U.S. Markets Slide Amid Political Uncertainty and Earnings Scrutiny

U.S. equities this week 

The U.S. equity markets were quite volatile over the shortened trading week. Mid-cap stocks declined the most, with the S&P MidCap 400 posting the steepest drop at 0.55%. The Dow Jones Industrial Average and the S&P 500 also moved lower, falling 0.53% and 0.35%, respectively. Losses were more modest among small caps, as the Russell 2000 slipped 0.32%, while the Nasdaq Composite finished slightly in the red. U.S. Equity markets closed on Monday in observance of Martin Luther King Jr. Day.

In 2025, the S&P 500 had an 18% return, marking three consecutive years of outsized gains, leaving investors questioning whether there is much room left to rise. Data is showing that these recent gains have become far more dependent on actual earnings growth. The share of S&P 500 returns driven by earnings growth rose from just 27% in 2023 to 84% in 2025, showing that profits are driving returns, not higher valuations. Consensus forecasts call for around 15% earnings per share growth, suggesting that earnings delivery will be the primary driver of any additional market upside. With valuations already elevated, the market’s ability to move higher will largely depend on companies meeting these profit expectations.

U.S. Political Headlines

Recent Trump statements and actions have rattled global markets, adding to investor uncertainty. While he ruled out seizing Greenland by force and delaying a proposed 10% punitive tariff on EU imports, his broader trade rhetoric continues to weigh on sentiment. Pension funds in Denmark and other Scandinavian countries—including Norway, Sweden, and Iceland—have signalled plans to reduce U.S. Treasury holdings, highlighting cracks in U.S.-European relations and raising concerns about potential downward pressure on Treasuries and the dollar. 

The U.S. Administration expressed concerns that China’s trade deal with Canada could be an attempt to circumvent U.S. tariffs by routing goods through Canada. In response, President Trump threatened to impose a 100% tariff on all Canadian imports if such a deal went forward, highlighting his aggressive trade stance. Against this backdrop, U.S. 10-year Treasury yields rose above 4.2%, while the dollar index slipped toward 97.

U.S. Earnings

This week’s earnings headlines were dominated by Netflix (NFLX). After hours on Tuesday, they released their quarterly report, which smashed its subscriber record, surpassing 325 million members and beating expectations across earnings and other key financial metrics. Despite the strong results, the stock still gapped down around 6% when markets opened the next day. Investor caution arose over pessimistic disclosures regarding future 2026 earnings and increased costs over their current proposed Warner Bros acquisition. Analysts say the market has become too accustomed to ‘Exceeding Expectations’ and the current stock value doesn’t represent their true advertising value.

Intel (INTC) soared 12% mid-week in anticipation of its earnings release on Thursday, which the company subsequently beat, exceeding expectations by $0.3 billion. This marks a continuation of Intel’s solid performance, following significant support from the U.S. government and a $5 billion investment from NVIDIA (NVDA) that occurred earlier last year. However, investor reaction was sharply negative, as weak guidance for the first quarter of 2026 and ongoing supply chain and manufacturing challenges overshadowed the solid quarter. As a result, Intel’s stock plunged by around 17% in one of its steepest single‑day drops in years, with markets focusing more on the cautious outlook than the earnings beat itself.

Commodities 

Gold reaches new highs over 5,000$ amid geopolitical uncertainty and the significant weakening of the US dollar. Silver and platinum prices also reached record highs on Friday. While precious metals gave back some gains after U.S. President Donald Trump announced a trade deal related to Greenland, uncertainty remains around the details of the agreement and the United States’ intentions regarding the sovereignty of the Danish territory. 

A severe winter storm across the northern United States has driven a sharp surge in demand for natural gas, pushing prices significantly higher. The Henry Hub benchmark recorded one of its strongest weekly performances on record, climbing above $5 per MMBtu, a rise of around 60% over the week. The impact has extended beyond the U.S., with higher prices and renewed concerns over U.S. gas infrastructure spilling into European markets. As a result, EU natural gas prices climbed above €40 per MWh, reaching their highest level in seven months.

