earnings front, during the past week, positive and negative EPS surprises across multiple sectors offset each other, leaving the index’s overall earnings growth rate unchanged. Corporate earnings are on track for a 13.2% year-over-year increase, its fifth consecutive quarter of double-digit growth. The sharp increase in corporate earnings, combined with stable and declining interest rates, is the foundation of the bull market. The forecast for 2026 is for small-cap companies to show much higher earnings growth than their large-cap peers, which could set the table for a terrific year for small caps. Please contact us if you are interested in our proprietary small-cap strategies, in which North Star has a track record dating back to the 1990s.
On the Chicago Sports scene, the Maroons of the University of Chicago continue to look like contenders for the Division 3 national basketball championship this year, adding weekend victories over Case Western and Carnegie Mellon. The Bulls, on the other hand, look like they are desperately trying to tank themselves into a shot at a lottery pick.
This Week
The markets were closed on Monday in observance of Presidents’ Day.
Earnings season enters its final innings, with 57 S&P 500 companies reporting results.
The economic calendar is light with the Bureau of Economic Analysis release of the personal consumption expenditures price index for December in focus. The consensus estimate is for a 2.8% year-over-year increase, even with the November data. It will be interesting to see if the PCE comes in tamer following the soft CPI report. The BEA will also report its advance estimate for fourth-quarter GDP growth, with economists forecasting a seasonally adjusted growth annual rate of 2.8%, down from the third quarter’s 4.4%.
The stocks mentioned above may be holdings in our mutual funds. For more information, please visit www.nsinvest.com.