Markets Rebound as Tariff Threats Ease; Inflation and Fed Policy Still Pose Risks

The U.S. and European equity markets saw a sharp recovery after President Trump backed off his previously threatened tariffs on several European countries related to his plans concerning Greenland. Investors interpreted that decision—alongside the announcement of a “framework” deal involving NATO and Arctic security—as a de-escalation of trade tensions, prompting broad-based gains across indices. While markets now appear to have questionably factored in the potential downside of such geopolitical friction, this cycle of threat → volatility → partial retreat (dubbed the “TACO trade”) introduces real risks to investor confidence if futures do not present clarity.

Inflation data reinforce the narrative that downside risks for the economy are more likely to center on policy missteps than outright economic collapse. The core personal consumption expenditures (PCE) price index—the Fed’s preferred inflation measure—rose 2.8% in November year-over-year, matching expectations, with a 0.2% month-over-month increase and steady (or slightly slowing) contributions from goods vs. services inflation. Headline inflation also rose 2.8%, indicating that broad inflation pressures remain intact. This complicates monetary policy: with inflation sticky, the Fed appears likely to hold rates steady at its upcoming late-January meeting rather than pursuing rate cuts.

At the corporate level, investor focus is narrowing to earnings results, guidance, and cost pressures. Procter & Gamble’s Q2 fiscal reports beat narrowly on EPS but missed revenue expectations; however, positive segments (beauty and healthcare), and unchanged 2026 guidance led Jefferies to reaffirm a Buy rating, with the view that the “worst is behind us” for P&G. Other names saw mixed reviews—Hyatt was downgraded at Evercore citing flat ex-U.S. RevPAR growth and margin weakening in its Americas business; Datadog was upgraded by Stifel but with a diminished price target, indicating tempered optimism amid competitive and pricing pressures.

Strategic implications include heightened sensitivity to U.S.-EU trade policy, implications for supply chains and global commerce, inflation risk persisting through early-to-middle 2026, and potential divergence in sector leadership. Sectors with exposure to consumer staples and inflation-linked costs may face pressure; conversely, small-cap and regional plays appear to be benefiting lately, as evidenced by the Russell 2000’s strong performance.

Open questions linger: What are the concrete terms of the Greenland “framework” and mineral rights claims? How will European countries retaliate, if at all? Will persistent core inflation force the Fed into delay on rate cuts? How resilient will consumer demand­—wage-adjusted—be if after-tax incomes continue to stagnate and borrowing costs remain elevated? These questions are crucial for forecasting earnings, risk premia and asset allocations going forward.