Volatility Returns as Earnings and Fed Policy Shape Market Leadership

February 2, 2026

Financial Markets

U.S. equity markets experienced heightened volatility last week as investors navigated a dense intersection of macroeconomic signals, policy developments, and a pivotal stretch of earnings reports. The Federal Reserve held interest rates steady, reinforcing a message of patience and cautious confidence in the economic backdrop. At the same time, earnings from several large technology companies drove sharp, stock-specific reactions, underscoring growing dispersion beneath the market’s surface. Adding to the policy backdrop, President Trump announced his pick for the next Federal Reserve chair, introducing another variable into an already sensitive macro environment.

Equity performance was mixed for the week, with the market-cap-weighted S&P 500 the only major equity index to finish higher. In contrast, small-cap stocks fell more sharply, reinforcing a defensive tone and continued investor preference for scale, balance-sheet strength, and earnings visibility. Sector leadership was uneven, particularly in technology, where company-specific results and forward guidance increasingly dictated relative performance. Risk sentiment was further pressured by developments outside of equities, as gold and silver continued to retreat following their recent historic rally and sharp correction, adding to the broader sense of market retrenchment.

The first wave of large technology earnings highlighted a common theme of elevated capital expenditures tied to artificial intelligence. Management teams emphasized improving AI monetization, but investor response differed notably between semiconductor and infrastructure providers versus software and application-focused companies. This divergence continues to frame a central market question—whether software companies can effectively translate AI investment into faster revenue growth and sustained margin expansion, or whether near-term benefits will remain concentrated in infrastructure enablers.

Economics

The Federal Reserve concluded its January meeting by holding the federal funds rate steady at 3.50%–3.75%, as widely expected. This decision followed three consecutive rate cuts in 2025 and reflected a desire to pause and assess evolving inflation and labor market dynamics. Chair Powell emphasized a patient, data-dependent stance, noting that the Fed is well positioned after easing policy by 75 basis points last year. Two governors, Christopher Waller and Stephen Miran, dissented in favor of an immediate 25-basis-point cut, though Miran scaled back from his prior call for a larger reduction.

While the decision itself was uneventful, changes to the policy statement leaned modestly hawkish. The FOMC upgraded its description of economic activity from “moderate” to “solid,” characterized the unemployment rate as showing signs of “stabilization,” and noted that job gains have “remained low.” Inflation language was left unchanged, with price pressures still described as “somewhat elevated.” Powell’s press conference struck a balanced tone, reiterating confidence in the economy’s resilience, emphasizing progress on services inflation, and again framing tariffs as a one-time price-level adjustment rather than a sustained inflation driver. Market expectations for future easing were little changed, with probabilities still implying only a low likelihood of a March rate cut, and the next reduction is broadly expected no earlier than June.

Separately, President Trump announced his intention to nominate former Federal Reserve Governor Kevin Warsh to succeed Chair Powell when Powell’s term as chair expires in May. Warsh, who served on the Fed from 2006 to 2011, is often characterized as hawkish, though his views are more nuanced. He has expressed confidence in a potential productivity-led growth cycle that could allow lower rates without reigniting inflation, while maintaining a critical stance on the Fed’s expanded balance sheet. While Warsh is generally expected to be confirmed by the Senate, the process could be complicated by ongoing political considerations. Senator Thom Tillis, a member of the Senate Banking Committee, has stated that he would oppose the confirmation of any Federal Reserve nominee until the Justice Department’s investigation into Powell is fully resolved—a position that is likely shared by other senators as well.

Importantly, Warsh is expected to fill Stephen Miran’s seat rather than replace Powell directly. Powell’s term as a Governor extends nearly three years beyond the end of his chairmanship, and he has not indicated whether he intends to remain on the Board. Should Powell ultimately step down, President Trump would gain another opportunity to nominate a Fed governor, potentially altering the future balance of hawks and doves on the Committee.

Conclusion

This week’s market activity reflected a complex interplay among earnings results, monetary policy signals, and evolving geopolitical and policy considerations. The Federal Reserve’s decision to pause rate cuts reinforced confidence in the underlying economy. At the same time, revised language underscored a willingness to remain patient as inflation and labor market trends continue to normalize.

At the same time, earnings-driven dispersion, particularly in large-cap technology, underscored the importance of selectivity as elevated valuations meet rising capital spending and more differentiated growth outcomes. The sharp correction in precious metals and crypto suggests a repricing of traditional safe havens as investors recalibrate risk premia, while leadership in equities remains uneven.

Looking ahead, key macroeconomic releases, additional earnings reports, and clarity on monetary policy will continue to shape market direction. In this environment, disciplined positioning, diversification, and a focus on underlying fundamentals remain essential as volatility persists and leadership continues to rotate.

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