Small Caps Surge, Inflation Eases

Good Afternoon. Major indices ended slightly negative for the week. CPI inflation was better than expected, but bank earnings were not up to par. The good thing is that the small caps did well this week, which shows the market is broadening. However, it will be interesting to see if this small-cap rally sustains, as in the past, small caps have gained in the short term but failed to sustain momentum.

Below are the key things to note this week:

Bank Earnings Disappoint: Major banks reported earnings this week, which failed to meet expectations. Overall, there are no signs of any issues, but the bar was higher for this quarter. More details in the curated insights section below.

Small caps finally shine: Rising confidence in the economic outlook is driving a sharp rotation into small caps. The Russell 2000 has now outperformed the S&P 500 for 11 straight sessions—its longest streak since 2008—and is up 7.9% YTD, far ahead of the sub-2% gains in large-cap benchmarks. Supported by strong GDP growth and solid earnings, investors are rotating out of mega-cap tech and into cyclicals, industrials, energy, and small caps positioned for an economic reacceleration.

WSJ

Inflation under control:
Inflation held steady into the year-end. Headline CPI rose 2.7% year over year in December, unchanged from November. The data is somewhat noisy due to distortions from the recent government shutdown, but price pressures in consumer staples—particularly food and electricity—remain elevated. Based on CPI data, the Fed’s preferred gauge, the PCE, is expected to be ~2.6% and will be released at the end of this month.

For the week:

• The S&P 500 is down 0.38%, the Nasdaq is down 0.66%, and the Dow 30 is down 0.29%.

  

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Liquidity:

• Banking Reserves + ON RRP: Banking reserves remain at approximately $3 trillion. ON RRP balance remains immaterial.

• Standing Repo Facility (SRF): The New York Fed’s standing repo operations (primarily reflecting SRF take-up)  as of Jan 16 is zero.

Here is a summary of this week’s key economic releases:

Target Rate Probabilities for Jan 28th FOMC Meeting:

CME FedWatch

Boeing outsold Airbus: Boeing logged 1,173 net aircraft orders last year, beating Airbus for the first time since 2018—a clear sign its recovery is gaining traction. December deliveries reached 63 jets, taking full-year deliveries to 600, the highest in seven years, including 44 737 Max aircraft. Read

Banks push back: JPMorgan Chase CFO Jeremy Barnum warned that banks could push back against President Donald Trump’s proposed credit card rate controls. Industry executives argue a 10% cap would shrink card availability and weigh on U.S. consumer spending. Corporate and political leaders began weighing in on the potential fallout this week. Read

Raymond James Acquisition: Raymond James Financial (RJF) has agreed to acquire Philadelphia-based Clark Capital Management, which oversees $46 billion in assets. The transaction is expected to close in the third quarter. Read

Private credit: JPMorgan Chase is building a dedicated team within its investment bank to help companies raise private capital rather than go public, signaling its view that private markets will remain dominant even as some large IPOs return. Public markets have weakened structurally, with fewer IPOs, longer private holding periods, more secondary funds, and greater institutional focus on private capital. JPMorgan sees this as a lasting shift in capital formation, not a cyclical pause. Read

JP Morgan Mixed: Net income totaled $13.0B on a GAAP basis and $14.7B excluding a significant item. Managed revenue was $46.8B, up 7% year over year, with reported revenue of $45.8B. Markets revenue rose 17%, driven by 7% growth in Fixed Income and 40% in Equity. The firm recorded a $2.2B reserve tied to the forward purchase of the Apple credit card portfolio. Credit costs were $4.7B, reflecting $2.5B in net charge-offs and a $2.1B net reserve build. Shareholder returns included $1.50 per share in dividends, totaling $4.1B, and $7.9B in net buybacks.

Bank Of America Beat: 4Q25 net income was $7.6B with EPS of $0.98, up 18% YoY. Revenue reached $28.4B (+7%), driven by Net Interest Income of $15.8B (+10%). Average deposits rose to $2.01T (+3%) and loans to $1.17T (+8%). $8.4B was returned to shareholders. BVPS was $38.44; TBVPS $28.73. Segment income: Consumer $3.3B, GWIM $1.4B, Global Banking $2.1B, Global Markets $1.0B. CET1 stood at 11.4% with average global liquidity sources of $975B.

Citigroup Miss: Revenue was $19.9B, up 2% YoY, or 8% excluding Russia. GAAP EPS was $1.19, while adjusted EPS excluding Russia was $1.81. The firm returned ~$17.6B to shareholders in 2025, a 133% payout ratio. CET1 stood at 13.2%, with TBVPS of $97.06 and BVPS of $110.01. Services rose 15%, Banking surged 78%, USPB grew 3%, and Markets declined 1%. The Q4 2025 effective tax rate was ~34%.

Wells Fargo Mixed: Net income was $5.4B, or $1.62 per share, with non-GAAP net income of $5.8B, or $1.76 per share. Total revenue reached $21.29B, driven by a 4% YoY increase in net interest income and 5% YoY growth in noninterest income. Noninterest expense declined 1% YoY to $13.73B, including $612M in severance. The firm repurchased $5.0B of shares in Q4 2025. CET1 stood at 10.6% and LCR at a preliminary 119%. Average loans were $955.8B and average deposits totaled $1.38T.

Blackrock Beat: AUM reached $14T after record FY net inflows of $698B, including $342B in Q4. Q4 as-adjusted EPS of $13.16 beat estimates by ~10%, with revenue of $7.0B up 23% YoY and ahead of consensus. Organic base fees grew at a 12% annualized pace; the dividend rose 10% to $5.73, with $5B returned to shareholders in 2025. Technology services benefited from Preqin, driving ACV growth of 31% YoY.

Goldman Sachs Miss: Q4 revenue was $13.45B, down 3% YoY and 11% QoQ. Diluted EPS rose to $14.01 from $11.95 last year. Global Banking & Markets revenue increased 22% YoY to $10.41B. Platform Solutions reported a $(1.68)B loss driven by Apple Card markdowns. Credit loss provisions reflected a $2.12B net reserve release. The quarterly dividend was raised to $4.50, payable March 30, 2026.

Morgan Stanley Miss: Q4 net revenues were $17.9B, up 10% year over year from $16.2B. EPS rose to $2.68 versus $2.22 last year. ROTCE was 21.8%, ROE 16.9%, with a 32% pre-tax margin. The firm declared a $1.00 dividend and repurchased $1.5B of common stock in Q4. CET1 stood at 15.0% at year-end.