Northwestern Mutual Warns on Valuations as Markets Rally on Cooling Inflation

Markets ended last week on a strong note as softer inflation data lifted sentiment, but Northwestern Mutual’s chief investment officer, Brent Schutte, urged investors to remain alert to risks as the economy heads into 2026.

A sharper-than-expected fall in the Consumer Price Index was the key driver of Thursday’s reversal, with headline inflation easing to 2.7 percent and core inflation dropping to 2.6 percent. 

Schutte, in his latest weekly commentary note, highlighted that both readings were well below consensus but cautioned that survey distortions during the government shutdown may have introduced a “temporary downward bias” because data collection coincided with Black Friday discounting.

Labour market signals also remained mixed. While private-sector payrolls continued to grow, the unemployment rate rose to 4.6 percent and the household survey has recorded net job losses this year. 

Schutte highlighted persistent divergence between payrolls and household employment and pointed to Federal Reserve concerns that payrolls may have been overstated since early 2024.

Still, falling bond yields and earlier rate cuts have provided support for both equities and fixed income, according to Northwestern Mutual. 

The 10-year Treasury yield has retreated to about 4.15 percent, bolstering areas that struggled with higher borrowing costs. Broader market participation also improved, with Micron’s double-digit surge illustrating how AI investment is beginning to benefit a wider section of the value chain.

Yet Schutte emphasised a measured approach. “We continue to watch for both known and unknown risks. Equity valuations are high, and the balance between elevated inflation and softening labour markets remains delicate,” he said. 

“This caution does not imply a need to shift portfolios dramatically but rather reinforces a timeless principle: ensuring that risk exposure aligns with long-term financial plans and that portfolios remain appropriately diversified.”

Schutte concluded that periods of concentrated market leadership are not unusual, but history suggests they don’t persist indefinitely. 

“Today’s market leaders are unlikely to be tomorrow’s stalwarts,” he stated.