Oil prices jump after Iran says critical Strait of Hormuz to remain shut
January lived up to its reputation as a seasonally strong month. Fortunately, as January goes, the year goes. Even better, small capitalization stocks beat large cap stocks, so there is definitely a shift underway to more domestic stocks versus the multi-international stocks that dominate the S&P 500. There is no doubt that since the U.S. economy is now leading global GDP growth, institutional money is being increasingly diverted to domestic stocks, which in turn is helping to boost small and mid-capitalization stocks.
The analyst community is expecting double-digit earnings growth this year for the S&P 500. We are still in the midst of the fourth quarter announcement season, so we still have wave after wave of positive announcements that will propel stocks higher. As always, stocks have to beat analyst estimates and provide positive guidance. Our best defense remains a strong offense. Some profit taking is expected as earnings announcements wind down, but this year is expected to have at least a 60% appreciation due to the strong forecasted earnings for our stocks, so any pullbacks should be viewed as a buying opportunity.
Speaking of pullbacks, when President Trump picked Kevin Warsh to be the next Fed Chairman, it triggered a rally in the U.S. dollar, plus a major sell-off in gold and especially silver. Essentially, even though Kevin Warsh is a critic of the Fed’s quantitative easing, he is an independent thinker and is not viewed as a Trump puppet who will be slashing key interest rates. During his Senate confirmation hearings, I expect that Kevin Warsh will not signal that he will be slashing key interest rates and reinforce that the Fed will be independent under his leadership, as well as stick to the Fed’s Congressional mandate of controlling inflation and unemployment. I should add that Kevin Warsh was presumed to be Treasury Secretary Scott Bessent’s pick, so it is anticipated that the Fed and Treasury Department will work well together.
Speaking of unemployment, there have been a lot of high-profile corporate layoffs announced recently. There is no doubt that AI is now promoting layoffs, especially as warehouses become increasingly automated. This may explain why the Conference Board’s consumer confidence index recently hit a 12-year low, since job security remains uncertain. Due to the Fed’s unemployment mandate, I am expecting at least three additional Fed cuts in 2026.
Regarding gold and silver, the recent consolidation should just be the pause that refreshes. What you will find if you try to buy gold, especially at Costco, it is frequently sold out. Silver is much more sensitive to industrial demand and should also firm up after consolidation. The primary reason that gold was up 64% in 2025 and was also appreciating this year is that there remains a lack of confidence in both central banks and governments, which is why gold had its biggest weekly rally since 2008 during the World Economic Forum at Davos.
It appeared that in the fourth quarter, the U.S. was on pace to experience over 5% annual GDP growth until that latest trade data was announced, so GDP estimates were lowered to a bit over a 4% annual pace. There is no doubt that the Trump Administration’s shifting tariff polices may have impacted the trade deficit, but now that the tariffs are largely finalized, except for South Korea, we should be getting more reliable trade data in the upcoming months.
The good news, as far as GDP growth is concerned, is that the Institute of Supply Management (ISM) announced that its manufacturing index surged to 52.6 in January, up from 47.9 in December. Since any reading over 50 signals a recession, the manufacturing recession is over after being below 50 for 12 consecutive months. The new orders component surged to 57.1 in January, up from 47.4 in December. Also impressive is that the production component surged to 55.9 in January, up from 50.7 in December. Finally, the backlog of orders component rose to 51.6 in January, up from 45.8 in December. Nine of the 17 industries surveyed reported an expansion in January. Overall, this is the best ISM manufacturing reading since 2022 and very encouraging for improving GDP growth.