Wall Street Has Worst Session Since April Meltdown

“This is ‘sell America’ again within a much broader global risk off,” said Krishna Guha at Evercore. “Global investors at the margin are looking to reduce or hedge their exposure to a volatile and unreliable U.S. What remains to be determined is the magnitude and duration of these dynamics.”

While traders have been able to get past a whirlwind of other unexpected developments this year — including the White House’s capture of Venezuela’s leader and its renewed attacks on the Federal Reserve — the size of the moves suggests that investors’ willingness to shrug off earlier shocks is beginning to erode.

As Trump heads to the World Economic Forum, he’s stoking a series of disputes with European leaders. Trump hectored the UK over plans to turn over sovereignty of Diego Garcia back to Mauritius, threatened eight European countries with tariffs for opposing his Greenland demands, and now he’s trying to force France to join his Board of Peace.

French leader Emmanuel Macron argued that Europe needs to develop more sovereignty to avoid “vassalization and blood politics.” Chancellor of the Exchequer Rachel Reeves said Britain wants to reduce tensions with Trump’s threat of tariffs. Canada stands completely behind Greenland and Denmark, said Prime Minister Mark Carney.

Treasury Secretary Scott Bessent urged calm, comparing the uproar over Greenland to what he called the “hysteria” that followed Trump’s announcement in April of sweeping tariffs. Trump is expected to arrive in Davos Wednesday.

“Tariff fears are back in focus and are now intertwined in geopolitical matters,” said Paul Stanley at Granite Bay Wealth Management. “While this adds a new wrinkle to the tariff issue, we believe cooler heads will prevail and that these tariff threats are being used as a negotiating tactic for control of Greenland.”

Meantime, the U.S. Supreme Court didn’t rule on Trump’s tariffs Tuesday, meaning it probably will be at least another month before a challenge to his signature economic policy is resolved.

The S&P 500 saw its biggest drop since October. Small caps also fell, but beat the U.S. equity benchmark for a 12th straight session. A gauge of tech megacaps lost 3.1%. Bitcoin sank below $90,000.

The yield on 10-year Treasuries climbed seven basis points to 4.29%. The slump in Japanese bonds deepened as investors gave a thumbs down to Prime Minister Sanae Takaichi’s election pitch to cut taxes on food.

The dollar slipped 0.3%. Gold rose past $4,700 an ounce to a record high. Oil topped $60 a barrel.

While traders have been able to get past a whirlwind of other unexpected developments this year — including the White House’s capture of Venezuela’s leader and its renewed attacks on the Federal Reserve — the size of the moves suggests that investors’ willingness to shrug off earlier shocks is beginning to erode.

“Tariff War 2.0, or Territory War 1.0 if you prefer, is in full swing and has potential to cause significant near-term market disruptions,” said Victoria Greene at G Squared Private Wealth. “A lot depends on how the next few weeks play out. So, we are not ‘panic selling,’ but watching carefully and ready for volatility.”

The market reaction is appropriate given the rapidly rising uncertainty, according to Michael O’Rourke at JonesTrading. If the tariffs go into effect or the U.S. illegally annexes Greenland, the drop in stocks should be much more severe, he noted.

There’ll be an “eagle eye” on Davos, what the U.S. does and what Trump says about its bid to acquire Greenland, according to Kyle Rodda at Capital.com.

“There’s a chorus calling that this will be a “TACO” moment: Trump will ‘chicken out’ when the blow back from his actions hits,” he added. “But there’s a chance that this won’t occur, especially given the U.S. president appears dead set on taking Greenland and the Europeans seem resolute in standing up to any bullying.”

Greenland’s prime minister said the Arctic island’s population and its authorities need to start preparing for a possible military invasion — even as it remains an unlikely scenario.

While markets have reacted, there’s clearly room for bigger moves if the rhetoric increases further, noted Jim Reid at Deutsche Bank.

