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Small Caps Lead the Way, 2026 Predictions, and a Public Service Announcement

  • Writer: Doug MacGray
    Doug MacGray
  • 2 days ago
  • 5 min read

January 18, 2026 STEADY INFLATION: The inflation rate (CPI) for December rose by 0.3% from a month earlier and held steady at a 2.7% annual rate according to the U.S. Bureau of Labor Statistics. This is the same rate as a month earlier. (For 2024, the CPI was 2.9%.) Food at home has decreased to a 2.4% annual rate. Electricity is up 6.7% while gasoline is down -3.4%. "Core" inflation, which strips out food and energy due to their short-term volatility, rose 2.6% in 2025 compared with 3.2% in 2024. This core rate continues to give investors' confidence that the Fed will lower rates in 2026.


U.S. LARGE CAP STOCKS STRUGGLE, BUT THE REST...: The major U.S. large cap stock indices struggled with the S&P 500 (-0.36%), NASDAQ Composite (-0.7%) and Dow Jones Industrial Index (-0.3%) all in negative territory. There was no sustained trend up or down, just a lot of bouncing around that ended up negative. On Wednesday, tech stocks, led by Nvidia, slumped to their worst day in a month due to concerns about potential new regulations and extended valuations. Other sectors of the S&P 500 kept it from being too bad of a day. On Friday tech stocks rallied after chip maker TSMC posted record quarter earnings. International stocks did not see the same volatility and continued an upward movement. Small cap stocks, as measured by the Russell 2000, were up 2.04% for the week and are up 7.92% for the year. The Russell 2000 has now outpaced the S&P500 for 11 straight sessions, the longest such streak in over 15 years. The rotation from the Magnificent Seven and other jumbo U.S. companies to the rest of the stock market continues.

LONGER-TERM PERFORMANCE: Below are the annualized three-year and five-year numbers for these same indices.

STRONG RETAILS SALES, BUT...: According to the U.S Census Bureau, retail sales rose by 0.6% in November. Sales were up 3.3% compared to one year prior. These are strong results, but the average annualized rate for the past three months has decreased to 2.3%, a slowing trend. Restaurants and bars were up 0.6% and are up 5.7% annualized for 2025, which is a good sign that consumers are not cutting back on discretionary spending. If you factor in inflation, sales are up 0.6% year over year, and still lower than 2022, the recent peak.


SALES OF EXISTING HOMES ON THE RISE: In December, sales of existing homes in the U.S rose for the fourth consecutive month, rising by 5.1% from the prior month. 30-year mortgage rates have been trending lower since May with likelihood that this trend will continue. Over the past year, aggregate wage growth has been consistently outpacing home price gains. Inventories continue to be the biggest challenge. Growth is continuing, but the pace of growth has decelerated. There is currently an inventory of 3.3 months' supply. The National Association of Realtors says 5 months is normal. The fundamentals of the housing market seem to support a modest growing trend in 2026.


FROM GOLDMAN SACHS' MOUTH TO...: According to a Goldman Sachs report last week, the U.S. economy will grow at an annual rate of 2.8% in 2026, and the probability of a recession in the next 12 months is down to 20%. The key driver is "that the drag from tariff increases should give way to a boost from business and personal tax cuts included in the One Big Beautiful Bill Act." This report also predicted that inflation will reduce to 2.1% by December. Goldman Sachs Research attributes 0.5% of the current inflation rate to be passthrough from tariffs to consumer prices. Goldman Sachs expects unemployment to hang around 4.5%, and the Fed to reduce its key interest rate by another one half of one percent.


BOB DOLL SAYS: Bob Doll of Crossmark Global makes his predictions every year as well. He says the economy will grow by 2.5% this year, but inflation will remain about where it is now. U.S. stocks will climb by less than 10%, and international stocks will continue to outperform U.S. stocks.


SOME WEEKENDS ARE HARDER: I generally get up on Saturday morning and write this email newsletter. Some weekends are harder than others, but I almost always manage to fit it in. This weekend, my daughter and son-in-law went on a weekend trip to see some California friends. So, we had our two granddaughters, aged 2 (3 in a little more than a month) and 9 months, all weekend. I know that for many of you this is your current life, and you have my full respect. After all, I used to have three little ones in the house, and I don't forget how much energy it took. I have been squeezing moments here and there. I hope it came out okay. Below is the 9-month-old being her normal happy self, and the two-year-old is trying not to smile for the camera, but she can't resist me.


...AND A PSA: Pay attention when you drive. Everyone is okay, but my daughter-in-law and her four children (my other four grandchildren), got rear-ended by an inattentive driver. She was driving a loaner car because hers was in the shop. It was scary. Don't be an inattentive driver.

Have a great week!


Our purpose is to honor God by helping our clients see the objective, find the path, and navigate past the obstacles to a more prosperous future.



Douglas R. MacGray, J.D., C.F.P. ®

President

Stonecrop Wealth Advisors, LLC

Direct | Cell | Fax

(610) 628 4545

"In matters of style, swim with the current; in matters of principle, stand like a rock." Thomas Jefferson


"For the mouth speaks what the heart is full of." Luke 6:45 (NIV)


SOURCES:

U.S. LARGE CAP STOCKS STRUGGLE, BUT THE REST...: https://www.wsj.com/finance/stocks/stocks-advance-as-earnings-boost-markets-505ab9ba?mod=stocks_news_article_pos4 AND https://www.wsj.com/finance/stocks/small-stocks-finish-week-at-records-acfc58e1?mod=stocks_news_article_pos1 and YCharts.com


(c) 2026 Anno Domini, Stonecrop Wealth Advisors, LLC, All Rights Reserved

Investment advisory services offered through Stonecrop Wealth Advisors, LLC, a Registered Investment Advisor with the U.S. Securities and Exchange Commission.


SDG

*S&P 500: This is a measure of the performance of the 500 largest companies in the United States, and it a common index to track the performance of U.S. equity markets, especially the large cap markets.

*MSCI All Country World Index X US: This is a broad measure of the performance of worldwide equity markets excluding the United States.

*Bloomberg U.S. Aggregate: This is a measure of the U.S. bond markets.

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