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How to Make the Most of Today’s Market
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Tactics that Work in Good Markets and Bad
How to Make the Most of Today’s Market
By: Sheraz Mian
January 31, 2026
Stocks have made impressive gains lately and are currently at or near record levels.
Many in the market hope that the worst is behind us and that the ongoing stock market momentum reflects favorable fundamental realities. Tariffs have been a persistent headwind for the market since last April. Still, the subsequent start of bilateral trade negotiations and announcements of interim trade deals helped investors put the tariff issue behind them.
The prevailing market consensus on the tariff issue is that, although many aspects remain outstanding, we now have a clearer understanding of the ground reality.
A constructive view of the economy is that while tariffs-induced uncertainty will likely affect near-term growth trends, the U.S. economy’s fundamentals remain rock-solid. This view is also optimistic about the Trump administration’s non-trade policy agenda, including taxes and regulatory reform. On top of this all is the ongoing AI-centric spending boom that is largely independent of fiscal and monetary policy.
Market bears see this optimism as lacking a fundamental basis. This line of thinking sees the tariff-induced uncertainty as severe enough to push the economy close to a recessionary growth level.
Market bears doubt that the upcoming Fed easing will boost growth, expecting sluggish expansion even as inflation remains high. Worries about macroeconomic fiscal imbalances and stock market valuations also appear in the bearish view of the market.
The interplay of these competing views will determine how the market performs in the coming months and quarters. To that end, let’s examine the landscape of bullish and bearish arguments to help you make up your own mind.
Let’s talk about the Bull case first.
The Economy’s Strong Foundation: The U.S. economy has literally been the envy of the world over the last few years, and those fundamentals are still intact despite continuing worries about their durability. It is this inherent resilience that allowed the U.S. economy to continue growing in the face of extraordinary Fed tightening over the last couple of years and is expected to be critical in sustaining growth in the current tariff-centric policy environment.
Growth is expected to decelerate due to uncertainty around the tariff issue. But we should keep in mind that the U.S. economy entered the current period of policy uncertainty in excellent shape. The earlier government shutdown continues to muddy the waters, making it hard to get a clear, real-time read on the economy. Still, there is no doubt that the economy’s underlying growth drivers remain intact.
A stable consumer and business spending backdrop, supported by a still-strong labor market, ensures that growth remains positive, albeit at a lower trajectory. Tied to all this is the secular boom in AI-centric spending, which is expected to remain in place for at least the next two years before starting to decelerate.
This is beneficial to the central bank’s fight against inflation, with moderating economic growth pushing inflation readings toward the Fed’s 2% target. The Fed’s pause decision at the latest meeting was no surprise to anyone in the market, but the expectation remains that the overall policy bias will continue to favor easing.
All in all, the strong pillars of the U.S. economic foundation run contrary to the typical signs of trouble ahead.
The Fed’s Easing Cycle: The pause to interest rate cuts at the latest Fed meeting is justifiably getting interpreted as reflecting the central bank’s comfort with the state of the economy and inflation. Downside risks to the labor market’s health prompted the central bank to ease monetary policy three times last year. But with recent data showing marked stabilization in the economy’s growth trajectory, they can remain in a wait-and-see mode while otherwise maintaining an overall easing stance.
The current pause notwithstanding, bulls see the inflation issue as headed toward a resolution that satisfies the central bank, allowing the Fed to continue easing policy. This view doesn’t see tariffs as inherently inflationary, but acknowledges that recent readings of labor market softness likely reflected tariffs-induced moderation in economic growth.
In the absence of renewed evidence of labor market weakness, it is perhaps reasonable to expect the Fed to remain on pause through the remainder of the current Chairman’s term. But market bulls expect the Fed to stay on the easing path and implement at least two quarter-point rate cuts this year.
Continued . . .
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Valuation & Earnings: Tied to the economic and interest rate outlook is the question of stock market valuation that still looks reasonable given the expected interest rate trajectory.
The S&P 500 index is currently trading at 23.4X next year’s earnings estimates, up from 20.7X following the April 2025 sell-off and 15.4X at the end of September 2022. This is close to the 10-year high multiple for the market, which is feeding the ‘AI bubble’ narrative in parts of the market. We should keep in mind that the index peaked at 26X at year-end 1999 in the Tech bubble.
The appropriateness or otherwise of valuation multiples has to be seen in the context of the interest rate outlook. Valuation multiples typically expand when the Fed is easing policy, particularly when the catalyst for the loosened policy is confidence on the inflation front instead of growth fears.
Earnings outlook is a key part of the valuation discussion. Contrary to the earlier doom-and-gloom fears, the ongoing 2025 Q4 earnings season is showing a steadily improving earnings outlook for the coming periods. You can clearly see this in earnings expectations for 2026 Q1 and the following periods.
