President Trump started 2026 with a bang. Markets have been reacting (again) to abrupt policy signals from Washington, while January earnings season put fresh pressure on “AI narrative” stocks to justify both spending and valuations.

The question isn’t just whether an “AI bubble” exists. It’s whether the pace of AI investment is translating into durable revenue and cashflow, quickly enough to support current pricing across the wider US tech complex, not only the “Magnificent Seven”.

United States

The year opened with a major geopolitical shock: US forces captured Venezuela’s President Nicolás Maduro in early January. (Reuters) Commentators have framed this as an opening move in a broader attempt to reassert US influence in Latin America and reduce Russian and Chinese leverage across energy, shipping and finance. (Reuters)

Central America’s proximity to critical routes (Panama Canal, Caribbean lanes, Pacific ports) makes it strategically important for both licit trade and sanctions evasion. Russia’s “shadow fleet” and offshore structures remain a live concern in the region, while China’s development lending and infrastructure footprint continues to grow. (Reuters) The risk is that coercive moves, without credible commercial alternatives, push governments towards China rather than away from it.

A few days later, Trump rattled markets by reviving his push on Greenland. While the rhetoric cooled, the episode still triggered renewed attention on Arctic security and the wider strategic contest in the High North. NATO has now launched a coordinated Arctic presence initiative, explicitly framed as a stabilising response to the Greenland tensions. (Reuters)

Growth with a more brittle labour market

Despite persistent “recession talk”, the US economy held up better than many expected through 2025, and early 2026 positioning still reflects that resilience.

Two themes are emerging:

1. A “jobless expansion” feel
   Output and earnings strength have not translated into broad-based job growth at the same pace. That makes the cycle more fragile: weaker household income growth can undermine consumption even if headline GDP remains decent. It’s also consistent with firms pursuing efficiency (including automation and AI-led productivity), while keeping payroll tight.
2. A more “K-shaped” distribution of outcomes
   Higher-income households continue to benefit from equity-led wealth effects, while lower and middle-income households feel inflation and labour-market softness more acutely. That mix tends to weigh on confidence and discretionary spending, even when markets look upbeat.

Equities: new highs, then scrutiny

The S&P 500 briefly traded above 7,000 on 28 January but finished the day just below the level. (Reuters) The milestone mattered psychologically, but the bigger story is what followed: the market quickly reverted to earnings discipline.

Microsoft’s results were the clearest example. The stock fell sharply after investors reacted to the combination of heavy AI capex and slower cloud growth. (Reuters) In contrast, Meta surprised positively and rallied. (Reuters) With Alphabet and Nvidia reporting in February, the market’s tolerance for “AI spend now, monetise later” is likely to be tested again.

Fed independence as a volatility risk

The Fed became an active political fault line in January. Chair Jerome Powell issued a public statement after the Department of Justice served subpoenas tied to testimony about Federal Reserve building renovations, which he framed in the wider context of political pressure on monetary policy. (Federal Reserve)

Trump has nominated Kevin Warsh to succeed Powell when Powell’s term as Chair ends in May, subject to Senate confirmation. (ABC News) Markets have not priced a major institutional rupture yet, but a perceived weakening of Fed independence would usually increase term premia and volatility over time.

UK

UK equities had a brief wobble around the Greenland rhetoric, but the move passed quickly.

The FTSE 100 crossed 10,000 for the first time on 2 January. (Reuters) (It has since moved higher still, with fresh records set into February.) (Reuters)

Inflation and rates

UK CPI inflation rose to 3.4% in the 12 months to December 2025. (Office for National Statistics) The surprise uptick complicates the near-term rate-cut narrative, particularly if services inflation stays sticky. The market impact is less about one print and more about whether easing expectations get pushed out again.

Housing

The housing market steadied in January after softness into late 2025. A modest monthly rise is consistent with a “muddle through” housing base case for 2026, but affordability remains sensitive to rates and wage growth.

Politics and positioning

Keir Starmer’s January approach has looked deliberately pragmatic: avoid unnecessary escalation with Washington while trying to open channels elsewhere, including a highly symbolic visit to Beijing. That kind of positioning matters more for medium-term trade and investment tone than for immediate market pricing, but it’s part of the backdrop investors are watching.

Europe

Eurozone growth surprised slightly to the upside at 0.3% in Q4 2025, with resilience despite tariffs and political noise. (Office for National Statistics) Germany and France avoided the worst forecasts, while Spain continues to argue it is setting the pace among developed peers.

Europe has also benefited from portfolio diversification flows out of the US, with some investors treating the region as a relative “safe haven” when US policy uncertainty spikes. The constraint remains the familiar one: trend growth is still low and structurally challenged in key sectors (autos, heavy industry), so the room for positive surprise may be limited unless productivity and investment lift.

Far East

China

China navigated 2025 better than the most pessimistic scenarios implied at the height of trade-war fears, but structural headwinds remain: demographics, a property slowdown, and subdued domestic consumption. Exports continue to do heavy lifting, with re-routing and diversification towards emerging markets and regional partners supporting volumes.

China’s fiscal stance has also remained expansionary, with bond issuance used more for refinancing and stabilisation (local government debt, property sector stress, bank recapitalisation) than for traditional “big bang” infrastructure. That’s consistent with a policy shift towards targeted industrial support and consumption measures, but it also highlights that the underlying adjustment is still ongoing.

Japan

Japan drew attention after large bond issuance and the call for a snap election on 8 February. Markets are watching debt dynamics, potential tax changes, and defence spending commitments closely, particularly given the sensitivity of JGBs and the yen to confidence shocks.

Emerging Markets

Latin America sits in the crosshairs of US policy following Venezuela. Investment sentiment may stay cautious in the near term, with Mexico especially exposed if trade and energy flows become more politicised. South America’s China linkage is a counterweight: countries with strong commodity and infrastructure ties may continue to lean towards whichever partner offers the more credible investment and trade package.

Indonesia experienced a sharp credibility hit after MSCI flagged concerns around transparency and free float, raising the prospect of a downgrade towards frontier classification. That is the kind of “index plumbing” issue that can trigger forced flows, even when the domestic story is more nuanced.

Summary

We said in January that investor patience would be tested in 2026. The first month delivered far more headlines than a typical start-of-year.

Despite geopolitical turbulence and Fed drama, markets have been remarkably resilient. Part of that looks like investors treating a share of Trump’s rhetoric as negotiating posture rather than immediate action, hence the “TACO” shorthand doing the rounds. That can be a stabiliser until it isn’t: if a future escalation lands as policy rather than theatre, volatility can reprice quickly.

For now, the market’s focal points remain straightforward:

• US earnings delivery versus AI capex intensity
• Any genuine damage to Fed credibility
• Inflation persistence and how quickly rate cuts are delayed or delivered
• Geopolitical shocks that become trade, energy, or shipping constraints