Fed week: rates steady as investors shift focus to earnings and economic outlook

• CME FedWatch shows 97% probability of Fed holding rates unchanged; traders price 59.4% chance of a June rate cut as the rate-cutting cycle that began September 2024 pauses.
• Market leadership is rotating: energy, industrials, and materials lead early 2026 gains, with small-cap Russell 2000 outpacing S&P 500 in January as growth beyond tech strengthens.
• Half of the 'Magnificent Seven' report earnings this week (Microsoft, Meta, Tesla on Jan 28; Apple on Jan 29), with S&P 500 expected to grow earnings 15% this year at a 22x forward multiple.

Market Summary: Fed Meeting and Earnings Focus

Federal Reserve Outlook

The Federal Reserve's two-day meeting concludes Wednesday, January 28, with markets pricing a 97% probability of rates remaining unchanged. Analysts expect an "uneventful" meeting following three consecutive rate cuts since September 2024. However, political pressure has intensified on Chair Jerome Powell, with President Trump advocating for lower rates and opening a criminal investigation into Powell. Traders are pricing a 59.4% chance of a June rate cut.

Market Dynamics and Leadership Rotation

US futures were mixed Monday, with the dollar hitting a four-month low and the yen strengthening on intervention concerns. Market leadership has broadened significantly beyond mega-cap tech stocks. Energy, industrials, and materials sectors are leading early 2026 gains, while the small-cap Russell 2000 has outpaced the S&P 500 in January. Growth sectors, including technology, have underperformed more cyclical and value-oriented areas.

Economic Backdrop

The US economy shows stability with inflation controlled and solid GDP growth. The S&P Composite PMI rose slightly to 52.8 in January, while the University of Michigan index was revised up to 56.4 from 54.0.

Key Earnings Catalysts

Major tech earnings this week include Microsoft, Meta Platforms, and Tesla (Wednesday, January 28) and Apple (Thursday, January 29). The S&P 500 is expected to grow earnings 15% this year, currently trading at 22x forward earnings. According to strategists, fundamentals drove most of last year's gains during earnings season, with lower rates providing a tailwind but "not a precondition" for market advances.

Trading Caution

Volatility typically peaks during Fed press conferences, with the 2:00-2:30 PM ET window considered particularly risky for trading.