“The blow-back from the Administration’s policies towards Greenland is significant,” said Matt Maley at Miller Tabak. “It is raising questions about the future of our relationships in Europe - and even the future of NATO — although that’s not a major concern yet by any means. However, the political and geopolitical landscapes are still becoming more volatile very quickly.”

The latest drama unfolds at a time when investors are the most optimistic on stocks in nearly five years, while protection against an equity correction is at the lowest since 2018, according to Bank of America Corp.’s latest fund manager survey.

With BofA’s indicator showing the market at a “hyper-bull level,” it’s time to increase risk hedges and havens, strategist Michael Hartnett said.

“Markets have reacted in a relatively sanguine fashion, and for now, we think that’s probably the right and expected reaction,” said Brian Levitt and Benjamin Jones at Invesco. “We knew the U.S. administration wanted to acquire Greenland, and President Trump has a clear history of threatening high tariffs and then walking them back.”

They also noted that these moves support their core views: A weaker U.S. dollar, higher precious metals prices, and potential outperformance by non-U.S. stocks.

'A Dangerous Bet'

Investors seeking to dump U.S. assets amid geopolitical uncertainty would be taking a “dangerous bet,” according to UBS Group AG Chief Executive Officer Sergio Ermotti.

“Diversifying away from America is impossible,” Ermotti told Bloomberg Television in Davos. “The U.S. is the strongest economy in the world, I wouldn’t really bet against that.”

Citigroup Inc.’s global banking head Vis Raghavan believes investors will pull through the initial “shock and awe” from Trump’s latest tariff threats.

“Hopefully sanity prevails and then you find some compromise, and folks will have to adjust, and this will land well,” Raghavan told Bloomberg Television in Davos.

European policymakers should fuel market turbulence to pressure Trump to back down from his Greenland claim, according to a senior executive at Allianz Global Investors.

“If I were an advisor to some European governments, I would say you almost need to create a little bit of market volatility because Donald Trump cares about that a lot, probably more than other politicians,” said Michael Krautzberger, chief investment officer for public markets at Germany’s largest asset manager.

“Our bet is that in the base case the severity will ultimately still be contained as investors bet on some version of a compromise,” said Guha at Evercore. “But the impacts would be very severe if this goes off the rails, and there will be long-lasting implications, including for the dollar.”

Political headlines are very unlikely to change the positive fundamental trends already in place, according to Paul Christopher at Wells Fargo Investment Institute, who believes the global economy is set to grow faster in 2026, especially in the U.S.

“Since April 2025, we have seen repeated tariff threats and counter-threats that ultimately have proven to be the opening bids in negotiations that have brought compromise,” he noted

Headlines out of Washington partially overshadowed the start of earnings season, and this week is looking like it could be a similar story, noted Chris Larkin at E*Trade from Morgan Stanley.

“The year is still young, but one of its most notable trends has been strength in small- and mid-cap stocks vs. tech softness and rotation away from the market’s longstanding megacap leaders,” Larkin said. “But with stocks starting the week in a defensive posture, it could be a challenge for recent winners to maintain their momentum without some clarity on the political front.”

U.S. vs. Rest of the World

After the S&P 500 rebounded from the brink of a bear market in April and spent the remainder of the year going from one record to the next, Trump billed it as a sign that he had transformed the U.S. — as he likes to put it — into the world’s “hottest” country.

Measured against stock markets from Tokyo to Frankfurt to financial capitals across the developing world, though, the verdict on Trump’s return to the White House is decidedly less triumphal.

In fact, equities worldwide — once the U.S. is excluded — have risen around 30% since he took office a year ago, roughly double the S&P 500’s gain, according to MSCI’s index. The U.S. hasn’t lagged that much during a president’s first year since 1993, when the nation was recovering from a recession and investors were flocking to growing markets overseas.

“We have anticipated a reversal out of high momentum stocks in January given current valuations, geopolitical and macroeconomic unknows, tariff rate uncertainty, and a midterm election cycle, none of which bode particularly well for robust market gains,” said Eric Teal at Comerica Wealth Management. “The emphasis should be on geographic and sector diversification and playing defense at this juncture.”

