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Executive Summary

• Geopolitics and Trade Policy Re-Emerge as Market Drivers: Escalating, then rapidly de-escalating, U.S.–EU tariff threats tied to Greenland triggered sharp volatility, technical damage, and a swift relief rally across risk assets.
• AI, Semiconductors, and the Cost of Compute: Diverging signals from chipmakers, memory suppliers, and enterprise software reinforced that AI remains a secular growth theme, but one defined by supply constraints and widening dispersion.
• Inflation Steady, Growth Resilient, Fed on Hold: Core PCE remained anchored near 2.8%, labor markets stayed firm, and monetary policy expectations were largely unchanged, allowing sector rotation to reflect sentiment rather than macro stress.

Geopolitics, Tariffs, and the Return of Headline Risk

The defining catalyst for market volatility this week was the abrupt reintroduction of geopolitical risk through renewed U.S.–EU trade tensions. Markets opened the week with their worst session of the year after President Trump called for an additional 10% tariff on imports from eight NATO members opposing the U.S. acquisition of Greenland. The magnitude of the selloff was notable. On Tuesday, the S&P 500 fell 2.1%, the Nasdaq Composite dropped 2.4%, and the Dow Jones Industrial Average declined 1.8%. Both the S&P 500 and Nasdaq broke below their respective 50-day moving averages and briefly slipped into negative year-to-date territory.

Selling pressure was broad-based and indiscriminate. Ten of eleven S&P 500 sectors finished lower, with information technology (-2.9%) and consumer discretionary (-2.8%) leading the declines. Mega-cap stocks amplified the move, as NVIDIA fell more than 4%, Broadcom dropped over 5%, Oracle declined nearly 6%, and Tesla slid more than 4%. The absence of any meaningful “buy-the-dip” activity underscored how quickly positioning unwound once policy uncertainty re-entered the narrative.

Safe-haven flows confirmed the risk-off tone. Gold futures surged $170, or 3.7%, to $4,765 per ounce in a single session, while the CBOE Volatility Index jumped nearly 29% to above 20. Treasury yields briefly spiked amid concerns about capital flows and retaliatory tariffs. Consumer staples finished marginally higher, the only S&P 500 sector to escape the selloff, while utilities and real estate remained weak under the weight of real-rate pressure.

Midweek, sentiment reversed just as abruptly. At the World Economic Forum in Davos, President Trump clarified that the U.S. would not use force to acquire Greenland, triggering a sharp rebound in equity futures. Later, the administration announced a framework agreement with NATO leadership and suspended the tariffs that were scheduled to take effect on February 1. Bloomberg subsequently reported that the European Union considered unfreezing and ratifying its trade agreement with the U.S., further easing near-term concerns. By Thursday, the S&P 500 had reclaimed its 50-day moving average near 6,830, and volatility retreated, though it remained elevated relative to prior weeks.

Despite the apparent resolution, the episode reinforced that geopolitics has reasserted itself as a first-order market variable. The speed and magnitude of both the selloff and rebound illustrated how quickly policy headlines can overwhelm fundamentals, particularly in markets characterized by concentrated leadership and elevated valuations.

Investment Implication: Maintain diversification and liquidity buffers, as geopolitical headline risk can trigger abrupt drawdowns even in fundamentally sound markets, while selectively using volatility-driven dislocations to add to high-quality positions.

AI, Semiconductors, and the Growing Dispersion Beneath the Surface

While geopolitics dominated headlines, leadership beneath the surface remained tied to artificial intelligence, semiconductors, and the rising cost of compute. That said, this week made clear that the AI trade is no longer monolithic. During Tuesday’s selloff, AI-linked mega-caps were among the hardest hit, yet the PHLX Semiconductor Index declined only 1.7%, outperforming the broader technology sector. Intel even gained more than 3% that day following an upgrade from HSBC, highlighting early signs of internal dispersion.

Comments from Micron executives provided a critical counterbalance to fears of near-term demand softening. According to Bloomberg, Micron management described the current AI-driven memory shortage as “unprecedented,” noting that demand for high-bandwidth memory (HBM) tied to AI accelerators is expected to exceed supply through at least 2026. That commentary had immediate market impact. SanDisk surged nearly 10% in a single session, Micron outperformed peers, and memory-related equities showed relative resilience even as broader technology stocks sold off.

