American stocks closed 2026's first full trading week with a bang, as all three major indexes notched gains and the S&P 500 and Dow Jones Industrial Average reached fresh all-time highs. The rally came despite—or perhaps because of—a December jobs report that fell short of expectations, cementing market bets that the Federal Reserve will hold rates steady this month.

The S&P 500 rose 0.6 percent on Friday to close at a record, bringing its gain for the week to 1.2 percent. The Dow advanced 0.5 percent to also post an all-time high, while the technology-heavy Nasdaq Composite jumped 0.8 percent. All told, it was exactly the start to the year that bulls had hoped for.

Jobs Report: Good Enough, Not Too Hot

The Bureau of Labor Statistics reported Friday morning that the U.S. economy added 50,000 jobs in December, below the consensus expectation of 70,000 but above the most pessimistic forecasts. The unemployment rate dipped to 4.4 percent from 4.5 percent, a modest improvement that suggests the labor market remains healthy without overheating.

For markets, the report hit a "Goldilocks" sweet spot. Job growth was strong enough to support the soft-landing narrative—where the economy slows enough to tame inflation without tipping into recession—but not so strong as to revive fears of Fed tightening.

"This is exactly the kind of report the Fed wants to see. Continued job creation, unemployment stable, wage growth moderating. It gives them cover to be patient and watch the data."

— Tom Essaye, Founder of Sevens Report Research

Bond traders immediately adjusted their expectations. The probability of a Fed rate cut at the January 27-28 meeting fell to just 3 percent, down from 16 percent before the report. The market is now pricing in roughly 97 percent odds of no action this month.

Week's Winners and Losers

Looking at the full week's performance, the top performers in the S&P 500 reflected several developing themes:

  • SanDisk (SNDK): Up 32% for the week as AI-driven demand for storage continues to surge following the company's strong showing at CES 2026.
  • Moderna (MRNA): Up 19% after filing for global regulatory approval of its mRNA flu vaccine, marking a major step in diversifying beyond COVID products.
  • Lam Research (LRCX): Up 16% as semiconductor equipment makers benefit from accelerating AI infrastructure spending.
  • Micron (MU): Up 13% on memory chip demand optimism tied to AI workloads.
  • L3Harris (LHX): Up 11% following Trump's call for a $1.5 trillion defense budget in 2027.

Defense stocks broadly rallied throughout the week after the president proposed boosting military spending by more than 50 percent. Northrop Grumman and Lockheed Martin each gained more than 7 percent on Friday alone.

What's Driving the Rally

Several factors have contributed to the market's strong start to 2026:

Earnings Optimism

Fourth-quarter earnings season kicks off next week with major banks reporting. Analysts expect S&P 500 earnings growth of roughly 9 percent for Q4 2025, which would mark the fifth consecutive quarter of year-over-year growth. More importantly, all 16 S&P 500 industry sectors are projected to show earnings growth in 2026—something that hasn't happened since 2018.

Rate Cut Expectations

While the Fed is expected to hold steady this month, markets still anticipate 50-75 basis points of cuts over the course of 2026. Lower rates typically support equity valuations by reducing the discount rate applied to future earnings.

Policy Stimulus

Trump's aggressive policy agenda—from mortgage bond purchases to defense spending to tax cut extensions—has created expectations of continued fiscal support for the economy. Whether these initiatives survive legal and legislative challenges remains to be seen, but markets are giving the benefit of the doubt for now.

Risks to Monitor

Despite the upbeat start, several risks warrant attention:

  • Valuation concerns: The S&P 500 trades at roughly 22 times forward earnings, well above the 10-year average of 18.7 times. This leaves little margin for error if earnings disappoint.
  • Supreme Court tariff ruling: The Court could issue its decision on Trump's tariff authority as early as January 14. An adverse ruling could create significant market volatility and fiscal uncertainty.
  • Bond market jitters: The 10-year Treasury yield has climbed to 4.2 percent, and further increases could pressure equity valuations, particularly for growth stocks.
  • Geopolitical risks: The Venezuela situation, ongoing tensions with China, and Middle East instability all present potential shock risks.

What's Ahead

Next week brings the unofficial start of earnings season, with JPMorgan Chase reporting Tuesday, followed by Wells Fargo, Bank of America, and Citigroup on Wednesday. Bank results often set the tone for the broader earnings season, providing insight into consumer health, loan demand, and capital markets activity.

The economic calendar includes consumer price index (CPI) data on Wednesday—the last inflation reading before the Fed's January meeting. Producer prices and retail sales round out a busy week for economic data.

For now, investors are enjoying a strong start to what Wall Street strategists broadly expect to be another positive year for stocks. The average S&P 500 price target among major bank strategists implies roughly 11 percent upside from current levels. Whether that optimism proves warranted will depend on earnings, the Fed, and the ever-present wild card of policy developments from Washington.