Fixed Income & Equities Markets Week in Review

During the latest holiday-shortened week, US stock indices experienced volatile but ultimately mixed performance, shaped primarily by geopolitical drama. The S&P 500 and Nasdaq Composite were modestly negative for the week (through Thursday’s market close). The Dow Jones Industrial Average (Dow) and the Russell Mid Cap Index were modestly positive, but the Russell 2000, was the “star of the show,” gaining 1.53%.

The week’s most significant event was the Greenland geopolitical drama. Over the weekend, President Trump announced that eight European countries, including Denmark, France, Germany, and the UK, would face 10% tariffs starting February 1st, and escalating to 25% on June 1st if Greenland was not sold to the US. Following these statements, European leaders said they were considering significant tariffs in retaliation. They also indicated a possible pause on approving the EU’s trade deal with the US. This caused a sharp market downdraft on Tuesday, with the major indices selling off by between 1.2% and 2.4%.

Wednesday brought a “walk back” and softening on these threats – and a subsequent two-day market rally. President Trump indicated that he agreed with NATO Secretary General Mark Rutte on a “framework” for a potential Greenland deal, prompting the US to hold off on imposing new tariffs. During his speech at the Davos summit on Wednesday, the president noted that this ruled out the possible use of excessive force and that he will seek immediate negotiations. This news seemed to put to rest the countermeasures floated by European leaders. However, questions remain about what the proposed structure of a possible deal might look like.

As noted above, small cap stocks provided leadership this week. But, they are also on a tear to start the year. Through Thursday’s market close, the small-cap dominated Russell 2000 gained 9.57% month to date, far outperforming the next-closest index shown in the table below (the Russell Mid Cap Index, up 4.97%). Impressively, it has outperformed the S&P 500 by 8.51% and the Nasdaq Composite by 8.72%. It is on track to outpace the S&P 500 for a 14th consecutive session, the longest streak since 1996. Reasons for the small cap performance surge include: 1) some investors may be rotating out of large cap technology stocks that have dominated performance the past couple of years, owing to concern about a possible artificial intelligence (AI) related bubble; 2) others may be taking advantage of the wide valuation gap between small cap stocks and large cap growth stocks; 3) the continued expectation that the Federal Reserve (Fed) will lower rates further during 2026 (smaller companies rely more on borrowing, so lower rates reduce financing costs and can boost earnings prospects); and 4) analysts are forecasting that earnings growth for smaller companies could accelerate this year, and possibly rise faster than those of large cap companies.

Turning to next week, two prominent events are looming: 1) the Fed’s Federal Open Market Committee (FOMC) policy meeting, where they will announce their latest decision on interest rate policy (and with expectations that they will not cut rates at this meeting); and 2) a ramp up in 4th quarter earnings season, as 103 of the S&P 500 companies report results. Some large cap technology & growth companies will be a prominent part of this “information parade.”