AI is Still Powerful, But More Selective

Wall Street starts the new year with a strange mix of confidence and tension. The market has delivered three straight years of strong returns, fuelled by AI spending and surprisingly durable profits. Yet, as fourth-quarter numbers begin to hit the tape, nobody seems sure whether those same forces can keep carrying the load in 2026.

AI is still the brightest spot in the story, though it isn't the all-purpose rally driver it was a year ago. Chipmakers continue to benefit from the scramble to build data-centre capacity, and TSMC is widely expected to show another jump in earnings on AI-linked demand. Samsung and memory suppliers are reporting similar strength. But traders are no longer rewarding every AI headline; the focus has tilted toward margins, capital intensity and competitive share, the kind of details that separate hype from durable revenue.

Softer Tailwinds But No Clear Pivot

The macro backdrop tells a similar two-sided tale. Consumers are still spending, unemployment isn't spiralling higher and S&P 500 earnings are projected to expand again this year. At the same time, the pace of hiring has cooled, wage pressure is uneven and inflation has not fully cooperated. Sector performance is becoming patchier, and economists worry the "soft landing" narrative may be vulnerable if labour costs refuse to settle.

Rates are the biggest change from a year ago. In early 2025, investors talked about Fed cuts as if they were scheduled flights; today, that confidence is gone. Forecasts from banks diverge sharply, futures markets look jumpy and January's policy meeting is now viewed as a placeholder rather than a pivot. With the path of policy uncertain, payroll and inflation prints have regained their ability to move markets.

Trade policy, which caused market turmoil in mid-2025, has gone quiet. The absence of new tariff battles has eased corporate anxiety, but CFOs still cite supply-chain resilience and cost pass-through as boardroom priorities. Geopolitics can still intrude, though recent flare-ups have been met with more shrugs than sell-offs.

Earning May be The New Narrative Driver

And that brings the spotlight to earnings. The big banks will go first, offering an early read on credit demand, deal flow and risk appetite. Financials could show a rebound in investment-banking income, a bright spot after a sluggish stretch, while technology firms will be judged on capital spending plans, hiring intentions and AI monetisation. Forward guidance may matter more than the actual prints as management teams decide how boldly to frame 2026.

After such a powerful three-year run in equities, investors aren't simply looking for "beats." They want proof that the rally's pillars remain sturdy, or, failing that, clarity about where the next one comes from. AI is still a driver, growth hasn't vanished and tariff anxiety has calmed, but none of those supports feel automatic anymore. That leaves earnings season with an unusual amount of narrative weight for January.