Economic Commentary
January 2026 economic data implied a solid growth outlook despite some noise. The widening trade deficit knocked Q4 GDP estimates down from 5% to around 4%, and perhaps even the high threes, but that is still strong growth, especially given the distortions from the government shutdown. We note that jobless claims have edged up toward 210,000—hardly a sign of labor market stress, but enough to confirm that conditions are no longer overheating. This is exactly the environment in which modest rate cuts can support small and mid-sized businesses that rely on bank credit rather than capital markets. On inflation, we did get a slightly higher-than-expected Producer Price Index number, but we are not alarmed. A portion of this is clearly tariff-related, and even in the worst case, the remaining pass-through is modest—perhaps another 0.3 percentage points on prices. When inflation is already running near the 2–3% range, this is well within the Fed’s target range, giving them no reason to raise, and keeping them on a path to reduce interest rates one or two more times this year. We also believe money supply growth, currently running around 4.5%, is a key signal. We would like to see money growth growing closer to 5–5.5%, and the current sluggishness argues for another 25–50 basis points of rate cuts to keep the economy on a healthy growth trajectory.
Investment Commentary
We continue to see equity markets rotating sharply, with dramatic dispersion within the Magnificent 7—Meta, a recent winner, and Microsoft, a loser—a clear sign investors are reassessing AI valuations and capital expenditures. We believe this is shaping up to be the year of the AI tools provider, not the AI producer, meaning returns will increasingly accrue to firms that supply AI hardware to boost productivity rather than those merely selling computing capacity. Capital spending will continue, but we expect the balance of returns to shift toward companies that supply the key components for building out AI infrastructure. On the bond side, markets initially sold off modestly as the odds of Kevin Warsh’s appointment firmed, as investors mistakenly framed him as overly hawkish. However, we disagree with that characterization—a Fed that is credibly tough on inflation is ultimately positive for bonds and the dollar, as artificially low rates are inflationary, and inflation is the true enemy of fixed income. With two major uncertainties—the Fed leadership transition and the risk of a government shutdown—having diminished, and tariffs remaining a wildcard but not a significant risk, we maintain that Warsh at the helm is a net positive for both bonds and equities, and we remain optimistic about the medium-term outlook for both.
Wealth Planning Commentary
Now that we are officially in 2026, let’s revisit the new income tax laws. The 2026 tax landscape is primarily defined by the One Big Beautiful Bill Act (OBBBA), passed in July 2025. This legislation prevented the massive “sunset” of the 2017 Tax Cuts and Jobs Act (TCJA) that was originally scheduled for January 1, 2026. Instead of taxes increasing for most Americans, the OBBBA made the current lower tax rates permanent and introduced several new targeted deductions.
Standard Deduction & Brackets
The standard deduction and income thresholds have been adjusted upward for inflation to prevent “bracket creep”.
- Standard Deduction: Rises to $16,100 for single filers and $32,200 for married couples filing jointly.
- Marginal Rates: The seven-bracket structure (10% to 37%) remains in place permanently.
- Senior Bonus: Taxpayers aged 65+ receive a new $6,000 “senior deduction” (up to $12,000 for joint filers) that stacks on top of the standard deduction, subject to income limits and phase-outs.
- Charitable Deduction Limitations: As previously discussed, itemizers will receive charitable deductions only for the charitable gifts above 0.5% of their AGI. Additionally, if your income puts you in the highest income tax bracket of 37%, these deductions will be limited to 35%.
New Targeted Deductions
Several new provisions offer significant relief for specific types of income and expenses:
- No Tax on Tips: Service workers can deduct up to $25,000 in qualified tips annually.
- Overtime Relief: Hourly workers can deduct the “premium” portion of their overtime pay (the half in “time-and-a-half”), up to $12,500 per individual.
- Auto Loan Interest: A new deduction of up to $10,000 is available for interest paid on loans for new vehicles assembled in the United States.
- SALT Cap Increase: The state and local tax (SALT) deduction limit jumped from $10,000 to $40,000 with phase-outs.
Investment & Wealth Transfers
High-net-worth individuals and retirement savers face new thresholds and rules:
- Estate Tax Exemption: The lifetime gift and estate tax exemption increased to $15 million per individual ($30 million for couples), made permanent by the OBBBA.
- Retirement Limits: 401(k) contribution limits rose to $24,500, while IRA limits increased to $7,500.
- Roth Requirement: High earners (over $150k) aged 50+ must now make all catch-up contributions to Roth (after-tax) accounts.
- Trump Child Savings Accounts: A new IRA-style account for children born 2025–2028, featuring a $1,000 initial government deposit.
We are happy to answer any questions you have, but as always, it is important to discuss all of these with your CPA.