The Race Between Inflation and Productivity

FEB 9, 20264 MIN

The Race Between Inflation and Productivity

FEB 9, 20264 MIN

Description

Market Breadth is Strengthening One of the most important themes so far this year has been the broadening out of the stock market. In recent years, the market’s gains were heavily concentrated in the largest companies, particularly the “Magnificent 7,” with the top 5 to 10 stocks dramatically outperforming the rest of the index. This year, the pattern has shifted in a meaningful way. Instead of a narrow rally led by a small group at the top, a much larger share of the S&P 500 has begun contributing to overall performance. While these companies may be smaller relative to the largest names, they are still substantial businesses, and their improved participation is a healthy sign for the market. Several indicators reinforce this trend: 68% of S&P 500 stocks are currently trading above their 200-day moving average, which is the highest level since 2024. This suggests the overall market remains structurally intact despite periodic pullbacks and volatility. The percentage of stocks reaching 52-week highs is extremely strong, sitting around the 96th percentile, a level typically associated with broad momentum. Perhaps most striking is how dramatically the market’s leadership has changed. In 2023, 2024, and 2025, the top 10 stocks contributed more than 50% of the S&P 500’s total performance. In 2026, the market is still up year-to-date, but the top 10 stocks have actually detracted from returns by roughly 26%. That final point highlights how different the current environment is. The market is moving higher, but not because the largest names are carrying the index. Instead, strength is spreading across a broader base of companies. The Inflation vs. Productivity Test for 2026 A broadening market is generally considered a healthier market. When more companies participate in a rally, it suggests the underlying economy is stronger and more evenly supported. Two major data releases this week will help determine whether that support can continue, especially as the economy enters what may become one of the defining themes of 2026: the race between inflation and productivity. At the center of this issue is a critical question: Can productivity grow fast enough to offset rising costs? More specifically, can output per worker increase at a pace that allows wages to rise without forcing prices higher? This week brings two important economic signals – Wednesday: the jobs report, delayed due to the temporary government shutdown; Friday: The Consumer Price Index (CPI), the key inflation reading Together, these reports will provide insight into both labor market strength and inflation pressure, and they will feed directly into market expectations for interest rates. One of the most important market indicators right now is the 10-year Treasury yield. Historically, the stock market has tended to hold up well as long as the 10-year yield remains below 4.5%. The yield is currently around 4.2%, and it has remained relatively stable in a tight range, below 4.5% and above 4%, for most of the past year. That range matters because the 10-year yield is highly sensitive to inflation expectations. If inflation spikes again, interest rates are likely to rise, and higher rates can quickly tighten financial conditions and pressure stock valuations. The path to keeping inflation stable depends heavily on productivity. When workers can produce more output per hour, it helps absorb higher wages without pushing prices higher. In that environment, inflation stays contained, interest rates remain more stable, and markets tend to respond positively. Ultimately, inflation, productivity, and interest rates are interconnected. If productivity growth can keep pace with rising labor costs, the economy can move into a positive reinforcing cycle. If not, inflation pressures can re-emerge and lead to higher rates, creating a more challenging environment for both economic growth and market performance. The market’s recent broadening is an encouraging sign, and this week’s data will help determine whether that trend has the foundation to continue as 2026 unfolds. <a href="https://fiplanpartners.com/our-team/greg-powell/">Greg Powell, CIMA®</a> President and CEO Wealth Consultant Email Greg Powell <a href="mailto:[email protected]">here</a> <a href="https://fiplanpartners.com/our-team/bobby-norman-cfp/">Bobby Norman, CFP®, AIF®, CEPA®</a> Managing Director Wealth Consultant Email Bobby Norman <a href="mailto:[email protected]">here</a> <a href="https://fiplanpartners.com/team-new/trey-booth-cfa-aif/">Trey Booth, CFA®, AIF®</a> Chief Investment Officer Wealth Consultant Email Trey Booth <a href="mailto:[email protected]">here</a> <a href="https://fiplanpartners.com/our-team/ty-miller/">Ty Miller</a><a href="https://fiplanpartners.com/our-team/bobby-norman-cfp/">, AIF®</a> Vice President Wealth Consultant Email Ty Miller <a href="mailto:[email protected]">here</a>   Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Economic forecasts set forth in this presentation may not develop as predicted. No strategy can ensure success or protect against a loss. Stock investing involves risk including potential loss of principal. Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.The post <a href="https://fiplanpartners.com/the-race-between-inflation-and-productivity/">The Race Between Inflation and Productivity</a> first appeared on <a href="https://fiplanpartners.com">Fi Plan Partners</a>.