Last week was exhausting. Not because of economic fundamentals. Not because of earnings. Because Donald Trump threatened to slap tariffs on eight NATO allies over Greenland, tanked the market 2%, then reversed course 24 hours later after a "framework deal" that nobody can actually explain.

Welcome to 2026.

The S&P 500 finished the week at 6,915, roughly flat after Tuesday's panic and Wednesday's relief rally. But underneath the calm surface, something more important is brewing. The Fed meets today and tomorrow (January 27-28), and the "higher-for-longer" narrative is hardening into concrete.

THE GREENLAND CIRCUS

Let me walk you through what happened, because the speed of this was remarkable even by Trump standards.

Saturday, January 17: Trump announces 10% tariffs on Denmark, UK, Germany, France, Sweden, Norway, Netherlands, and Finland starting February 1st - rising to 25% in June - unless they support his plan to acquire Greenland. European leaders respond with "we will not be blackmailed." NATO Secretary General calls emergency consultations. Markets aren't open, but futures start wobbling.

Tuesday, January 21: US markets open and immediately crater. S&P 500 falls 2.06% to 6,797. Nasdaq drops 2.39% to 22,954. This is the worst single-day performance since October. The VIX spikes above 20. Treasury yields jump. The dollar weakens. Classic risk-off.

Why did it hit so hard? Because this wasn't theoretical trade war escalation with China, this was threatening our closest military allies, the countries we've defended for 75 years through NATO, over a territorial dispute that makes zero strategic sense. Denmark's a treaty ally. We already have military bases in Greenland. The whole thing felt unhinged, and markets priced in geopolitical chaos premium.

Wednesday, January 22: Trump speaks at Davos, says he won't use military force to take Greenland (that's reassuring?). Then announces he reached a "framework of a future deal" with NATO Secretary General Mark Rutte on Arctic security. Tariffs canceled.

Markets rip higher. S&P recovers to 6,915. Nasdaq jumps back to 23,501. The entire selloff reversed in 36 hours.

What was the "framework deal"? Nobody knows. Trump called it "the concept of a deal" and said it would last "forever." NATO said it focused on "collective Arctic security efforts." Denmark said Greenland still isn't for sale. Basically, everyone agreed to keep talking and Trump declared victory.

The market basically said ok, good enough. On to the next crisis.

WHAT THIS ACTUALLY TELLS US

Strip away the theatrical absurdity, and here's what reality matters and what we can take away:

1. Policy volatility is the new normal. Markets can whipsaw 2-4% in days on policy pronouncements that get reversed before implementation. This isn't "Trump being Trump", instead it's structural uncertainty that makes position sizing and risk management more critical than stock picking.

2. Markets are conditioned to expect walk-backs. Tuesday's selloff wasn't as severe as it could've been because traders have learned that Trump's most aggressive threats often don't materialize. That's... not exactly reassuring. It means we're in a pattern where actual policy changes get discounted until proven real, which creates massive information inefficiency.

3. The Greenland demand exposed real geopolitical fractures. Even after the "deal," European leaders are furious. French President Macron said "no intimidation will influence us." Sweden's PM said "we will not allow ourselves to be blackmailed." To be honest, even if the market shook it off, this is arguably the most strained US-Europe relations since Suez in 1956. That has long-term trade implications regardless of whether Trump actually imposes tariffs.

THE ECONOMIC DATA UNDERNEATH

While everyone obsessed over Greenland, the actual economy continued its slow deceleration.

Manufacturing PMI (January flash reading): 51.9 That's up from December's 51.8, but barely. It's the second-weakest reading since July. New orders rebounded after falling in December, but employment growth slowed to a six-month low. Output accelerated slightly. Translation: manufacturing is growing, but just barely, and momentum is fading.

The S&P Global report noted: "Despite the slight uptick, business confidence deteriorated, reflecting softer order inflows and persistent uncertainty surrounding tariffs and trade policy." There's that word again. More uncertainty.

ISM Manufacturing (December): 47.9 This is the manufacturing index that actually matters to the Fed, and it's in contraction territory (below 50). December marked the 10th consecutive month of manufacturing contraction. New orders at 47.7. Employment at 44.9. This isn't exactly a sector thriving.

Why the divergence with S&P Global's PMI showing 51.9? Different methodologies, different panel composition. But the directional message is the same. Currently, manufacturing is weak, demand is soft, and tariff uncertainty is freezing capital investment decisions.

THE FED MEETS THIS WEEK (AND DOES NOTHING)

The FOMC convenes today (January 27) and tomorrow (January 28). Chairman Powell's press conference is Wednesday at 2:30pm ET.

The outcome is 97% certain according to CME FedWatch - rates stay at 5.25-5.50%. No cut.

Here's what I'm watching for in Powell's commentary:

1. Does he acknowledge the manufacturing weakness? The Fed's dual mandate is maximum employment and stable prices. Manufacturing employment is contracting (11 of the past 12 months per ISM). If Powell brushes this off as "sector rotation" rather than cyclical weakness, it signals the Fed prioritizes inflation control over growth support. That's hawkish.

2. How does he frame inflation progress? Core PCE (the Fed's preferred measure) was 2.8% in November. Services inflation at 3.4%. That's sticky, and way stickier than the Fed projected six months ago. If Powell emphasizes "greater confidence needed before adjusting policy" (the language from December FOMC minutes), it confirms we're in higher-for-longer territory through at least mid-2026 and possibly the full year.

