Cooler January Inflation and AI Disruption Fears Drive 2026 Sector Rotation

Remy: Headline consumer inflation figures for January coming in cooler than expected. And this does come on the heels of the U.S. jobs report for January. Now, nonfarm payrolls top forecast with a 130,000 boost, and unemployment fell to 4.3%. The sharp downward revision to 2025. Jobs groups disappointing with only a gain of 181,000. Now, the word of the week for Wall Street seems to be AI disruption. We've watched a selloff across the financial sector that started with insurance brokers on Monday and spread to wealth management and real estate by mid week, and now trucking and logistics hit by worries about AI driving freight management into the future. Well, joining us this morning to weigh in on the latest economic data. And what's moving the markets is Brian Vendig who is president and CIO of MJP Wealth Advisors. Good morning and happy Friday to you, Brian. Thank you so much for joining us. So first and foremost, let's start out with the US economic data, the jobs report inflation figures. does all of this mean for the central bank?

Brian: Well thanks Remy, and good morning. I think for the Federal Reserve, even though we're going through a transition of fed chair over the next couple of months, I think it gives Powell the air cover not to make material changes with fed policy until Kevin Warsh comes into that role. And I think it's because with the cooling and inflation that we've seen now year over year, and also a bounce back in the jobs report off of some of those tepid December numbers, I think shows again that the labor market is stable. bending not breaking. We did see under the surface, though, in these inflation numbers, that manufacturers and companies that are producing finished goods are increasing price, and that price is being borne on a majority side by consumers. And that's why I think when you look at the retail sales numbers that recently came out, consumers are sensitive to price. You're going to hear that story of the wealth gap. I still think continuing throughout the year. But all in all, these macroeconomic numbers show a stable economy. The fed doesn't need to take a lot of action with rates. However, I still think 1 or 2 rate cuts are in the cards based on where these inflation numbers are and where yields are in the market. So I think that's going to be a good news item in the second half of the year.

Remy: Yeah. And of course on this Friday morning we're also paying attention to the markets. So ahead of the open on this Friday we are looking at stock futures. Little change after the release of economic data. But there has been plenty of volatility this week. And we saw insurance brokers, wealth advisors, commercial real estate brokerages, fintech and even trucking and logistics getting hammered on concerns about disruption from AI tools. do you think we're seeing just a temporary overreaction to some of these potential tools? And what do you make of this in terms of the ramifications and impact on these industries in the long run?

Brian: Yeah, it's a great question, Remy. I think we got to take a step back, though, from some of the disruptive concerns this week. And just look at the bigger picture, because underneath the surface we see over 60% of stocks actually trading above their 200 day moving average, which is higher than where we were at the end of November being in the low 50s. So underneath the surface, we are seeing a rotation from tech to other cyclical parts of the economy. And I think that makes sense in the fact that, you know, Q4 economic growth, GDP numbers were better than expected. You look at earnings outlooks for 2026, with contributions of earnings coming from areas outside of tech, even though tech still looks like it's the primary earnings driver and Q4 earnings so far that have been reported are, uh, increasing year over year by more than 10% So these are all things that show that this rotation trade has been forming and still taking hold over the last couple of months. And I think it's because investors are concerned about productivity risk or profitability risk. You're making these investments into AI. We've seen significant numbers coming out again from the hyperscalers, as we know, and it's really more about how does this how do these changes play through people, process, capital investment decisions. And I think it's really more of a show me story. And we need a little bit more time. I think the disproportional impact in some areas of the market isn't is an overreaction. Going back to your question, I think it started with software and now it's playing through some of these other areas, as you mentioned. But I still think if you follow earnings and where earnings is going to go, I think tech has an opportunity for some recovery over the balance of the year. But we do like cyclicals with that good economic backdrop policy backdrop. So don't forget about health care financials industrials that would complement tech for 2026.

Remy: Yeah. And Brian I just want to build on what you just mentioned because you mentioned some sectors that are seeing double digit percentage gains this year within the S&P 500. And as you mentioned, energy materials, consumer staples and industrials are soaring double digits. But at the same time on this Friday morning, we're looking at the S&P 500, the index itself hugging the flat line. The Russell 2000 is managing to outperform up over 4% year to date. So what's going on there?

Brian: Yeah I think the Russell has been obviously in the penalty box for the last couple of years that we know. And I think what investors are saying going back to, you know, October or November into this year where we've seen, you know, market gyrations is they're looking at valuations, they're making sure that they're not overpaying for growth. And we think about small cap stocks. We've been one that have been favoring small cap stocks for a while. And hopefully this is the year we we see the outperformance because economic growth or forecast for profit growth from the smaller names are actually quite significant and exceeds the growth forecasts that we're seeing from those larger cap names. And I think right now, investors are being choosy to make sure that they're not overpaying for those forward price to earnings ratios. While we're waiting for that story to play out regarding technology and how that leads to profit growth from this AI innovation story. So for now, I think broadly diversified portfolios make sense. I know that's the classic thing to say, but I think really being selective this year is the theme. And the other part is don't forget about international equities. We've also increased some exposures going to last year in the international equity space, which I think with some of the monetary and fiscal policy measures happening around the world. We're seeing a little bit of an opportunity there as well, especially on the backs of a potential slightly neutral to weaker, weaker dollar this year also.

Remy: Well, Brian, thank you so much for joining us on this Friday morning and giving us your perspective, as well as insights on the broader market and the latest economic data releases.

Brian: Thank you, Remy.