What we are seeing this earnings season is that while companies in a number of industries are unable to have adequate visibility in their business, there are many others that continue to drive sales and earnings growth even in this environment. We are seeing many of these leaders from a variety of sectors, including Finance and Technology, come out with strong quarterly results and describe trends in their businesses in reassuring terms despite the tariffs uncertainty.
Current consensus expectations for this year and next reflect strong growth that is broad-based and not driven by one or two sectors. While estimates had come down sharply following last April’s tariff announcements, the trend has totally shifted now, with estimates broadly reflecting a stable-to-positive trend line.
In the absence of a nasty economic downturn, the earnings picture can actually serve as a tailwind for the stock market in an environment of easing Fed policy.
Let’s see what the Bears have to say in response.
The Market’s Fed Exuberance: The Fed’s pause decision at the latest meeting was largely expected, but many in the market are hoping for continued rate cuts this year provided incoming economic data remain supportive.
The view that tariffs cause only a one-time bump in inflation is plausible, but far from proven at this stage, particularly since the full tariff impact has yet to seep through to the economy. An accelerated easing cycle along the lines outlined here to forestall softness in the labor market risks entrenching inflation expectations at a level that is materially above the Fed’s target. Inflation expectations get entrenched at an elevated level when households and businesses expect prices to remain high, potentially limiting the Fed’s inflation-fighting ability.
Tied to the first risk is the prospect that the economy’s true health may be far more fragile than recent GDP readings suggest. Low-income households have been struggling for a while, but anecdotal evidence from earnings calls suggests that even better-off consumers are becoming more cautious in their spending plans. On top of this is the diminished outlook for business spending beyond the AI space due to policy uncertainty, at least in the near term.
In the worst-case scenario, stalled progress on the inflation front may stop the Fed from easing policy even as the economy continues to weaken further; this is the so-called ‘stagflation’ scenario. But even if that isn’t the case and the Fed continues to ease, the economy’s decelerating momentum may be hard to reverse by then.
The Valuation Reality Check: Given the bears’ view that the prudent course for the Fed is to be in no hurry to start easing policy in the absence of any economic issues, they see no fundamental reason for valuation multiples to expand beyond current record levels.
Higher-for-longer interest rates should have a direct impact on prices across all asset classes, including stocks. Everything else constant, investors will use a higher discount rate, driven by interest rates, to value the future cash flows of the companies they want to invest in.
This means lower stock values in a higher-interest-rate environment.
The Earnings Growth Question: Current consensus estimates show +12.1% growth this year and +15.2% growth in 2027, following the +12.4% growth in 2025.
Market bears see these earnings growth expectations as inconsistent with an economy facing a significant jump in tariffs, even if questions about the sustainability of the ongoing AI-centric spending boom are overlooked.
The full extent of the emerging tariff regime has yet to take effect, but the aggregate effective tariff rate is already more than five times higher than it was over the last few decades. It is hard to envision that this tariff jump will have no impact on inflation, economic growth, or corporate earnings.
Notwithstanding the tough going in the manufacturing sector and the growth implications of still-elevated Treasury yields despite Fed easing, earnings expectations for this year and next will need to come down significantly to get them in line with economic reality.
Where Do I Stand?
While I acknowledge that the pace of Fed easing will likely be slower through the remainder of the current Fed Chair’s tenure, which runs through May, I am skeptical of the higher-for-longer Fed policy view and see this scenario as nothing more than a low-probability event.
The current Fed Funds rate is still above the level that central bank officials and economists consider the ‘neutral’ policy rate. At the ‘neutral’ policy rate, Fed policy is neither ‘stimulating’ nor ‘restricting’ economic activity.
Even if further progress on the inflation front is slower than the Fed and the market are projecting at present, the central bank has plenty of leeway in its policy arsenal to begin easing without adversely affecting its fight against inflation. This doesn’t mean the Fed should put rate cuts on autopilot, but it does suggest they don’t need to wait an extended period to consolidate the inflation gains.
Regular readers of my earnings commentary know that the earnings picture remains resilient, and the latest development is upward revisions to estimates for the current and coming periods.
The Trump administration’s overall policy thrust is expected to be pro-growth and pro-market. Still, it is reasonable to expect some period of market tentativeness as we sort through the bilateral trade negotiations. We remain confident that investors will soon come around to our view of inflation, earnings, and the much more positive times ahead. The market’s rebound from the April lows reflects this view of the economy and market.
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Sheraz
Sheraz Mian serves as the Director of Research and manages the entire research department. He also manages the Zacks Focus List and Zacks Top 10 Stocks portfolios. He invites you to access Zacks Investor Collection.
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