3. Does he comment on fiscal policy? This is the wild card. Lyn Alden's latest research (which I'll get to) argues we're in the era "fiscal dominance" - where government deficits drive economic activity more than Fed policy. If Powell acknowledges this dynamic even implicitly, it's a major shift in Fed communication.

4. What's his reaction function to geopolitical chaos? The Greenland episode is over (for now), but Trump's making similar noise about Canada (100% tariffs threatened over a China trade deal). Does the Fed view this as signal or noise? Powell's unlikely to comment directly, but his framing of "risks to the outlook" will tell us whether the Fed is discounting Trump's threats or actually worried about implementation.

My base case is that Powell holds rates, emphasizes data-dependence, notes inflation progress is "welcome but not yet sufficient," and dodges questions about Trump. Markets yawn. Equities drift sideways.

But the big risk in this case is if Powell sounds more hawkish than expected, specifically if he pushes back against market pricing of two rate cuts in 2026. In that situation you'll see growth stocks get hammered. Anything trading above 40x forward earnings is vulnerable.

LYN ALDEN'S CRITICAL FISCAL DOMINANCE FRAMEWORK

While markets obsessed over Greenland geopolitics, Lyn Alden published research on January 4th that explains what's actually driving the economy. It's the most important macro analysis I've read in months.

The thesis is that structural fiscal deficits have surpassed private sector lending as the primary driver of economic activity and inflation.

Let me break down why this matters in practice.

Historically, the economy expanded when banks lent money. Private sector credit creation, think of mortgages, corporate loans, consumer borrowing, were what actually drove growth. The Fed controlled this by adjusting interest rates, which made borrowing more or less attractive.

That regime is over.

Alden's data shows that for most of the past 15 years, the fiscal deficit (government spending minus tax revenue) has grown faster than private sector credit creation, even during non-recessionary periods. The government is now the marginal buyer supporting demand, not households or corporations.

During periods when unemployment is below 4% (like now), the US is running deficits of 6-7% of GDP. That's unprecedented outside of wars or deep recessions. Historically, low unemployment meant balanced budgets or surpluses. Not anymore.

Why? Three structural forces:

The Fed ended quantitative tightening on December 1st, earlier than expected. Lyn describes the next phase as the "gradual print" - with balance sheet expansion roughly in line with nominal GDP growth. They won't call it QE (because that term is politically toxic), but functionally it's ongoing support for Treasury and repo market plumbing.

This would mean that traditional Fed policy (raising/lowering rates) matters less than it used to. Fiscal policy, government spending and deficits, now matters more.

And fiscal policy in 2026 is absolutely expansionary. Neither party wants spending restraint. Trump's proposing tax cuts. Democrats want more social spending. The deficit will be 7%+ of GDP regardless of who controls Congress.

Now we have to consider what this means for portfolios.

Assets that benefit from fiscal dominance:

Assets that suffer:

Probably every analyst in the world is watching this right now and I’ve mentioned it in a dozen articles, but we need to watch what happens with the hyperscalers. If the hyperscalers (Microsoft, Amazon, Google, Meta) maintain $220 billion or more in annual capex, that's one pillar supporting growth. Combined with fiscal transfers, it keeps the economy afloat. But if AI investment slows, because returns on deployed capital disappoint, that pillar cracks. Then we're running solely on fiscal stimulus, which eventually hits diminishing returns or triggers bond market revolt.

POSITIONING FOR THE NEXT MONTH

We're heading into February with:

Here's how I'm positioned:

Overweight:

Underweight:

Alternatives:

Cash/Bonds:

The big question for Q1is if the market prices in higher-for-longer rates, or does it keep expecting cuts that don't arrive? If you believe Powell (and I do), rates stay above 5% through at least June. That means growth stock multiples compress from current levels.

Conversely, if fiscal stimulus keeps nominal growth above 4%, earnings growth could surprise positively and offset multiple compression. That's the bull case, and it's why I'm not running for the exits despite rich valuations.

But I'm definitely not adding to expensive positions until we see any of the following:

(a) Fed actually cuts rates

(b) inflation drops below 2.5%

(c) earnings growth re-accelerates above 15%.

None of those look likely in the next 60 days.

WHAT TO WATCH THIS WEEK

Wednesday, January 28 - 2:00pm ET: FOMC statement released

Wednesday, January 28 - 2:30pm ET: Powell press conference

Thursday-Friday: Mega-cap earnings (Microsoft, Apple reportedly this week)

The FOMC statement language matters. I'm watching for any shift in the assessment of:

Powell's presser will get questions about:

My expectation is a dovish hold. Rates unchanged, but Powell acknowledges progress on inflation and says the Fed is "closer" to cutting. Markets interpret this as cuts starting in March or May. They're wrong, and I think the first cut comes in September at earliest REGARDLESS of who is sitting at Fed Chair.

If I'm right, growth stocks get repriced lower over the next 90 days. Quality value (profitable companies, reasonable multiples, dividend growth) outperforms.

If I'm wrong, and Powell signals cuts sooner, growth rips higher and I'll consider adding exposure.

This isn't a market to be a hero. It's a market to be patient, selective, and focused on what you can control which is position size, risk management, and not doing anything stupid just because Greenland drama made you anxious for 36 hours.

The Earnout Investor provides analysis and research but DOES NOT provide individual financial advice. Jamie Dejter may have a position in some of the stocks mentioned. All content is for informational purposes only. The Earnout Investor is not a registered investment, legal, or tax advisor, or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.