Headlines compete for attention
This past week was another reminder of how headline-sensitive markets are. But at the same time, they are not headline-driven. Concerns over escalating rhetoric about Greenland and the catfighting in Davos briefly rattled investors, but tensions died down as a Greenland deal was announced. Attention quickly returned to the familiar anchors of economic data, earnings, and interest rates. While volatility picked up, the attractive narratives of steady growth, cooling inflation pressures, and improving market breadth remain intact.
Stocks finished the week lower, but well above their weekly lows. Year-to-date, all major U. S. indices are still positive thanks to the partial recovery at the end of the week. The episode reinforced a key lesson practiced throughout 2025: the quickly shifting tides of White House policy can be paddled safely if you keep one eye on the horizon and don’t fight the current too hard.
Geopolitical tensions burned brightly but briefly
Markets tumbled early in the week after President Trump threatened new tariffs on several European trading partners tied to negotiations over Greenland. The move reignited concerns about trade friction, inflation risk, and fracturing global stability. The S&P 500 suffered its largest single-day decline since October as investors rushed to reassess known and unknown risks.
What stood out was not just the equity selloff, but the unusual behavior across other asset classes. The U. S. dollar weakened sharply and didn’t recover even after tensions eased, posting its worst weekly decline since last June. Policy uncertainty continues to be a frustrating risk for global investors, with little clue as to what the next trigger will be.
Despite both domestic and foreign investors becoming more accustomed to these snap crises, impatience is giving way to weariness. The 0-to-60 crises and policy whiplash are creating lengthening hangovers for traditionally defensive assets like U. S. Treasuries. Although inconsequential in size, the announcements of Danish and Swedish pension funds selling Treasuries demonstrate that certain players are leaving the table.
Nonetheless, the situation over the North Atlantic territory de-escalated quickly. President Trump later announced progress toward a framework addressing U. S. security interests in Greenland, and the planned tariffs were rescinded. Stocks rebounded midweek, recovering a meaningful portion of their losses and allowing strategists to refocus on the upcoming Federal Reserve meeting.
The brief episode carried an important signal. International investors appear increasingly sensitive to U. S. policy volatility. Talk of a mass exodus from U. S. assets remains premature, but governmental and foreign institutional voices are growing louder and more irritated. Fund flows this year show stronger interest in Europe and Japan than in U. S. equities, suggesting diversification is happening but not due to recognizable panic selling. International stocks continue to outperform U. S. stocks.
Gold (and silver) were the clearest beneficiaries of the uncertainty. Prices surged to new highs, extending a strong rally that has now carried on well into the new year. Gold and other metals have earned their role as diversifiers, but the speed of growth argues for some measure of caution. The long-term believer has been vindicated, but the new investors may not necessarily be prepared to stick around through volatility.
Economic fundamentals are still in the driver's seat
With this episode of geopolitical theater behind us, markets returned their focus to economic data and earnings. The tone there was largely constructive this week. Incoming data continues to point to a U. S. economy growing at a solid pace, supported by the ever-resilient consumers and stable labor conditions.
Unemployment claims remain low, signaling that layoffs are still contained. January has had a habit of marking the annual low in initial jobless claims over the past two years. Given the Wile E. Coyote-style drop in claims, it wouldn’t surprise me to see a burst higher through the end of Q1. Not that I think that is anything to worry about. We’re a long way off from the danger zone of jobless claims.
Consumer confidence improved to a five-month high, and spending data point to continued momentum through the end of last year. Together, these indicators suggest that economic growth remains durable, even as the labor market shows signs of cooling.
Unfortunately, inflation remains sticky. The Fed’s preferred measure, core personal consumption expenditures (PCE), held at 2. 8% year over year, still well above the central bank’s long-term target. The Cleveland Federal Reserve projects December PCE to remain flat at 2. 8% for the prior twelve months, while numerous banks forecast accelerating PCE inflation in December. This keeps pressure on policymakers to move carefully.
The Federal Reserve meets this week, and expectations are clear. Rates are expected to remain unchanged after three cuts over the past four months. This meeting is an opportunity for the committee to set the stage for policy in 2026. Investors will be listening closely to Chair Powell’s comments for clues about how the Fed views the balance of risk between stubborn inflation and a slowing labor market. What might otherwise have been a sleepy meeting will be made more interesting by the ongoing investigations and the speculation over Powell’s successor.
Earnings, AI, and the changing of the guard
Earnings season is now firmly underway, and early results have been encouraging. Roughly four out of five reporting companies exceeded profit expectations, consistent with Q3. This week’s slate of reports from mega-cap technology companies will be especially important.
Investors are still looking for evidence that heavy AI investment is translating into sustainable revenue growth and profitability. While the technology sector is still expected to lead earnings growth this year, the performance gap between mega-cap tech and the rest of the market has narrowed. In the background, there are gnawing concerns over stalling or cancelled datacenter commitments. If not this quarter, I expect this to start coming up on earnings calls.
Source: @MacroEdgeRes
Market leadership has begun to rotate. Smaller companies and more cyclical sectors have shown strength, reflecting rising confidence that economic growth and easing financial conditions can support profits beyond a narrow group of stocks. The Mag-7 has been broadly flat year to date, while mid-cap and smaller stocks have gained traction.
Make no mistake, I’m not beating the bearish drum. I’m beating the diversification drum. This is likely a trade of quick gains in favor of longer-term strength and sustainability. A portfolio dependent on a handful of names can rise and fall quickly. A market driven by broader participation tends to be healthier.
Yes, a faltering Mag-7 will hurt the S&P 500-only crowd and contribute to U. S. stock underperformance. At the same time, it may extend this bull market years longer than if we ran headlong into a blowoff top. This market behavior certainly reinforces the case for diversification at a time when valuations are stretching.
What this means for investors
The coming week brings two major tests for markets. The Federal Reserve meeting will set the tone for interest rate expectations, while high-profile earnings reports will provide a clearer read on corporate profitability, particularly within the AI-related industries.
For investors, last week offered more reassurance that the markets are resilient enough to withstand continued uncertainty. We aren’t one slip from disaster. Volatility picked up, but it did not derail the underlying trend. Economic data continues to support a constructive outlook, and market pullbacks tied to headlines have so far proven short-lived.
I remain cautiously optimistic. There is no shortage of potential headwinds economically or geopolitically. It would be foolish to say it’s all clear sailing ahead. However, it is these risks that keep exuberance from getting out of hand and can allow the market to make slow, grinding progress.
Improving growth, gradually easing rate pressure, and solid earnings support the case for staying invested, while recent rotations argue against overconcentration. If you believe that corporations will be earning more in five years than they do today, then you have no reason to fade a bullish outlook. A diversified portfolio with exposure across large-cap stocks, mid-cap equities, international markets, and selective alternatives appears best positioned to navigate both opportunity and uncertainty in the months ahead.
