No Triskaidekaphobia Here

As of Friday morning, 75% of S&P 500 companies have reported Q4 earnings, and the headline results remain positive. Sales growth is up 9%, and earnings have grown over 12% — both higher than consensus analyst forecasts. From a major sector perspective, materials, industrials and energy registered the strongest earnings surprises, which at least partially explains their dramatic outperformance so far this year. Despite negative total performance in the last six weeks, technology sales and earnings have exceeded median estimates with only 20 of 64 index companies left to report earnings.

A few themes stand out. First, consumers continue to spend, but this remains a highly promotional and value-seeking environment. Second, consistent with strong performance of non-U.S. indices, companies are reporting strong international sales and activity: Some cite a weaker dollar last year (note that the dollar has strengthened against most major currencies so far in 2026), but the incrementally positive growth backdrop in the UK and Europe and stronger growth impulses in Japan and select Asian countries are contributing.

As we have noted, how sustainable those growth impulses will be remains a significant focal area for us. U.S. tax refund-induced consumer demand, German defense spending increases, a newly confirmed Japanese growth mandate and other examples are often cited as macro tailwinds. Through our consistent non-partisan lens, it appears growth impulses contingent on stimulus may not be sustainable.    

For those less familiar, the bipartisan Congressional Budget Office (CBO) provides a wide-ranging analysis to Congress, and Wall Street pays close attention to its annual and interim updates on the federal budget. As we are fond of saying, the U.S. Treasury bond market acts as the capital market governor; as global finance’s cornerstone, Treasury bond yields (which move in the opposite direction of price) are a key determinant of consumer and corporate borrowing costs. While government bond prices react to everything from inflation scares to geopolitical tensions and labor market movements, overall indebtedness represents the core risk factor affecting any borrower/lender relationship. More succinctly, if a borrower has too much existing debt, lenders step aside.

The CBO has had several policy changes to digest since its last budget projection in January 2025, but, with its pencils down for the moment, it estimates an 8% increase in 2026’s budget deficit and an aggregate 6% deficit increase from 2026 through 2035.¹ The CBO cites three major policy developments driving that increase: the 2025 Budget Reconciliation Act (including personal and corporate tax changes from summer 2025), which increased deficits by an estimated $4.7 trillion; higher tariffs, which reduced deficits by an estimated $3 trillion; and immigration policies, which increased estimated deficits by $500 billion.² While the CBO anticipates revenues to increase, spending or government outlays will grow at a 4.4% annual rate over the coming decade and will move from 23.3% of gross domestic product (GDP) in 2026 to almost a quarter of GDP by 2036.³ Finally, the CBO projects U.S. debt held by the public as a percentage of GDP will rise from 99% at the end of 2025 to 120% at the end of 2036. Said another way, in 10 years, for every dollar the U.S. produces in economic growth, it will owe a dollar and 20 cents in debt, and that is just debt held in Treasuries.

While these numbers may seem daunting, it’s important to put them into context. First, the bond market prices risks every second it is open, and recent U.S. Treasury bond auction performance as well as trends in bond prices trading in the secondary market indicate ongoing demand for U.S. debt. Second, several other countries, including recent market darling Japan, have more challenged indebtedness figures than the U.S. We do not want to live by the “cleanest dirty shirt in the pile” (can you tell I have a teenage boy at home?) mantra for owning U.S. bonds over other choices, but country- and region-relative perspectives are important. We have shared a key yield level we are watching — 5% for 10-year U.S. Treasury bonds — as a potential pivot point that would suggest markets have concerns about U.S. indebtedness and likely other factors. With yields tracking close to three-month lows, the market is taking the CBO information in stride, but — again — the level of borrower indebtedness remains a focal point for investors, and future updates on policy changes and CBO projections (alongside other resources including the Penn Wharton Budget Model and Yale Budget Lab) have our attention.

Earnings season provides considerable insights, but disentangling company-specific performance explanations from broad read-throughs remains a key focus in our research. As noted above, a more value-oriented consumer continues to emerge. Sifting through the earnings of companies such as McDonald’s, Wendy’s and Brinker (whose brands include Chili’s and  Maggiano’s Little Italy), we find that consumer traffic and promotional activity remain linked. Airline companies have suggested similar phenomena, in some cases noting divergences between business travel and personal spend.

Our economics team continues to emphasize a “K” shaped economy, with higher income consumers thriving while lower income consumers are disproportionately impacted by inflation and employment trends. This week’s employment data — which was delayed from last week due to the partial government shutdown — provided perhaps some false hope about the strength of the labor market. The unemployment rate fell and total payrolls exceeded expectations, but the industries actually hiring remained narrow. Companies in healthcare services are repeatedly the employers of choice, continuing the theme of the last two calendar years. Leisure and hospitality, which had largely benefited post COVID, remains challenged in more recent readings. Retail, financial services, professional services and manufacturing are all in decline. Some bright spots to the labor picture included a decline in underemployment (those in jobs not fully utilizing their skills). Finally, the New York Federal Reserve released quarterly data suggesting consumer credit is generally good but is showing some marginal weakness. 

U.S. inflationary data released on Friday came in below economists’ expectations, but lower energy prices helped the broadest measure of consumer inflation register a positive surprise. However, core inflation, which strips out more volatile food and energy prices, registered a 2.5% annual pace: For many, this reading may be close enough to the Fed’s 2% target to allow it to lower the target interest rate.

Our latest read is that the Fed has shifted its policy focus from being primarily inflation driven for most of 2025 until the late summer to being primarily labor market driven from the summer until its meeting last January, having recently becoming more balanced between inflation and employment concerns. This more balanced outlook provides the Fed with optionality as it digests an economy that consensus forecasts have likely underappreciated, with a consumer who keeps spending but is seeing some marginal credit weakness. With political pressure to cut interest rates amid a bond market concerned about fiscal health, retaining optionality is likely the Fed’s continuing playbook. And while we think the bias to lower interest rates is likely the correct one, the underlying economic strength may keep the Fed more restrained than markets expect.

¹ The Budget and Economic Outlook 2026 to 2036. Congressional Budget Office. Accessed 13 February 2026.

² Ibid

³ Ibid