January's Momentum: What's Already Priced In for 2026?

The idea that January brings a market rally is a long-standing piece of investing folklore. The so-called "January effect" suggests stocks, especially smaller ones, tend to outperform in the first month of the year. The historical explanation points to year-end tax-loss harvesting, where investors sell losing positions for tax benefits, followed by a buying spree in January to reposition portfolios. Another theory is "window-dressing," where fund managers buy back underperforming stocks to improve their year-end reports. Post-holiday capital deployment by investors and seasonal liquidity are also cited.

Yet the statistical foundation for this seasonal quirk is weak and has eroded over time. Between 1928 and 2000, the stock market's average January return was a solid 1.7 per cent. But that pattern has reversed in the modern era; from 2000 to 2023, the average January return was actually negative 0.3 per cent. More telling is how often January has been the year's best month. For large-cap stocks, it has been the top performer only 14 times in the past 98 years. For small caps, the frequency is even lower, with January ranking first just 8 times in the past 47 years. These numbers suggest the effect is more myth than reliable rule.

The January barometer, which claims that a January gain predicts a positive full-year return, suffers from a similar flaw. While it has been correct about 78% of the time historically, that predictive power is overstated. The reason is simple: the stock market has been positive in a given year about 67% of the time anyway. In other words, the barometer's signal is barely better than a coin flip. Its historical accuracy is largely a statistical artifact of the market's overall tendency to rise, not a meaningful forecast.

The bottom line is that these seasonal patterns are now largely priced into the market or have faded entirely. The market's current momentum is driven by fundamental flows-economic data, corporate earnings, and monetary policy-not by the calendar. Investors should be cautious about basing decisions on these particular seasonal patterns. As the evidence shows, the January effect is a statistical anomaly that has diminished, and the January barometer's predictive power is weak. The setup for 2026 is not written in the first month's returns.

The Real Drivers: Capital Deployment and Consensus Sentiment

The market's start to 2026 is being driven by tangible, fundamental flows, not seasonal folklore. The setup is one of capital being actively redeployed from the sidelines into risk assets, supported by a solid earnings foundation and a clear shift in institutional positioning.

The scale of this capital deployment is staggering. With money market cash levels at a record $7.6 Trillion, the traditional January influx of 401(k) contributions, year-end bonuses, and discretionary mandates is hitting a massive pool of dry powder. This isn't a seasonal quirk; it's a structural flow of new money seeking yield as short-term rates have declined. The market's momentum is being fueled by this fresh capital, which has historically aligned with favorable January performance across major indices.

Underpinning this capital movement is a robust fundamental backdrop. The S&P 500 is entering this period with ten consecutive quarters of positive year-over-year earnings growth. This broadening profit cycle, which began as an AI-led surge, is now diffusing across more sectors, providing a tangible reason for the market's resilience. It's the kind of sustained earnings momentum that can support a risk-on environment, moving the narrative beyond speculative sentiment.

Institutional activity confirms this shift. Options flow is skewed toward buying, and demand is concentrated in specific sectors like Energy and Real Estate, signaling a deliberate, strategic allocation rather than a herd reaction to calendar dates. Retail participation is also a key component, with retail traders accounting for 60% of OCC customer volume. This blend of institutional positioning and retail flow creates a multi-layered support structure for risk assets.

The bottom line is that the current momentum is built on these real, fundamental drivers. The January barometer may offer a historical correlation, but the market's path is being charted by capital deployment, earnings growth, and consensus sentiment. For investors, the task is to separate this signal from the seasonal noise, focusing on whether these flows are sustainable or if they have already priced in the good news.

Valuation and Risk: The Asymmetry of the Bet

The market's current momentum is built on a foundation of capital deployment and earnings growth, but the valuation picture now presents a clear asymmetry. Global equities are trading at new all-time highs, a level that inherently prices in perfection. This creates a setup where the consensus view of continued strength is already embedded, leaving little room for error. The bullish January narrative, therefore, may be largely discounted.

This is particularly true for the January barometer. While a positive start has historically correlated with a strong full year, that predictive power is now likely already priced in. The market's forward trajectory is being driven by tangible flows and fundamentals, not by a calendar signal. In other words, the barometer's historical accuracy is a statistical artifact of the market's overall tendency to rise, not a fresh catalyst. For investors, the question is no longer about whether January sets the tone, but whether the current price already reflects that tone.

The key risk is a reversal of the seasonal flows that have fueled the start. If economic data or monetary policy shifts cause yields to rise, the record $7.6 Trillion in money market cash could quickly reverse direction, pulling capital from the market. More fundamentally, the ten-quarter earnings streak is a powerful support, but it is not infinite. Any sign that this profit cycle is faltering would directly challenge the rationale for the current highs.

This creates a potential for a sharp correction, especially if the seasonal anomaly breaks. A rotation from small-caps to large-caps is a likely scenario in such a reversal. Small-caps, which often benefit from the January barometer's tailwind and retail-driven flows, could see their momentum stall, while the broader market's resilience on mega-cap earnings might provide a relative floor. The asymmetry here is clear: the downside risk of a flow reversal or earnings disappointment appears more acute than the upside from simply confirming a positive January.

The bottom line is that the bet on continued momentum is now a high-stakes one. With valuations elevated and the consensus view entrenched, the market has little margin for a stumble. Investors should focus on the durability of the underlying earnings growth and the sustainability of capital deployment, rather than on seasonal patterns that are already in the price.

Catalysts and What to Watch: Testing the Thesis

The real test for the market's momentum now moves beyond calendar-based speculation. Investors must monitor specific forward-looking events and metrics that will either confirm or challenge the current thesis of capital deployment and earnings support. The January barometer is a historical footnote; these are the actual catalysts.

First, watch the flow of capital itself. The record $7.6 Trillion in money market cash is the fuel for the rally, but its sustainability is key. Early-year data on retail participation, which accounts for 60% of all OCC customer volume, will show if this deployment is broad-based and durable. A sustained drop in retail conviction or a reversal in institutional positioning would signal the initial flush of new money is fading, removing a critical pillar of support.

Second, monitor for a rotation in market leadership. The S&P 500's 17% gain in 2025 significantly outpaced the Russell 2000's 12% return. This divergence is a notable trend. Any widening of this gap, or a sudden reversal where small-caps begin to outperform, would signal a shift in the market's internal dynamics. It could indicate a rotation away from the mega-cap concentration that has driven the index, testing the breadth of the rally's foundation.

The most critical catalyst, however, is the continuation of positive earnings momentum. The S&P 500 is entering this period with ten consecutive quarters of positive year-over-year earnings growth. This broadening profit cycle, which has diffused beyond mega-cap tech, is the fundamental bedrock of the current setup. Any deceleration in earnings growth, particularly if it becomes widespread rather than isolated, would directly challenge the rationale for the market's elevated valuations. The upcoming earnings season, with 45% of the S&P 500 reporting by the end of January, provides the first major test.

The active January macro calendar adds pressure. Events like the Non-Farm Payrolls report and the FOMC rate decision can quickly shift the environment for risk assets. If these data points suggest a stronger economy or a more hawkish Fed, they could reignite the flows that have fueled the start of the year. Conversely, weaker data could accelerate a reversal. The bottom line is that the market's path is being charted by these real dynamics, not by the first month's return.