The strength extended into semiconductor equipment and storage names leveraged to AI capital spending rather than consumer electronics cycles. Lam Research, KLA, and Applied Materials continued to benefit from expectations that advanced-node complexity and HBM-intensive architecture will drive higher equipment spending per wafer. Analysts also emphasized that these companies have materially reduced exposure to China over the past two years, shifting revenue toward U.S., Taiwanese, and Korean customers aligned with leading-edge data center and AI infrastructure buildouts.

As the week progressed, dispersion became more pronounced. Intel surged more than 11% on Wednesday and was up over 15% for the week before reversing sharply on Friday after issuing disappointing near-term guidance. Despite the pullback, management commentary emphasized strong long-term demand, a repaired balance sheet, and expanding foundry interest, underscoring that execution risk—not end-market demand—remains the central debate.

At the same time, enterprise software continued to face valuation pressure. Analysts questioned whether generative AI tools are structurally compressing traditional SaaS pricing models, leading to multiple compression across names such as Salesforce, ServiceNow, Adobe, and Atlassian. Multiple firms saw price target reductions during the week, reflecting uncertainty around long-term monetization rather than near-term earnings misses. This stood in contrast to select mega-cap platforms such as Microsoft, Alphabet, and Meta, where AI integration is viewed as defensive and margin accretive.

Late in the week, sentiment improved again as reports indicated that Chinese technology firms may resume orders for NVIDIA’s advanced AI chips, highlighting both the global demand backdrop and the ongoing sensitivity of the sector to regulatory and geopolitical developments.

Investment Implication: Favor AI-related companies with demonstrated pricing power, tangible infrastructure exposure, and strong balance sheets, while maintaining a selective and risk-aware approach to enterprise software businesses facing margin and valuation uncertainty as AI adoption evolves.

Inflation, Growth, and a Market Anchored by Policy Stability

In contrast to the week’s volatility, the macroeconomic backdrop remained remarkably stable. Core PCE inflation held at 2.8% year over year in November, unchanged from September and October. Monthly core PCE readings came in at 0.2%, matching expectations and reinforcing the view that inflation is sticky but contained. Personal spending rose 0.5% in both October and November, signaling continued consumer resilience.

Labor market data further supported this stability. Weekly initial jobless claims remained near 200,000, consistent with a low-firing environment rather than an overheating labor market. Continuing claims held below 1.9 million, and the University of Michigan consumer sentiment index improved to 56.4, though it remained subdued relative to historical norms.

Sector performance reflected this balanced macro backdrop. Cyclical sectors such as energy and consumer discretionary benefited as risk appetite improved. The energy sector received an additional tailwind from sharply rising natural gas prices, which surged more than 25% during the week amid forecasts for a significant winter storm expected to impact dozens of U.S. states. Some regions are projected to receive up to two feet of snow, raising concerns about energy demand spikes and supply disruptions. Oil prices also moved higher, with crude briefly topping $61 per barrel.

In contrast, defensive sectors lagged during the relief rally. Utilities, real estate, and consumer staples underperformed, reflecting continued sensitivity to elevated real rates. Financials weakened late in the week, driven primarily by company-specific earnings disappointments, including Capital One’s post-earnings decline following weaker results and its announced acquisition of Brex.

The key takeaway is that macro stability acted as a shock absorber. Even during the sharp fall, there was little evidence of a reassessment of the underlying growth or inflation trajectory. Price action was driven by headlines, positioning, and sector-level narratives rather than a fundamental macro shift.

Investment Implication: With inflation and growth trends broadly stable, portfolio positioning should emphasize earnings quality, balance sheet strength, and sector selection rather than short-term macro timing, recognizing that strong economic data can occasionally act as a headwind for equities by tempering expectations for future rate cuts.

Chart of the Week

Gold’s recent acceleration this week ends the rising wedge that has been developing since the high in October. The end suggests a price target of $5031 in the near term.

Source: StockCharts, Ryan Puplava, CMT® CTS™ CES™

Bottom Line

This week reinforced that markets are being shaped by three forces simultaneously: fragile geopolitics, a maturing and more selective AI investment cycle, and a steady but unspectacular macro backdrop. Navigating this environment requires discipline, selectivity, and an acceptance that volatility is likely to remain a feature rather than a bug in 2026.

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