Opportunities exist outside of large cap technology including regional/mid-sized banks and quality small cap companies as well as consumer staples and healthcare that offer downside protection, he added.

“Beneficiaries of the rise in geopolitical tensions would be defense stocks, financials and gold, and we are long these in our portfolio,” said Mohit Kumar at Jefferies.

“Investors and the U.S. administration are likely to keep focus on the U.S. Treasury bond market, which weakened modestly in the wake of U.S. President Trump’s latest tariff threats,” said Paul Donovan at UBS Global Wealth Management. “The implications of additional tariffs are more US inflation pressures and a further erosion of the USD’s status as a reserve currency.”

Bessent said Trump could announce his pick for the next Fed chair as soon as next week, amid intense anticipation over the White House’s search for a new central-bank chief.

As Europe considers how best to respond to Trump’s latest threats over Greenland’s sovereignty, there’s one extreme potential countermeasure that’s fueling debate among investors.

European countries hold trillions of dollars of US bonds and stocks. That’s spurring speculation they could sell such assets in response to Trump’s renewed tariff war. hat’s easier said than done. The bulk of these assets are held by private funds outside the control of governments, and in any case such a move would likely hurt European investors too.

“While investors could remain worried about Liberation Day 2.0 selling from Europe over the U.S. threat to take Greenland, European investors likely have limited options if they wish to rotate out of Treasuries,” said Gennadiy Goldberg at TD Securities. “However, in the near-term, attempts at diversifying can pressure Treasuries.”

Investors are concerned that the threat of a 200% tariff on French wine and champagne could be the beginning of a further escalation in the trade tensions that many had hoped to leave behind in 2025, said Ian Lyngen at BMO Capital Markets.

“Greenland and tariffs have become the primary conversation at Davos and headlines from the event are serving as a reminder of the uncertainties associated with Trump 2.0 and the White House’s agenda,” he said.

“The threat of tariffs and the potential for EU retaliation are fueling fears of a renewed trade war,” said Fiona Cincotta at City Index. “There is hope that the U.S. administration could de-escalate at the World Economic Forum this week.”

Meantime, the Citigroup Inc. strategist who called European stocks’ outperformance has turned more cautious on the region, citing worsening relations between Brussels and Washington over Trump’s push to seize Greenland. Beata Manthey cut stocks in continental Europe to neutral from overweight.

“Investors should be prepared for ‘wildcard’ developments on tariffs and trade this year, as well as a range of potential market reactions,” said Anthony Saglimbene at Ameriprise. “At least early in the new year, the White House has laid down several wildcards that have forced investors to remain on guard.”

While the geopolitical risks are troubling in the short term, in the bigger picture, investors remain bullish on stocks and expectations for economic growth and strong earnings in 2026, according to veteran Wall Street strategist Louis Navellier.

“Odds are likely that today will be seen as a buying opportunity,” he said.

Corporate America is heading for another solid earnings season, according to Morgan Stanley’s Michael Wilson, after analysts set a low bar with expectations for the smallest profit increase in almost two years.

Data compiled by Bloomberg Intelligence show S&P 500 earnings per share are predicted to rise by 8.4% for the fourth quarter, the lowest since early 2024. Wilson said the stage is set for firms to beat estimates by over 5 percentage points, a rate he said would be above average.

U.S. stocks are heading into a high-stakes reporting season as a solid start to 2026 lifted the S&P 500 Index to record highs. With the gauge trading above long-term valuations, Wilson said companies will need to top expectations on both sales and earnings to drive “meaningful” outperformance.

“While we are mindful of potential short-term volatility, we expect global equities to rise further and recommend under-allocated investors to add exposure,” said Ulrike Hoffmann-Burchardi at UBS Global Wealth Management. “Those who are concerned of market swings should ensure they hold a well-diversified portfolio, and consider gold or capital preservation strategies to manage potential drawdowns.”

(Credit: Adobe)

Copyright 2026 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.