The market that refused to blink and dispersion is the signal

Dispersion is the signal

This was supposed to be a week of verdicts. Jobs. Tariffs. Rates. Instead, markets got ambiguity and treated it like oxygen.

December payrolls undershot expectations but remained well within the market-perceived bullish-for-equities tolerance. 50,000 jobs added and unemployment down to 4.4% kept the data squarely in the Fed no-action zone. Too soft to spook inflation, too firm to pull forward easing. Hiring slowed, firing slowed more, and demand held. The market processed it in seconds and kept rotating.

The tariff story followed the same script. The Supreme Court’s failure to deliver a ruling was not read as indecision but as intent. Markets tend to interpret time as a source of nuance. A rushed decision would have led to a blunt outcome and a higher probability that tariffs would be struck down outright. Delay suggested a more layered judgment and, more importantly, a longer runway before policy risk hardens into policy reality. From an equity risk-taking perspective, that pause mattered far more than the verdict itself. With the can kicked down the road, uncertainty was temporarily discounted rather than resolved, and risk capital stayed in motion.

So equities rallied anyway. Not in a straight line, and not where last year’s leadership lived. Mega-cap tech lagged. Secular growth stalled. The market did not abandon risk; it simply changed its uniform amid the great January market rotation. Small caps surged more than 5% on the week, powered by an aggressive short squeeze that marked one of the strongest starts to a year in over 10 years. Cyclicals tied to nominal strength quietly took the baton. Dispersion widened. This was not a beta chase. It was a rotation with intent.

Bonds were quieter but no less informative. The long end outperformed, flattening the curve even as enthusiasm for near-term rate cuts cooled. 2-year yields nudged higher, reinforcing the idea that January easing is off the table. 10-year yields barely moved, trapped in a narrow range that screamed wait and see. Fixed income volatility collapsed even as geopolitical stress increased, a pairing that rarely holds for long.

The dollar strengthened, reaching 1 month highs. Gold ignored it and surged anyway, hovering near record levels. This was not a geopolitical panic bid; it was a credibility trade. When fiscal gravity deepens, gold seldom waits for consensus.

Oil added a geopolitical premium of its own. Crude posted its strongest daily gain since October as tensions in Iran flared and rhetoric sharpened. Global inventories suggest a fade, but prompt supply concerns argue for urgency. Energy sat right at the crossroads, carrying just enough risk premium to make short positioning uncomfortable heading into the weekend.

Bitcoin did almost nothing. After a strong start to the year, it simply held ground, with 90,000 acting as a psychological anchor. In a week defined by dispersion and rotation, crypto chose consolidation.

The common thread across assets was not conviction but selectivity. This market is not moving together; it is fragmenting. Correlation is low, dispersion is high, and that combination punishes lazy positioning. Secular narratives are being pushed aside by nominal reality. Growth is running hot enough to favor cyclicals, not hot enough to force tightening, and not weak enough to justify aggressive easing. It is an uneasy equilibrium, but one that the market indicates it knows how to trade.

The real risk is not whether equities can grind higher from here. It is whether rates or policy eventually spoil the party. Supply returns next week. Tariff uncertainty re enters the frame. Volatility remains cheap at the front and quietly bid further out. This is the kind of setup that looks boring until it is not.

For now, the market refused to blink. It rotated instead, priced time as optionality, and carried just enough unresolved tension into the weekend to keep everyone slightly off balance. That, more than any headline, is the state of play.

Chart of the week

“Breakout or bull trap? Valuation hubris means no room for mistakes”

“US stock market is now trading at a circa 3x ratio vs money supply. This us up 100% since the 2022 trough and above the 2000 dot com peak. Global stocks, commodities, govt bonds and credit combined posted a +50% year..for the best aggregate performance since 2009. Not much margin for error”. (Bobby Molavi, GS)

Productivity is the new payroll

Something important is happening beneath the surface of the US economy, and it is not showing up cleanly in the jobs numbers. Productivity has taken the wheel.

Business sector productivity surged at a 4.9% annualized pace in Q3, following an already muscular 4.1% gain the quarter before. That is the fastest two quarter stretch in roughly 2 years, and while year over year figures look more modest at 1.9%, short horizon data always lies. When you smooth the noise and look at the 8 quarter moving average, productivity is running closer to 2.4%, well above the post pandemic norm, above the last decade’s trend, and even edging past the long run post war average. This is not a spike. It is a regime shift trying to establish itself.

