Weekly Investment Perspective

U.S. equity markets posted mixed results last week amid a choppy and headline-driven trading environment. The Dow Jones Industrial Average fell 0.3%, the S&P 500 declined 0.4%, and the Nasdaq Composite slipped 0.7%, while the Russell 2000 rose over 2%, continuing the recent theme of improving market breadth and relative strength in smaller-cap stocks. Markets struggled to find direction as policy uncertainty and escalating geopolitical headlines outweighed an otherwise constructive economic backdrop, including a slightly cooler-than-expected CPI report (core CPI rising 2.6% year-over-year) alongside solid retail sales that pointed to continued consumer resilience. That fragile equilibrium is being tested again to start this week following renewed geopolitical headlines over the weekend, led by President Trump’s push to acquire Greenland and the associated threat of tariffs on Europe, which is weighing on risk sentiment in this week’s early trading.

Geopolitics has quickly become the dominant macro theme to start the year, with trade policy once again at the center of market volatility. Over the weekend, President Trump reiterated his intent to pursue Greenland’s acquisition, threatening 10% tariffs on several European nations beginning February 1, escalating to 25% by June if negotiations stall. European leaders have signaled potential countermeasures, reportedly considering up to €93 billion in retaliatory tariffs, restrictions on U.S. companies’ access to EU markets, and use of the bloc’s anti-coercion trade tools. While there is ongoing discussion around de-escalation—particularly with European leaders set to engage U.S. officials at the World Economic Forum in Davos this week—the episode reinforces how quickly policy rhetoric can spill over into markets and raise near-term risk premiums.

Bond markets have reacted accordingly. Long-term U.S. Treasury yields are backing up with the 10-year yield pushing toward 4.3% in early trading, its highest level since early September, reflecting both inflation sensitivity to tariffs and rising term-premium concerns. The move has been even more dramatic overseas, particularly in Japan, where government bond yields surged following political developments tied to potential tax cuts. The 40-year Japanese government bond yield moved above 4% for the first time on record, contributing to global rate volatility and reinforcing that sovereign bond markets, not just equities, are increasingly sensitive to political developments.

Beyond trade, several additional political crosscurrents remain in focus. Attention is building around President Trump’s potential pick for the next Federal Reserve Chair, with the final contenders being BlackRock’s Rick Rieder, National Economic Council Director Kevin Hassett, Fed Governor Christopher Waller, and former governor Kevin Warsh. At the same time, the administration’s growing “affordability” push, framed as prioritizing Main Street over Wall Street, is becoming a more prominent policy pillar, with implications for sectors ranging from financials to healthcare and housing. This theme has already surfaced in recent rhetoric around credit card rates, buybacks, and corporate pricing power. Overlaying this backdrop is continued uncertainty around the Supreme Court’s pending ruling on the administration’s use of emergency powers under the International Emergency Economic Powers Act (IEEPA), which could shape the durability of tariff authority later this year. While these issues have not yet driven sustained market moves, they add to the broader backdrop of policy uncertainty that investors are grappling with early in 2026.

Earnings season has begun on a more constructive note beneath the surface. Early fourth-quarter results from major banks were met with a negative market reaction, in part due to elevated expectations and lingering policy overhangs related to President Trump’s call for a 10% cap on credit card interest rates. However, management commentary broadly pointed to a resilient economy, stable consumer spending, and benign credit trends, reinforcing the view that the U.S. economy entered the year on solid footing. Meanwhile, strong earnings results and guidance from Taiwan Semiconductor Manufacturing Company, the leading manufacturer of advanced AI chips, added confidence to the durability of the AI investment cycle.

Looking ahead, the coming week is likely to remain dominated by geopolitics and earnings. Global leaders and policymakers will gather in Davos, where markets will be listening closely for any signs of trade de-escalation—or escalation—between the U.S. and Europe. On the corporate front, earnings season will pick up, with a heavy slate of reports from financials, industrials, healthcare, and technology companies. Key economic data, including Core PCE inflation, jobless claims, and PMI surveys, will also provide important checkpoints on inflation and growth trends as markets continue to reassess the outlook for Fed policy.

2026 The Long View | First Merchants Bank