Australia 

On Thursday, the ABS produced strong employment figures of 4.1%, down 0.2% from the previous figures and smashing the predicted 4.4%. This unexpected shift set expectations for the RBA to move to a tightening policy and start raising rates for the first time since November 2023. This expectation gave an immediate lift to AUD, with AUD/USD trading 0.4% higher on the day. This has placed heightened importance on the January CPI release on the 28th, which is now seen as a key determinant in shaping the Reserve Bank of Australia’s next interest rate decision.

Europe

European equities struggled this week, with Italy’s FTSE MIB leading European losses, dropping 2.11%, followed by Germany’s DAX, which fell 1.57%, and France’s CAC 40, down 1.40%. The UK’s FTSE 100 also retreated, slipping 0.90%. Similarly, in the currency market, the pan-European STOXX Europe 600 Index fell 0.98% in reaction to growing global geopolitical tensions.

UK

The UK labour market showed signs of weakness in the three months through November, with slower wage growth adding to concerns. The International Labour Office reported that the unemployment rate remained at a five-year high of 5.1%, with job losses concentrated in retail and hospitality. Meanwhile, annual pay growth excluding bonuses eased to 4.5% from 4.6%, and private-sector wages—closely watched by the Bank of England—rose just 3.6% year-over-year, the slowest pace since November 2020.

On the consumer side, retail sales rebounded slightly in December, rising 0.4% after two consecutive months of decline. However, inflation unexpectedly accelerated to 3.4% from 3.2% in November, driven by higher airfare and tobacco costs. The Bank of England continues to aim for a return to its 2% annual inflation target by April or May.

Japan

The Nikkei 225 slipped 0.17%, while the broader TOPIX dropped 0.79%, weighed down by domestic political uncertainty in Japan. The Japanese government bond (JGB) yields are spiking, adding to concern over the country’s already fragile finances. The Bank of Japan (BOJ) on Friday left the cash rate unchanged at 0.75% as anticipated.

Japanese political and financial uncertainty’s effect on the bond market 

Yields on Japan’s 10-year government bonds rose more than 8 basis points to 2.26%, reaching their highest level since 1997. Long-term bonds also saw significant moves, with the 30-year JGB climbing 25 basis points in a single day—its largest one-day gain since the U.S. “Liberation Day” tariff announcements in April 2025—as concerns are mounting over Japan’s high debt levels. The surge reflects investor unease surrounding Takaichi’s proposed temporary cut to the consumption tax.

Addressing these market jitters at the World Economic Forum in Switzerland, Finance Minister Satsuki Katayama emphasised the government’s commitment to stabilising bond markets. She described Japan’s fiscal management as “consistently responsible and sustainable,” stressing that current policies are not expansionary.

China 

There were mixed results for Chinese markets this week, reflecting signs of uneven economic growth. The CSI 300, the primary onshore benchmark, slipped 0.62%, while the Shanghai Composite bucked the trend, rising 0.84%. In Hong Kong, the Hang Seng Index edged lower, falling 0.36%.

China’s statistics bureau reported that the economy met the government’s full-year target for 5.0% growth in 2025, but the rate of expansion slowed in the fourth quarter to the slowest since China reopened from the COVID pandemic. This marked the third straight year that the country met its official growth target of around 5%. Nominal economic growth, which is unadjusted for price changes, reached 4% in 2025, the slowest pace since 1976, excluding 2020, when the pandemic began.

Other indicators point to reducing domestic demand despite pockets of strength in production. Industrial output grew 5.2% year on year in December, primarily supported by export demand and manufacturing activity. In contrast, retail sales rose just 0.9%, missing expectations and marking the slowest pace in years, highlighting ongoing weakness in household spending. Fixed asset investment contracted 3.8% in 2025, the first annual decline since the late 1990s, driven by a sharp downturn in real estate investment and continued caution among private investors.

Together, these figures underline an uneven recovery, with export-led output offset by weak consumer demand and faltering investment. This backdrop continues to present challenges for policymakers as they seek to sustain growth amid global protectionism and a sluggish property market.

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