A Spirit of Dialogue vs. Spirited Dialogue

In the current geopolitical zeitgeist, Davos didn’t change the macro picture; it just revealed the underlying fissures on a larger stage. With our usual nonpartisan lens, we evaluate the world on a probabilistic basis, considering scenarios that may develop while recognizing how difficult predictions may be. The two largest risks that we see coming out of the WEF are increased trade tensions and what that may mean for inflation. Last week, we discussed how capital markets can mimic a Saint Bernard; the baseline is stoic and calm, but with enough tugging on the proverbial fur, reactions can suddenly emerge.

To be sure, this week revealed that markets do have concerns about a perceived change in security relationships — including the North Atlantic Treaty Organization (NATO) — and if countries will look to actively diversify away from holdings like U.S. Treasuries or the dollar (more on this to follow). In the few hours since the Davos forums officially closed, while some felt a major crisis was diplomatically avoided regarding Greenland, others worry that policymakers and companies attending or observing may ultimately alter their strategic choices on trade and supply chains, recognizing those are not snap-of-the-fingers changes. A more isolated world means risks of higher production costs that either businesses or consumers must endure, impacting corporate profits or consumer spending, which ultimately manifests in lower earnings. This is one of the reasons why having a multifaceted portfolio matters in the current environment. 

While equity market performance is often the focus, we emphasize the bond market as the most important market to gauge investor sentiment. For context, U.S. bond yields, which move in the opposite direction of price, remain at historically subdued levels. The U.S. 10-year Treasury Bond, which we term the cornerstone of global finance (as it remains the basis for pricing mortgages and many other consumer borrowing tools), has sported a sub-5% yield since 2007. More recently, over the past three months, the 10-year Treasury has ranged narrowly between 4.0% and 4.3% and, as of Friday, was near the top of that range.

Some notable developments from the week included a much-publicized move by a Danish pension fund to sell all of its U.S. Treasury holdings and news that India’s U.S. Treasury holdings have dropped by 26% from their 2023 peak, based on Treasury holdings data released this week. While India still has substantial U.S. Treasury holdings, one concern we have is if the tone emerging from Davos adds to what investors are calling the “Sell USA” trade. Historically, U.S. government bond markets have enjoyed ample liquidity thanks to broad global holders: As such, we will continue to monitor flows. We would view a breech above 5% as a signal that bond markets have concerns about geopolitics as well as national debt levels, and we will keep you posted on our views. We should note that the corporate bond market — particularly investment grade bonds — continues to see strong issuance and demand, and our focus last week on credit spreads remaining very low by historical standards holds. 

As of the end of the week, we are just 12% through earnings season, as measured by the S&P 500, so it is still early. Thus far, sales have grown by 7% and earnings by 18%. The “surprise” — or the difference between analyst expectations and reported results — for sales has been a mere 1%, but it has been notably larger for earnings at 8% (based on Bloomberg data as of January 23).

Financial Services has had the highest percentage of total companies reporting thus far, with about a third of the companies in the index reporting. Banks have reported consumer activity as healthy and resilient, yet several questioned momentum heading into the new year given some macro headline concerns about employment and cost pressure trends. On balance, however, it was a good close to 2025.

We also heard from several Industrial companies, and the overall trend points to a sluggish backdrop amidst CFO restraint on spending plans and uncertainty around tariff pressures. Given how broad the industry is and the range of end markets, we don’t want to jump to conclusions, but pared with top-down macro data we evaluate, this remains a slower growing sector with significant company-specific considerations. That said, sales activity is decent, and order books reveal reasonable momentum. Next week, over 20% of the S&P 500 will report earnings, and we will have detailed thoughts — especially around Technology. 

While very “rear-view mirror” in nature, U.S. third quarter GDP data coming in at a 4.4% annualized rate reiterated that consensus growth estimates were too pessimistic relative to economic reality. Personal consumption and net exports were notable contributors to GDP while inventories were a slight headwind. The University of Michigan consumer sentiment data on Friday suggests that consumer momentum may continue, as respondents reported heightened expectations for current and future conditions while also ratcheting down their inflation expectations.

Through a global lens, European inflation data came in below expectations and under the 2% hurdle targeted by the European Central Bank, and United Kingdom inflation reflected a more mixed picture, but in balance with expectations. As previously discussed, consumer activity within the Eurozone remains a focus for us: While European equity markets have advanced thanks to better earnings growth and corporate governance, demographics and productivity growth have been challenged. We want to continue to see organic growth and spending trends ratchet higher, and positive German consumer expectational data suggests some ongoing strength. The aggregate global picture continues to reflect consumers still spending, businesses reflecting cautious optimism and policymakers gauging inflation amidst a challenging macro backdrop.