What to watch in the week ahead

• Rotation was the central feature of US equity markets last week. Tech came under pressure amid worries that fast-evolving AI coding tools could disrupt the software industry. The "Magnificent 7," a group of leading US tech firms, fell 4.7%, their worst week since April, on anxiety over the pace of capital spending on AI.
• But the sector recouped some of this lost ground after a rally on Friday. The drag from tech on the benchmark was also largely offset by gains in a broader range of sectors. The equal-weighted S&P 500, which dilutes the impact of the top tech stocks, rose 2.1% for the week and hit a record high.
• Investors will be looking to see if this rotation will continue, or will a stabilization of confidence in tech help the S&P 500 climb to fresh highs? After Friday's rebound, the index is again less than 1% from its all-time high. US economic data will also be a key focus, with releases on employment and inflation due. Finally, Japanese equities jumped on Monday after Prime Minister Takaichi's coalition won a historic supermajority. Can the market gain further?

Will the rotation in equity markets go further?

After a period of steady equity market gains, volatility returned last week. Although the S&P 500 ended the week just 0.1% lower, there were large daily swings and big movements in many prominent stocks. Only a 2% gain on Friday prevented the index from suffering its largest weekly loss since November.

The main theme through much of the week was anxiety over the outlook for tech, and especially the software sector. The chief worry was that an upgrade to coding tools by Anthropic could disrupt the business models of software firms. A 7.8% decline in the sector extended the loss in the S&P 500 software index to nearly 15% over the past two weeks. A second major theme was the more selective approach to tech stocks, with investors looking for strong earnings to justify heavy AI capital spending. Finally, there was also a rotation away from tech toward other parts of the market. The equal-weighted S&P 500, which dilutes the influence of large tech firms, ended the week 2.1% higher and hit a record high. That compares to a near flat outcome for the broader index, and a 1.8% fall in the techheavy Nasdaq Composite.

This week, investors will be looking to see if confidence in tech can stabilize, and whether the broadening of the rally can continue. While we believe the outlook for AI remains positive, we think the next stage of the tech rally will be led by companies in the applications layer, selling AI solutions to consumers and businesses. We also expect the rally to encompass a wider range of sectors, driven by a combination of fiscal expansion, loose financial conditions, and accelerating productivity gains. In the US, we favor the consumer discretionary sector, among others, which should benefit from rising wages and actions by the administration to assuage worries over affordability. Banks—in the US and globally—look attractively valued given favorable net interest margins and improving loan growth. Health care is benefiting from strong demand due to an aging population, while utilities are being helped by fast-rising energy demand for data centers.

So, we expect the rally to get back on track, with the S&P 500 ending the year at 7,700, versus 6,932 at the time of writing. We advise investors to position for a broadening rally—both sectorally and geographically. Outside the US, Japan could be a particular focus after news that Prime Minister Takaichi's coalition won a historic supermajority. This provides a powerful mandate for the prime minister to pursue her agenda of tax relief and fiscal expansion, along with market-friendly corporate governance reforms. So, we keep our Attractive rating on Japanese equities and see scope for further upside, especially in sectors benefiting from domestic policy (defense, banks, real estate, IT services) and global themes (power, data centers, automation, select autos).

Can the rally in precious metals regain momentum?

Gold remained under pressure for much of last week. Even after a rebound late on that is continuing into Monday, the precious metal is still around 7% below its all-time high. Volatility has been elevated. Recent weeks have included the largest daily decline since 2013 and the largest daily gain since 2008. The immediate catalyst of the swings was the nomination in late January of Kevin Warsh to head the Federal Reserve, which eased fears that the appointment of a more dovish candidate could accelerate the recent weakening of the US dollar. Gold had previously benefited from worries over the value of the US currency.

The recent bout of volatility has called into question the value of gold as a hedge against geopolitical and market swings. We believe such worries are overdone, and that the rally in gold will resume. Even after recent swings, gold is still up around 16% so far this year, having been a key beneficiary of bouts of geopolitical uncertainty, which we expect to persist. We also do not expect Fed policy to end the rally in gold, as has happened several times historically. Kevin Warsh, though favoring a smaller Fed balance sheet, has advocated for lower rates. This should support gold, even if longer-term worries about the value of the dollar abate. This likely further decline in real US rates should help support investor demand for gold exchange-traded funds by lowering the opportunity cost of holding the non-yielding metal. Finally, other drivers of the gold rally remain intact, including robust demand from central banks.

Our forecast is that gold we end the year around USD 5,900 an ounce, up from USD 5,025 at the time of writing. This feeds into our broader positive view of commodities. We believe that strong performances from industrial and precious metals have scope to continue, and we anticipate commodities will play a more prominent role in portfolios in 2026, with returns driven by supply-demand imbalances, geopolitical risks, and longterm trends. For investors with substantial allocations and significant unrealized profits in gold, broadening commodity exposure to include copper, aluminum, and agricultural assets can help diversify sources of future return and potentially steady portfolios.

Will US economic data shift the outlook for the Fed?

Markets are expecting a hiatus in rate cuts from the Fed, especially after the central bank indicated it saw signs of stabilization in the labor market. But the main question for investors is how long this hiatus will last, and how much lower rates will go. A wide range of leading Fed officials are set to speak this week, and we can expect more guidance on the outlook in the coming months. It will also be a big week for US data. The jobs report for January—the release of which was delayed by the most recent partial government shutdown—will now be published on Wednesday.

Investors will be looking to see if the data supports the Fed’s view that the deterioration in the labor market is now leveling out. For context, the US economy created 584,000 jobs in 2025, down from 2 million in 2024, and the slowest rate since 2020. Last week’s job openings survey from JOLTS was also weaker than expected, pointing to lower demand for workers. The consensus forecast is that January’s data should point to a stabilization, with job creation of 70,000 in January versus 50,000 in December, while the unemployment rate is expected to hold steady at 4.4%. While this would allow the Fed to be patient in cutting rates, a relatively stable inflation release should support expectations that the Fed will be able to ease later in the year. The consensus forecast is that the core consumer price index for January will rise by 2.5%, above the Fed’s 2% goal, but down from 2.6% in the prior month.

Against this backdrop, the market is now pricing 60 basis points of easing from the Fed in 2026. Our base case is for two more 25-basis-point reductions. With returns on cash set to fall further, we advise investors to seek diversified income. We believe quality bonds—specifically high grade government and investment grade corporate bonds—have an important role as a source of yield and diversification in 2026. We also recently turned more constructive on emerging market hard currency debt, whose absolute yields of 6-7%, improving fundamentals, and supportive conditions in their issuers’ economies, may be appealing to income-seeking investors.