Despite a year of sticky inflation, unanticipated escalation in international relations across existing conflict zones and new flash points, and worries of a potential trade drop-off amid reciprocal tariffs and geopolitical strong-arming between the US and China, stocks have somehow managed not only to hold on to their post-pandemic gains but even went on to hit several new highs in 2025. The flagship US indices, the S&P 500 and Nasdaq 100, are both up around 30% and 50%, respectively, from early April lows, but now a fresh and fairly universally unexpected new saga in the Trump presidency threatens to end the bull run for good.
After the audacious and likely illegal regime change attempt in Venezuela, President Trump has turned his sights towards the US's former first ally and fellow NATO member, Denmark, in a move that could see the end of an enduring alliance between the US and Europe, as well as a serious disruption to trade between these huge historic partners. The impact on the affected US and European stock markets has been predictably large, but China has been a safe harbour for equity investors, as previous market paradigms are being thoroughly challenged. In addition to these major factors, Fed policy and macroeconomic factors will also play a significant role in determining where stocks will head in 2026.
P1: From old friends to new foes
Once the closest of allies, the US and Europe now find themselves at an impasse on the matter of Greenland. Unable to reach an agreement on the sale of the Danish territory in the North Atlantic that's rich in vital rare-earth metals, Trump took his favoured option of tariff threats to force the EU's 27 member-states to reconsider. The US President pledged 10% tariffs on eight EU nations starting on 1 February, rising then to 25% in June should no deal be forthcoming. Prior to Trump reaching a so-called "framework" of a deal, the Dow Jones Industrial Average slid more than 800 points, while the S&P 500 and Nasdaq Composite each dropped more than 2% when trading resumed on Tuesday, 20 January.
But far from a mere knee-jerk reaction to the rhetoric, many analysts fear this could become a long-term trend that could end the multi-year bull market in US equities. The Cboe Volatility Index (VIX), known colloquially as Wall Street's fear gauge, spiked to highs last seen in November. According to Krishna Guha, Head of Global Policy and Central Banking Strategy at Evercore ISI: "This is 'sell America' again within a much broader global risk off." Investors in Europe are also spooked, with futures for the European Stoxx 50 and the UK's FTSE 100 indices now down 1.51% and 0.48%, respectively. Meanwhile, the French CAC 40 fell 2.1%, and the German DAX dropped by 1.35% at the opening of trade today. The result of the US invading and taking possession of Greenland would be devastating for the European economy, not only as a result of the vast mineral wealth revenue that would be lost but also in the less quantifiable form of a loss of confidence in the security and integrity of the Old Continent. Much will also depend on whether Trump's intimidation of the Fed leads to the rate cuts he wants. If Europe makes rare-earth concessions on Greenland and the Fed chief delivers on softer policy, Western stocks could avoid a deeper correction.
P2: China ready to cash in on fallout
One global superpower was understandably rather pleased with the news of the rise in US-Europe tensions. Chinese stocks responded positively to the development, with the Hang Seng and Mainland indices rising sharply on Tuesday and Wednesday. The possibility of a long-term dispute over Greenland means that China is likely to continue accepting the influx of risk-hungry investors put off by lower fixed income yields. Goldman Sachs, for one, thinks the MSCI China Index will rise 20% this year, and this comes after a 28% rally in 2025. The bank's strategist, Kinger Lau, states that: "Our expected equity gains in 2026 are almost entirely earnings-driven." This means that the feeling is that Chinese companies will be able to turn the short-term opportunities of this lovers' tiff into enduring economic and strategic gains.
There's also the close to$7 trillion in Chinese time deposits coming due this year, and this great wall of capital is a fresh reason to think Chinese stocks can continue to grow despite the geopolitical risks still at play. What's more, it's expected that President Xi Jinping's Communist Party will soon add fresh stimulus to maintain 5% growth. Even after roaring to a$ 1 trillion trade surplus despite Trump's tariffs, the CCP has identified boosting domestic demand as its number-one priority in its latest five-year plan (2025-2030). Global investment funds are correspondingly reappraising their stance on China, with Fidelity analyst George Efstathopoulos recently telling CNBC that China is no longer "uninvestable". And Chinese equities are certainly a much better value than their US counterparts. Indeed, with P/E ratios of 23, 21 and 23, respectively, Alibaba, Baidu and Tencent are all trading at significantly lower multipliers versus Amazon, Apple and Alphabet, whose numbers are all in the early thirties. Whether the recent growth can be sustained throughout 2026 remains to be seen, but the fundamentals are certainly there.
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