Fed Hints at Rate Hikes as Middle East Tensions and Walmart Earnings Test Markets
Today's market narrative is being shaped by a significant warning shot from the world's largest retailer. Walmart's disappointing forecast for the year ahead has cast a shadow over the health of the consumer, adding a fresh layer of uncertainty to markets already grappling with a divided Federal Reserve and simmering geopolitical tensions.
Market Snapshot
- 📉 Dow Jones Futures: -0.23%
- 📉 S&P 500 Futures: -0.21%
- 📉 NASDAQ 100 Futures: -0.34%
- 📉 FTSE 100: £10,598 (-0.98%)
- 📈 Oil (WTI): $66 (+1.91%)
- 📈 Gold: $4,984 (+0.16%)
- 📈 10-Year US Treasury Yield: 4.102% (+0.51%)
- 📈 Bitcoin (BTC): $66,667 (+0.33%)
Fed Signals Higher-for-Longer as Rate Hike Talk Re-emerges
The US Federal Reserve is adopting a tougher stance on inflation, making future interest rate cuts less likely in the near term. Minutes from its January meeting, where rates were held at 3.50%–3.75%, reveal a significant division among officials on where policy should go next.
While some members felt supporting the job market should be a priority, and that rates could come down if inflation slides as expected, several others argued that any easing may not be necessary for some time. For the first time in months, some officials even mentioned that rate hikes could be necessary if inflation proves more stubborn than expected, underscoring the need for clear signs that price rises are under control before any policy shift. This is a marked change from late 2025, when multiple rate cuts were delivered.
This tougher language comes as the US economy continues to show strength, with a recent fall in the unemployment rate to 4.3%. The market, which had been pricing in rate cuts for June, is now being forced to consider the possibility of higher interest rates. The next set of inflation data will be critical; a high reading could take rate cuts off the table for 2026 entirely.
Geopolitical Tensions Escalate in the Middle East
A significant build-up of US military forces in the Middle East has ratcheted up tensions with Iran, with prediction markets now indicating a 70% chance of military strikes by the end of 2026. This has put global markets on edge, with oil prices recently jumping more than 4% after US officials stated that military force remains a possibility.
The Economic Choke Point: Strait of Hormuz
The primary risk centres on the Strait of Hormuz, a narrow shipping lane through which roughly 20% of the world's oil and a significant amount of natural gas passes. A closure of this strait would remove approximately 16 million barrels of oil per day from the global supply.
Such a disruption could cause crude oil prices to spike towards $130 per barrel. This would create a nightmare scenario for central banks, potentially pushing US inflation to 6% and forcing them to raise interest rates into a slowing economy—a painful condition known as stagflation, where prices rise but economic growth stalls.
How Markets Historically React to War
History offers a valuable lesson: markets tend to fear the uncertainty before a conflict more than the conflict itself. Stocks often fall in the build-up to war and then rally once the military action begins.
- The Gulf War: The S&P 500 fell nearly 18% during the four-month military build-up, then surged over 17% in the weeks after the operation launched.
- The Exception (2022): The Russia-Ukraine war was different. The initial stock market dip was modest, but the year-long decline was driven by the energy inflation it caused, which forced the Federal Reserve into aggressive rate hikes.
The key takeaway is that the biggest risk to a portfolio is not the military action itself, but the central bank's reaction to the resulting energy price shock.
Key Company and Sector Movers
Beneath the surface of the main indices, a dramatic sorting process is underway, particularly in the technology and consumer sectors.
Walmart's Weak Guidance Spooks Investors
As the world's largest retailer, Walmart's earnings report was a crucial health check on the US consumer, and the results have given investors pause. While the company narrowly beat Wall Street's expectations for its fourth-quarter results, its forecast for the current fiscal year (fiscal 2027) came in softer than anticipated. Walmart said it expects adjusted earnings per share between $2.75 and $2.85, well below analysts' forecast of $2.96. The news sent shares down more than 2% in pre-market trading.
This comes at a pivotal time for the company under new CEO John Furner, especially as its stock has been trading at a historically high valuation after recently crossing a $1 trillion market capitalisation. The weak outlook will sharpen focus on whether Walmart can retain the higher-income customers it recently attracted.
Bright Spots in E-commerce and Home Goods
In contrast to Walmart's caution, other retailers offered more positive news:
- Wayfair: The online home goods retailer posted its first annual sales gain since 2020.
- Etsy: Shares in the e-commerce platform climbed after it beat fourth-quarter earnings expectations and announced it was selling its clothing resale service Depop to eBay.
The AI Arms Race: Infrastructure, Divestments, and Global Competition
The artificial intelligence sector continues to see massive capital flows and strategic shifts:
- Infrastructure Investment: OpenAI is reportedly raising over $100 billion from tech giants to build the vast physical infrastructure (chips and data centres) needed to stay ahead. Underscoring this trend, Indian conglomerate Adani announced plans to invest $100 billion in AI data centres.
