Market Volatility Persists, but Fundamentals Remain Supportive

Today's blog is written by Chris Fasciano, chief market strategist at Commonwealth. He represents Commonwealth in various media appearances, advisor speaking events, and Commonwealth conferences. He also oversees and mentors a dynamic team of investment research analysts who specialize in equity and fixed income markets. Prior to this role, Chris spent 10 years as one of the firm’s portfolio managers, involved with asset allocation and fund selection. With a deep background in small- and mid-cap stock research, Chris is uniquely positioned to analyze the latest economic data and offer valuable insights on navigating today’s volatile markets. Chris Fasciano is a guest writer and is not affiliated with LPL Financial.

U.S. equity indexes have wobbled over the last couple of weeks. Concerns about artificial intelligence (AI) hyperscale spending have hit the high-profile mega cap growth names. At the same time, concerns about the impact of AI on established businesses have rippled through the software and finance industries.

In the short term, markets are always susceptible to headlines and future concerns that haven’t yet come to fruition. However, over the long-term, fundamentals drive markets. And for the most part, they remain supportive.

Let’s explore some of the more important ones.

Jobs Growth Slow but Trending Better

Last week, the January employment report came in above expectations. Non-farm payroll jobs growth was reported at 130,000 which was almost double consensus estimates. It was also the most monthly jobs produced in over a year. Government jobs declined while private payrolls were up 175,000. The caveat is that the initial monthly data has been subject to downward revisions for most of the year. As a result, 2025 saw three months of negative jobs creation. The most recent being October, in large part due to the government shutdown. Since then, the trend has been slowly improving. This is a positive sign that the employment market might be stabilizing after the 75 basis points of Federal Reserve (Fed) interest rate reductions. However, jobs growth remains low relative to history. But it is still growth.

Consumers having jobs is a key part of what drives their spending choices. Prices play a role as well, so let’s look at the inflation consumers are currently facing.

Consumer Prices Gradually Cooling

The core Consumer Price Index (CPI) also delivered somewhat better news last week. The January report showed year over year CPI running at 2.5%. This is down slightly from the prior month’s report of 2.64%. This is the slowest rate of inflation growth since March 2021. The potential impact of tariffs remains a wild card. Therefore, it is probably too early to declare this trend the start of a new downturn in inflation. However, this is also several months in a row that consumer inflation has come in below expectations. A moderating inflation picture would be a welcome development not only for investors, but also for economists.

The Fed Remains on Pause

And that leads us to monetary policy. Fed interest rate decisions are driven by a focus on their dual mandate of employment and inflation. Last week’s reports of better jobs growth and moderating inflation are a positive development from this perspective. Lower inflation would certainly give the Fed the ability to further reduce interest rates if jobs growth weakens further or turns negative for a sustained period.

Because the Fed has made it clear they are data-dependent, it is unlikely that these reports will change their stance on interest rate policy. In addition, there were three dissenting votes on the 25 basis point reduction at the December meeting. This was followed up by January’s decision to pause. All of this indicates that there is no clear consensus on the path forward for interest rates. Barring any dramatic change in macroeconomic data, it is likely the Fed will be on hold at least until Kevin Warsh becomes the new Fed Chair. This is expected to occur for their meeting in June.

Earnings Growth is Strong and Broad

With the Fed most likely on the sidelines, and no boost to sentiment coming in the near term from declining rates, investors should continue to focus on the underlying fundamentals. The good news on that front is they continue to be quite positive.

At the start of the fourth quarter back in October, analysts were expecting S&P 500 Index earnings to grow 7.2%. By the end of the fourth quarter analysts had become more optimistic, and growth expectations had risen to 8.3%. As expectations rise, the bar for companies to clear to satisfy investors moves up as well. As a result, so do the chances that results will be perceived as disappointing.

Through the end of last week, roughly 75% of the companies that make up the S&P 500 have reported fourth quarter earnings. According to FactSet data, 74% of those companies exceeded analyst’s views. Because of that strength, earnings growth is on track to rise 13.2% in the last quarter of 2025. If this is where things end up, it would be another impressive quarter and should be well received by investors.

Another encouraging sign for market participants is that we are seeing more breadth in earnings growth than in the previous few years. Nine of the 11 S&P 500 sectors have reported earnings growth on a year over year basis so far, with only consumer discretionary and energy reporting a slight decline in earnings. But 10 of the 11 are reporting earnings above expectations, with only materials unable to do so. In another good sign for increasing participation from other sectors and industries, industrials had the highest percentage of earnings reported above expectations.

A year ago, when companies beat earnings estimates, analysts anticipated that earnings were being pulled forward and full year estimates didn’t go up. Instead, analysts reduced them due to concerns that the headwinds impacting the economy would also cause companies to struggle. If that were to happen again, this would be the time to bring down estimates that appear to be too optimistic. But this year is different. 2026 full year estimates have ticked higher in the last month. This should be an encouraging sign for market support.

Why Diversification Matters Now

The broader earnings growth and upbeat outlooks for 2026, have been reflected in sector performance. This matters for portfolio positioning.

There are seven sectors with positive returns for the year, led by double-digit returns for basic materials, energy, consumer staples, industrials, and utilities. Two of the worst-performing sectors are technology and communication services, both with low, negative single-digit returns. These were the favored areas of the markets over the last few years.

We have also seen improving earnings outlooks in other areas of the market like small caps and international markets. Not surprisingly, these areas are some of the best-performing parts of the markets over the first six weeks of the year. This follows relatively strong returns last year as well.

Investors will always find and eventually allocate capital to relatively cheap valuations and improving fundamentals. They seem to be doing so currently with the belief that an improving earnings picture will continue. Diversification has historically been the best way to position portfolios for markets with broadening participation. All one needs to do is examine the best-performing asset classes over the last several months to know we are in such a period.

Disclosure: There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.​