By Sam Goldfarb
Call it the glass half-full market.
In recent weeks, government data has been mixed, showing both disappointing job gains and robust economic growth. But U.S. investors have been focusing on the positive side of things, piling into bets that suggest that they have strong confidence that the economy will keep powering forward.
The Dow Jones Industrial Average is off to its best start to a year since 2003. Investor demand has been particularly strong for the stocks of companies exposed to swings in the economy such as retailers. Despite expectations for some further interest-rate cuts, yields on longer-term U.S. Treasurys remain stubbornly high -- a sign investors don't expect a recession that would trigger deeper cuts.
Investors generally explain their optimism in two ways: First, they think recent economic data has been reasonably encouraging, with the slowdown in job growth largely caused by decreased immigration and government layoffs rather than a sharp downturn in private-sector labor demand. Second, they are hopeful that the economy can improve from here, thanks in part to reduced trade policy uncertainty and the lagged impact of last year's tax cuts.
"We're looking at resilient real and nominal growth in the U.S.," said Blerina Uruçi, chief U.S. economist at T. Rowe Price, "so, the stock market will do well in that environment historically."
Wall Street's rosy outlook was on full display Friday.
New data showed that the economy added a seasonally adjusted 50,000 jobs in December, below economists' expectations for a 73,000 increase. Job gains for the previous two months were also revised lower by a combined 76,000.
Still, stocks rallied, with the Dow pushing closer to the 50000 milestone. A big reason was some brighter aspects of the report, including a drop in the unemployment rate, which some see as the best gauge of labor market strength.
In an encouraging sign for investors, recent stock-market gains have been broad-based -- not just powered by the tech sector, as has been the case over much of the past few years.
Information technology, in fact, has been the second-worst-performing sector in the S&P 500 this month, outperforming only utilities. The top-four-performing sectors have been materials, consumer discretionary, industrials and energy -- all seen as particularly sensitive to the growth outlook.
One tailwind for stocks has been expectations for more interest-rate cuts this year. Cyclical stocks started outperforming last month after Federal Reserve Chair Jerome Powell signaled openness to more cuts if there are further signs of weakness in the labor market.
Investors are also much more optimistic about the outlook from Washington, D.C., this year, with the November midterm elections putting pressure on President Trump to pursue more growth-friendly policies following last year's trade wars. In recent weeks, the administration has been pushing an affordability agenda, scaling back some tariffs while introducing policies intended to push down mortgage rates.
Trump has also floated the idea of using revenue from tariffs to fund rebates to taxpayers -- an idea that some investors believe could eventually gain traction despite an initial cool reception from congressional Republicans. At the same time, a potential Supreme Court ruling against some of Trump's tariffs would also be largely welcomed on Wall Street.
Optimism about the economy isn't only reflected in stocks. Bonds have sent similar signals, with the gap widening between the yields on short- and long-term Treasury yields, or what is known on Wall Street as a steepening yield curve.
Since the end of July, bets on rate cuts have caused the yield on the 2-year note to fall more than 0.4 percentage point to just over 3.5%. The yield on the 10-year note has declined less than 0.2 percentage point to a little under 4.2%.
Investors say there are several possible explanations for the widening gap, including some negative ones. Those include increased worries on Wall Street about whether the Fed can retain its independence amid pressure from Trump to sharply cut rates.
Mostly, though, investors see the steepening curve as a positive sign. Yields on Treasurys largely reflect expectations for what rates set by the Fed will average over the life of a bond. When the Fed is cutting rates, that tends to drag down short-term yields. But longer-term yields can lag behind, as long as economic growth is solid and investors see a risk that rates could move higher again in the future.
"U.S. growth continues to be in a very good place," said Olumide Owolabi, head of the U.S. rates team at Neuberger Berman. "It's going to be difficult for [longer-term yields] to trade so low when the economy is growing at the pace at which it's growing."
Some investors argue that markets might reflect a little too much confidence.
Brian Jacobsen, chief economic strategist at Annex Wealth Management, said that corporate profits could be hurt if businesses start overinvesting because of new tax incentives or a fear of losing out to competitors in the artificial-intelligence build-out.
"I think that the economic outlook is a positive one, but my big concern is that it's already priced in," he said.
Write to Sam Goldfarb at sam.goldfarb@wsj.com
(END) Dow Jones Newswires
January 11, 2026 22:00 ET (03:00 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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