Geopolitical tensions once again stole this week’s headlines. U.S. equities, bonds, and the dollar plunged on Tuesday in response to President Trump announcing higher tariffs on EU countries over their objections to U.S. control over Greenland but later reversed course as a framework had been reached. With international tensions easing, attention shifted back to Q4 2025 earnings results, which continued to shine despite notable disappointment from chipmaker, Intel. Investors now await news from the Fed’s first meeting of 2026 where it is widely expected to hold rates steady.
Week’s Key Items:
- S&P Flash PMIs signaled sustained business growth in January. The Flash US Composite PMI rose to 52.8 on the month, up from December’s 52.7. Numbers above 50 indicate expansion while those below signal contraction. The headline number was driven by a slight improvement in the manufacturing sector which offset no change on the services side.
- Consumers are feeling better about the economy. The University of Michigan’s Surveys of Consumers said its Consumer Sentiment Index increased to 56.4 this month, up from December’s 52.9. Sentiment improved across the board in January, though concerns about high prices and the labor market lingered.
- Inflation drifted slightly from the Fed’s 2.00% target level in November. The personal consumption expenditures price index, a measure the central bank uses as its main forecasting tool, showed inflation rose 2.80% year-over-year (YOY). That was up from October’s 2.70% reading. Despite concerns over higher prices, consumers continued to spend as personal consumption expenditures rose 0.50% in both months.
Stocks Modestly Lower, Rebounding from Early Week Volatility
Rising geopolitical tensions rocked Wall Street again this week, leading the Dow Jones Industrial Average to shed 725 points on Tuesday. The drop was driven by President Trump’s announcement that eight NATO members’ U.S. imports would face higher tariffs until a deal was reached for the purchase of Greenland. That sent markets into a tailspin as the “Sell America” trade gathered steam during the session, sending U.S. equities, bonds, and the dollar lower. Fortunately, those concerns were put at ease on Wednesday when Trump announced the administration would not impose the levies, citing that a framework had been reached for a future deal on the island. The news culminated in an 895-point, two-day rally for the Dow, erasing Tuesday’s losses. The Russell 2000 Index got an even bigger boost, rallying to a new all-time high as investors increased their bets on the small cap and domestically focused index as it looks to be well positioned to outperform this year on healthy U.S. growth and corporate earnings. Friday’s session saw stocks relatively unchanged as investors caught their breath and prepared for the impact of the impending polar vortex. Economic news largely took a back seat to geopolitical headlines this week but those reports showed a resilient economy heading into the new year. Flash PMIs and consumer sentiment pointed to steady demand which should help lift corporate results. On the earnings front, Q4 2025 earnings continued to track higher, now expected to climb 9.10% YOY. Lower rates and continued consumer spending make it a favorable backdrop for equities. Despite the positive corporate tailwinds, Washington headwinds could continue to drive markets in the short-term. Next week, the Fed holds its first meeting of the year with markets widely expecting no change in interest rates. However, investors will be tuned into Fed Chair Jerome Powell’s post-meeting comments given his increasingly vocal criticism towards the Administration. Although his tenure as Fed Chair draws to a close, Powell will still likely face tough questions on the Fed’s independence and the timing for more interest rate cuts later this year.
The Week Ahead
It’s shaping up to be a big week for markets as the Fed holds its first FOMC meeting of the year. On the economic front, investors will pour over reports on inflation and durable goods.
Student Loan Changes in 2026
This year marks several major changes to student loans that will affect millions of Americans. According to the Education Data Initiative, federal student loan debt totals in the U.S. average $30.4 billion per state. The average federal student loan debt per borrower is more than $30,000 in every state in the country except North Dakota where it’s $29,115. Residents in the District of Columbia have the nation’s highest federal student loan debt at an average of $54,561 per borrower. The biggest change occurring this year regarding student loans is the expiration of a temporary tax exemption for student loan forgiveness. In 2026, forgiven loans will revert to being treated as taxable income, resulting in the issuance of an IRS Form 1099-C that requires borrowers to report the amount of forgiven or cancelled debt as income on their tax return. Borrowers who qualify for loan forgiveness in 2026 may wish to discuss this with their tax advisor because every situation is unique, and some states may impose state income taxes on federal student loan forgiveness.
Student loan forgiveness occurs when the government cancels some or all of a borrower’s federal student loan balance, so the borrower is no longer required to repay it. This applies only to federal student loans, not private loans. Over the past five years, tens of millions of borrowers received partial or full student loan forgiveness. There are several paths to loan forgiveness. One is the Public Service Loan Forgiveness (PSLF) program where people with public service jobs (government workers, teachers, military, nurses, nonprofit employees, social workers, etc.) who have made 120 qualifying payments (about 10 years’ worth) could have the remaining balance of their loan forgiven. This program was introduced to encourage Americans to pursue public service careers with the promise of student debt relief. The latest guidance from the Department of Education indicates that the PSLF will remain tax free. The Income-Driven Repayment (IDR) Forgiveness program forgives the remaining balance on student loans for those who have been making payments for 20 or 25 years (depending on the plan). Borrowers with an IDR repayment plan will begin paying taxes on the amount forgiven this year. There are other types of loan repayment plans, and borrowers should speak with their tax professional about any loan forgiveness and tax implications that may be relevant to their situation.
Changes to Repayment Plans
Beginning on July 1, 2026, new borrowers will have two repayment options, including the following:
•The Standard Repayment Plan, which involves fixed, equal payments that pay off the loan over a 10-year period. This option remains unchanged.
•The new Repayment Assistance Plan (RAP), which was created under the OBBBA passed in July 2025, and will be the only income-driven repayment (IDR) plan available on new loans. Under RAP, payments will be 1-10% of a borrower’s annual adjusted gross income, based on earning level, with $10 flat payments for those earning $10,000 per year or less. To attain forgiveness, the borrower will have to make regular payments for 30 years.
Separately, last month, the Department of Education announced it is ending the SAVE (Saving on a Valuable Education) plan that was introduced in 2023. Borrowers enrolled in SAVE will need to transfer to another repayment plan.
Key Takeaway
In 2026, many borrowers will be affected by student loan forgiveness being taxable. A borrower with $50,000 forgiven could owe approximately $10,850 in federal taxes. Borrowers should consult with their advisors to ensure they are prepared.