Manufacturing has lagged historically, but even there the tone is changing. After spending much of the past decade shrinking efficiency rather than expanding it, factory productivity accelerated 3.3% annualized in Q3 and is now up 2.3% over the past year. The sector is stirring. Not roaring yet, but clearly waking up.

What makes this productivity revival especially notable is that it is arriving without a surge in labor input. Hours worked barely rose. Headcount growth stayed subdued. Output rose anyway. That tells you everything you need to know about where the adjustment is coming from.

Corporate America is running lean by design. Elevated inflation over the past few years, layered now with tariff uncertainty, has pressured margins and constrained the spending power of lower income consumers. Firms are responding the only way they can without sacrificing profitability: doing more with less. Hiring is cautious. Payroll expansion is selective. Efficiency is the growth lever.

At the same time, there is a quiet arms race unfolding. Companies are not blindly chasing AI headlines, but they are testing, piloting, and integrating automation across workflows because the cost of standing still is rising. No CEO wants to explain in two years why competitors widened margins while they waited for certainty. Productivity spending has become a form of defensive offence.

This has near term consequences. A productivity-led expansion is not labour-friendly at first glance. Job growth stays soft. Wage demands remain restrained. Workers hesitate to push for wage increases when firms clearly prioritize efficiency over expansion. That is the uncomfortable phase in which we are now.

But macroeconomically, it is powerful.

Hourly compensation growth has slowed to around 3.2% year over year, the weakest pace in more than 2 years. Combine that with the productivity surge and unit labor costs have now contracted for 2 consecutive quarters, rising just 1.2% over the past year. That is about as clean a disinflation signal as you will find without a recession.

This is why inflation pressure keeps easing even as growth refuses to roll over. It also explains why the Federal Reserve suddenly has room to maneuver again. Productivity is doing the Fed’s job for it. Lower unit labor costs relieve price pressure, open space for rate cuts, and support growth without reigniting inflation. That is a rare combination.

Longer term, the implications run deeper. Immigration constraints and an aging population are quietly capping labor force growth. The economy cannot rely on ever expanding headcount the way it once did. Productivity is becoming the primary engine of GDP growth by necessity, not choice.

And here is the part markets are only beginning to price. Productivity driven growth compounds. The income, earnings, and wealth generated by higher efficiency do not disappear. They recycle. They eventually create new demand, new industries, and new jobs, even if those jobs do not resemble the ones being displaced. The timeline is uneven, but the destination is familiar.

For investors, this is the kind of backdrop that rewards patience and punishes nostalgia. Growth is coming from inside the machine, not from adding more workers to it. Earnings expand without margin compression. Inflation stays contained. Policy gets easier, not tighter.

This is not a jobs boom economy. It is something quieter and arguably more powerful.

The US economy is not hiring its way forward. It is engineering its way there.

Global stocks are projected to return 11% over the next 12 months

Global stocks are expected to keep climbing in 2026 but not as strongly as last year, with diversification across styles, sectors, and regions potentially giving a boost to investors, according to Goldman Sachs Research.

The world economy is poised for continued expansion in 2026, and the US Federal Reserve is forecast to provide further modest easing.

“Given this macro backdrop, it would be unusual to see a significant equity setback/bear market without a recession, even from elevated valuations,” Peter Oppenheimer, Goldman Sachs Research’s chief global equity strategist, writes in a report titled “Global Equity Strategy 2026 Outlook: Tech Tonic—a Broadening Bull Market.”

• Our analysts’ 12-month global forecasts indicate equity prices, weighted by regional market cap, are expected to climb 9% this year and return 11% with dividends, in US dollar terms.
• The strong rally in global equities in 2025 has left valuations at historically high levels across all regions—not just in the US but also in Japan, Europe, and emerging markets. “Consequently, we think that returns in 2026 are likely to be driven more by fundamental profit growth rather than by rising valuations,” Oppenheimer says.
• Investors who diversified across regions were rewarded last year for the first time in many years, as the US underperformed most major markets. Our analysts expect diversification as a theme to continue in 2026, extending to investment factors such as growth and value and across sectors.