Cooler January CPI Fuels Sector Rotation as Energy, Materials Lead in 2026

Remy: Let's get to the big story breakdown. While U.S. equity markets are little changed after the release of January CPI, which came in cooler than expected. Now, the Fed's next meeting is still over a month away, and we are looking at fed futures pointing to over a 90% chance that the central bank will stay on hold at the next meeting. Now in markets, we saw more selling yesterday and crypto did build on its recent weakness in New York morning trade. We are looking at crypto majors higher and trade weakness is an emerging market factor adding to overall volatility. Well joining me on this Friday morning to weigh in is Walter Todd president and CIO of Greenwood Capital. Walter good morning. Thank you so much for joining us. Well it's been quite the week for the broader market, but I do want to get your reaction to January CPI, both the headline number as well as core figures. So what did you make of the reading?

Walter: Yeah. So it kind of continues a slowing trend in inflation that we saw late last year and should be good for risk assets. We're seeing a little bit of that this morning. Small caps moving higher, more so than the the broader market due to lower rates as a result of the lower CPI. So should be, you know, maybe help stop the selloff that we've had for several days here in the markets and, you know, clears the plate maybe later in the year for the fed to start to lower rates again.

Remy: Yeah. And today's inflation figure does come on the heels of that January jobs report which was released on Wednesday. We saw nonfarm payrolls come in higher than expected. But we did get those revisions for 2025. And we also saw the unemployment rate fall to 4.3%. So given the labor market and inflation market inflation outlook right now, what does this mean for the fed, especially given expectations of Kevin Warsh as the potential next fed chair?

Walter: Yeah, it's a great question. I mean, first we need to get Kevin Warsh in the seat. Right. Powell's got two more meetings here in March and April. And presumably Warsh is going to be in in May. But we don't know that for sure. May have a bit of a hold over there. And the vice chairman has to step in. Um, so to your point, we've got mixed signals here. got, you know, relatively healthy labor market. It seems kind of stuck in that slow to high or slow to fire dynamic, but low unemployment rate. And you do see that slowing inflation trend I think that's the key for the fed in terms of unlocking potential cuts. Uh, as we move through later in the year. And the market kind of bumped up the probability of a potential third cut on this CPI report this morning to about 50% by the end of this year. So, um, again, a lot of mixed signals here in the market in the macro data. But at least that this trend continues, I think we will see fed cuts in the second half of 2026.

Remy: Yeah, and Walter, uh, speaking of which, I think it's so important to separate, uh, signal from the noise out there. And when we take a look at the volatility we saw in markets in particular, given expectations or concerns about disruption from artificial intelligence, where do the markets actually stand here? And what do you make of this volatility we're actually seeing in the equity averages?

Walter: Yeah Remy, I mean we're six weeks into the year. It feels like six months to me. After watching the volatility, you know, the overall headline volatility in the indices is relatively muted. Uh the VIX is around 20 which is elevated but not you know extraordinarily so. But yet we've seen just tremendous single name volatility around this AI disruption. Some would say AI destruction that's occurring in various industries kind of on a rolling basis every day. With that said with all the volatility underneath the surface, you know the S&P is basically unchanged for the year. So we think it you know, can create opportunities both on the on the buy and sell side when you see these big moves up And of course, of course finally these big moves down related to no real fundamental news. Um, so a great example of this is, you know, IBM reported about, you know, 10, 15 days ago with great report stocks down, you know, 15-20% since that report, as a result of these some of these headlines that are hitting the um consulting and software space which they occupy. So we think it can, you know, you can take advantage of some of the volatility, uh, if you have conviction in the names that you hold.

Remy: Yeah. And speaking of volatilities, I do want to get your take on commodities in particular precious metals. So we know that gold and silver have seen wild swings here in 2026. And indeed it does feel as though it has been six months since the year has started. But when it comes to your outlook for commodities, what do you make of it and do you still consider them risk assets?

Walter: Um,yes. So as it relates to precious metals specifically, we definitely saw, you know, parabolic moves, uh, you know, in the last, you know, 3 to 4 weeks, uh, particularly in silver, but certainly in gold as well. And we've seen it unwind of that trade. I mean, so there was, you know, some fundamental backup for the moves in gold and silver, but that we kind of lost that narrative when they went parabolic. Uh, and that's, you know, just a very dangerous situation in the short term. And we've seen the results of that. I think in general, when you broaden out beyond precious metals to just, you know, commodities in general, you know, the weaker dollar has been a nice, uh, you know, tailwind for those areas of the market, as well as some fundamental dynamics around, you know, the build out in AI that, you know, requires a lot of copper and other materials. So I still think there's a fundamental case there to have commodity exposure or commodity based company exposure. And those have done very well. Materials. One of the strongest sectors so far this year. Energy. If you look at that commodity space up 20% so far this year. So we do think having exposure to those areas makes sense.

Remy: Yeah. And speaking of sectors, of course when we take a look at the top performers within the S&P 500, as you mentioned, we're seeing energy up about 20% year to date. Also consumer staples materials industrials seeing double digit percentage gains so far. So this is quite a stark comparison to what we saw last year. So what do you make of this rotation?

Walter: Yeah it's been I mean to use a term violent honestly the rotation in terms of the speed with which it's happened. And if you look at the really just the past three years, honestly, you've seen, you know, consumer discretionary communication services and technology have kind of dominated the narrative and the performance. you've seen the sectors that are rising to the top this year. Like you mentioned, energy consumer staples is also up there, which is kind of kind of strange bedfellows with the industrials and materials behind them. Um, so I think, again, having a diversified portfolio, recognizing that we are seeing some that rotation in the market is probably a little stretch in the short term. So honestly, we would be looking for opportunities in some of the sectors that have lost out so far this year. So I think there's opportunities actually in technology. But we do have a broadly diversified portfolio that does have significant decent exposure to energy in these other sectors. Final point I would make is got a 20% move in energy, but the weight in the S&P has moved up about a quarter of a percent. We're at 3.3% roughly, which is about half the weight of Nvidia. So you know medium to longer term I still think there's more to go in this rotation. It's just happened very quickly. So it may take a rest.

Remy: Yeah. Speaking of rest we are heading into holiday weekend. So Monday U.S. markets and bond markets will be closed. So Walter, thank you so much for joining us on this Friday morning and have a great holiday weekend.

Walter: You as well. Thank you.