2026's First Week: A Fed-Friendly Rally with a Tariff Overhang

The rally that pushed major indices to new highs was triggered by a single, decisive piece of data: the December jobs report. Released on Friday, it showed the economy added 50,000 jobs, a figure that missed expectations but was the real story. The more critical signal came from the unemployment rate, which fell to 4.4% from 4.6% in November. This combination created a classic "Fed-friendly" setup.

The report was the first "clean" read after the six-week government shutdown, which had delayed data for September through November. Traders had been bracing for a weak report, but the drop in unemployment-indicating more people were finding work or leaving the labor force-was a stronger signal of underlying labor market strength than the softer headline jobs number. As a result, the near-term catalyst for a Federal Reserve rate cut vanished. "For us, the Fed will key off the unemployment rate more than the noise in the headline," said a strategist, calling the data "slightly bearish for US rates."

The market's reaction was immediate and decisive. Bond traders nearly wiped out their bets that the Fed would cut rates later this month, sending Treasury prices lower and yields higher. This shift in Fed expectations provided the immediate tailwind for equities, removing a key overhang and allowing the market to focus on other themes, like the pending Supreme Court ruling on tariffs.

Market Reaction: Record Highs and Early Rotation

The rally that ended the week was a broad-based one. All three major indices closed at new all-time highs on Friday, with the Nasdaq Composite jumping 0.8% to lead the charge. The S&P 500 and Dow Jones Industrial Average also notched records, gaining 0.6% and 0.5% respectively. This capped a winning week for the market, with the Nasdaq up 1.1%, the S&P 500 up 0.9%, and the Dow up 1.8%.

The strength wasn't confined to the mega-cap tech names. The rally was broad, with defense and energy sectors rallying earlier in the week. Even the 'Magnificent Seven' saw gains, with Nvidia and Alphabet posting positive moves. In fact, Alphabet recently surpassed Apple in market capitalization, highlighting the ongoing shift in tech dominance.

Yet, signs of rotation are already emerging. While the week ended on a high note, the rally showed some cracks earlier in the period. The tech-heavy Nasdaq pulled lower on Thursday, pressured by data-storage shares, and the benchmark S&P 500 ended essentially flat. More telling was the performance of key AI names, which saw mixed performance earlier in the week as the AI trade cooled. Nvidia and Broadcom fell during that stretch, suggesting some profit-taking and a rotation into more defensive or cyclical areas.

The bottom line is that the rally has broadened beyond its recent tech-centric roots, but it is also showing early signs of fatigue. The record closes are a powerful signal of momentum, but the mixed signals within the tech sector and the sector rotation indicate the setup is becoming more nuanced. For now, the Fed-friendly jobs data provides a tailwind, but the market is starting to test its breadth and sustainability.

The Immediate Setup: A Supreme Court Ruling on Jan 14

The market's record highs have created a new vulnerability. With the Fed's near-term rate-cut bets erased by the jobs report, the next major catalyst is a Supreme Court ruling on the legality of President Trump's sweeping global tariffs. The court is expected to issue its decision by Wednesday, Jan. 14.

This ruling is a massive unknown. It could either ease or escalate trade policy uncertainty, with direct consequences for corporate earnings and the manufacturing cycle. As Wells Fargo's chief equity strategist noted, companies are in a wait-and-see mode, holding off on restocking. "We have the ruling potentially tomorrow," he said. "I think after that, the companies might start to restock again, and that's gonna kickstart the manufacturing cycle." The court's decision will test presidential powers and could force a major reset in US economic strategy.

The setup is now a binary event. The market is positioned at all-time highs, leaving it exposed to a sharp reversal if the ruling disappoints or if future data shows a faster labor market slowdown than expected. The court's silence on Friday left traders with a clear next target: the Jan. 14 deadline. Any delay or unexpected outcome would inject fresh volatility, testing the rally's breadth and the market's appetite for risk.

Tactical Risk/Reward: What to Watch

The immediate setup is now binary. The Supreme Court ruling on the legality of President Trump's sweeping global tariffs is the clear near-term catalyst, expected by Wednesday, Jan. 14. This decision will test presidential powers and could force a major reset in US economic strategy, directly impacting corporate earnings and the manufacturing cycle. As Wells Fargo's chief equity strategist noted, companies are in a wait-and-see mode, holding off on restocking. "We have the ruling potentially tomorrow," he said. "I think after that, the companies might start to restock again, and that's gonna kickstart the manufacturing cycle."

Watch for rotation patterns to signal a shift in market leadership. Earlier in the week, we saw a clear rotation away from tech stocks, with the Nasdaq Composite closing lower by 0.4% on Thursday as names like Nvidia and Broadcom fell. In contrast, the defense and energy sectors rallied. Sustained strength in these areas versus tech could indicate a broader market shift, moving beyond the recent mega-cap tech dominance.

The Fed's next move remains contingent on future data, but the December jobs report has removed the near-term rate-cut catalyst. The market's reaction to that data-a sharp reversal in bond trader expectations-created a tactical pause. With the Fed's immediate path now clearer, the focus shifts entirely to the tariff ruling and the subsequent corporate restocking cycle it may trigger. Any delay or unexpected outcome from the Supreme Court would inject fresh volatility, testing the rally's breadth and the market's appetite for risk.