- Nvidia's Strategic Shifts: Chipmaker Nvidia, whose shares recently rose after Meta announced it would use its next-generation systems, revealed it has sold its entire stake in both Recursion Pharmaceuticals and Arm. This contrasts with Cathie Wood’s ARK Invest, which has been buying shares in some AI-related firms as prices fall, highlighting a split in strategy among major investors.
- Global Tech Alliances: As Microsoft's President voices concern over state subsidies for China's tech industry, India is joining the US-led Pax Silica initiative, an alliance aimed at securing the global supply chain for advanced semiconductors.
The Great Software Divide
Wall Street is deeply divided on the future of software companies. While analysts have raised earnings forecasts, a basket of software stocks vulnerable to AI disruption has fallen heavily. Some, like Polar Capital, believe the sector faces an existential threat from AI tools that can now write code and automate tasks. This caution is supported by longer sales cycles, as businesses take more time to evaluate new AI products. Yet others, including JPMorgan, see the selloff as extreme and believe a rebound is due for strong companies.
Standout Performers and Laggards
- Figma Shines: Design software firm Figma bucked the negative trend, with its shares soaring after reporting a 40% year-over-year revenue increase and a blowout forecast for 2026.
- Moderna Gains: Shares in the biotech firm jumped after the US Food and Drug Administration (FDA) agreed to review its experimental mRNA flu shot, reversing a previous refusal.
- Chipmakers Soar: Analog Devices saw its shares jump after forecasting record revenue, driven by booming demand from AI data centres.
- Cybersecurity Slump: Palo Alto Networks' stock fell sharply after disappointing earnings, dragging down the rest of the cybersecurity sector.
The 'Ex-America' Trade Gathers Steam
An interesting trend has emerged at the start of 2026: global stocks are significantly outperforming their US counterparts. While the S&P 500 is down around 1% for the year, an index of global stocks excluding the US (the MSCI ACWI ex-US) is up around 8%. As confirmed by strategists at JPMorgan, this represents the worst start to a year for US markets relative to the rest of the world since 1995.
The dynamic suggests that investors, concerned by high valuations in the US tech sector and uncertainty around potential trade tariffs, are actively looking for better opportunities abroad.
Economic Health Check: Mixed Signals Emerge
Recent data paints a complicated picture of the US economy, with areas of strength offset by signs of cooling.
On the positive side, business spending remains robust. Core capital goods orders, a key indicator of business investment, rose in December, marking the fourth straight quarter of growth, largely fuelled by the AI investment boom in data centres.
However, the labour market is showing signs of losing steam. The wage premium for switching jobs has shrunk to its narrowest gap since 2020. This indicates that employers are regaining bargaining power, and the 'Great Resignation' period of rapid wage growth for job-hoppers is firmly over. Elsewhere, housing construction is sending mixed signals, with new builds rising but future permits falling, suggesting high mortgage rates are still a headwind.
Crypto Market Update: Corporate Stumbles and Protocol Milestones
The digital asset space is sending its own mixed signals, with significant corporate governance issues and stock collapses contrasting with regulatory progress and important network achievements.
Corporate Crypto Comes Under Fire
Several publicly traded crypto-related companies are facing headwinds. ETHZilla's stock plummeted 8% after it was revealed that prominent investor Peter Thiel's Founders Fund had sold its entire 7.5% stake. This comes as the company trades 97% below its peak.
Separately, Nakamoto Holdings is facing a potential delisting from the Nasdaq for its stock price falling below the $1 minimum. The situation has been described as a 'heist' after a complex merger and subsequent 99% stock collapse that left retail investors with heavy losses.
Regulatory and Market Structure Shifts
On a more positive note, there are signs of increasing regulatory clarity in the US. Bridge has received conditional approval from the Office of the Comptroller of the Currency (OCC) to form a federally chartered trust bank. This would allow it to offer services like digital asset custody and stablecoin issuance under direct federal supervision, a key step in bridging traditional finance with digital assets.
Meanwhile, the supply of stablecoins—digital tokens pegged to currencies like the US dollar—has stalled at around $300 billion. This pause in growth is attributed to lower trading volumes and less attractive yields on dollar-based assets.
Ethereum Reaches Staking Milestone
In a landmark for the world's second-largest cryptocurrency, Ethereum's proof-of-stake contract now holds over 50% of the total ETH supply for the first time. This indicates a strong long-term commitment from investors who are 'staking' their coins to help secure the network in exchange for rewards, reducing the amount of ETH available for active trading.
NOTE: This content is for informational and educational purposes only and does not constitute financial advice. Always do your own research. Not financial advice (NFA).