Markets Broaden Amid Geopolitical Uncertainty and Mixed Economic Signals

January 20, 2026

Financial Markets

Equity markets finished the week mixed but close to record highs, as participation continued to broaden beyond a narrow set of leaders. Large-cap indices posted modest declines, while small-caps and the equal-weighted S&P 500 advanced on the week. Notably, small-cap stocks[1] have now outperformed the cap-weighted S&P 500 for 11 consecutive sessions—the longest such streak since 1990. This extends a trend that has been building for several weeks, with stocks further down the market-capitalization spectrum outperforming mega-caps, particularly the “Magnificent Seven” that have dominated returns over the past two years. From a market structure perspective, this rotation is generally constructive, as it reduces reliance on a narrow group of leaders.

Fourth-quarter earnings season began in earnest, with mixed but generally constructive results from the banking sector. Investment banks emerged as relative bright spots, with Morgan Stanley and Goldman Sachs rebounding after early weakness tied to initial money-center bank reports. However, bank stocks also faced policy-related headwinds, as executives at Citi and Wells Fargo warned that proposals to cap credit card interest rates at 10% could meaningfully restrict credit availability and weigh on economic activity. These concerns came amid already elevated expectations, which set a high bar for earnings. Technology sentiment improved later in the week following a strong earnings report from Taiwan Semiconductor Manufacturing Company, which delivered a sizable fourth-quarter beat, raised long-term revenue growth targets, and guided to significantly higher capital expenditures for 2026—reinforcing confidence in sustained AI-driven demand and helping temper fears of an AI investment bubble.

Equity markets are under pressure following the long holiday weekend, as renewed trade tensions tied to President Trump’s threats to impose tariffs on several European nations over Greenland have resurfaced. On Saturday, the President warned that eight countries—including Denmark, France, Germany, and the United Kingdom—could face 10% tariffs beginning February 1st, escalating to 25% by June, unless U.S. demands related to Greenland are met. The announcement triggered a sharp risk-off reaction, pressuring global equities and driving safe-haven assets such as gold and silver to record highs. European officials signaled potential retaliation, with reports suggesting the EU is considering up to €93 billion in countermeasures, including restrictions on U.S. firms’ access to European markets and possible use of the bloc’s anti-coercion instrument. While subsequent comments from U.S. and European leaders suggested efforts to de-escalate, including planned discussions at Davos, markets remain sensitive to the risk of further retaliation. Some strategists have cautioned that Europe’s substantial ownership of U.S. equities and Treasuries represents a far more disruptive lever than trade flows, underscoring how geopolitical brinkmanship continues to inject episodic volatility into otherwise resilient markets.

Economics

December’s Consumer Price Index was the week’s key economic release and came in largely in line with expectations, offering little to disrupt the prevailing inflation narrative. Core CPI rose 0.2% month over month, slightly cooler than consensus, while headline CPI increased 0.3%, matching expectations. On a year-over-year basis, core inflation eased to 2.6%, modestly below consensus and prior readings, while headline inflation held at 2.7%. Under the surface, core goods prices were flat, while core services rose 0.3%. Shelter inflation increased 0.4% and was the primary driver of the monthly gain, as anticipated after an assumed zero reading in October. Overall, the report was noisy but unsurprising, with consensus holding that the Federal Reserve’s focus is more squarely on labor market conditions than on incremental inflation progress. Market pricing for near-term easing reflected this view, with January rate-cut odds remaining very low.

On the consumer front, data were modestly supportive. Retail sales exceeded expectations, with headline sales rising 0.6% month over month in November, and existing home sales also surprised to the upside. Additional anecdotal support came from retailer commentary at the ICR Conference, where management teams reported resilient holiday spending, in-line-to-better-than-expected earnings trends, and optimism about prospective fiscal stimulus. Encouragingly, macro commentary from bank management skewed positive. JP Morgan highlighted continued strength in consumer and small-business activity, supporting stable credit conditions and spending trends. Bank of America similarly pointed to solid consumer health and growth across all major borrowing categories.

Small business sentiment also showed tentative improvement. The NFIB optimism index edged up to 99.5, driven by a notable rise in the share of firms expecting better business conditions. The uncertainty index fell to an 18-month low, reflecting easing cost pressures and labor challenges. Still, surveys revealed lingering caution, with taxes cited as the top concern and mixed expectations for future sales volumes.

The Federal Reserve’s January Beige Book echoed this steady-but-uneven tone. Economic activity grew at a slight to modest pace across most districts, an improvement over prior reports. Hiring was essentially flat, with firms focused on backfilling positions rather than expanding headcount, consistent with a “low hiring, low firing” labor environment. While price pressures were generally modest, tariff-related cost concerns were a recurring theme, and some businesses began passing higher costs through to customers.

Conclusion

Markets continue to display resilience, supported by broadening equity leadership, improving sentiment beyond mega-caps, and generally constructive earnings commentary. Small-cap outperformance and strength in cyclical areas suggest investors are increasingly confident in the durability of economic growth.

At the same time, the economic backdrop remains nuanced. Inflation is moderating, but unevenly; consumers are gradually regaining real purchasing power, and labor market conditions point to cooling rather than deterioration. The Federal Reserve remains firmly data-dependent, with policy debates reflecting both progress on inflation and caution about labor risks.

Looking ahead, earnings, policy developments, and the evolution of consumer and labor data will remain key drivers. Geopolitical tensions—including renewed trade threats and the risk of retaliation from key U.S. allies—remain a source of episodic volatility and could weigh on sentiment if they escalate. Even so, the broader market focus remains anchored in fundamentals—growth, profitability, and the path of monetary policy.

[1] Measured by the Russell 2000 index.

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