Japan, Greenland & Davos

Good morning investors,

Tuesday's 2.1% S&P 500 decline marked Wall Street's worst day in three months, but context matters more than headlines. The selloff stemmed primarily from Japan's bond market turmoil rather than Greenland rhetoric alone, as 40-year Japanese yields hit record highs and threatened to pull global capital flows back toward Tokyo.

Markets have now pushed both the S&P 500 and Nasdaq into negative territory for 2026, yet the VIX spike that accompanied yesterday's decline historically signals opportunity rather than crisis. Dating back to 1990, weekly VIX surges of 30% or more have coincided with median S&P 500 returns of 17% over the following twelve months, nearly double the long term average, with stocks ending higher in more than 80% of those cases.

Futures point to tentative recovery with S&P ($SPY ( ▼ 1.55% )) futures up 0.1%, Dow ($DIA ( ▼ 1.33% )) futures essentially flat, and Nasdaq ($QQQ ( ▼ 2.03% )) futures down marginally. Gold extended its record run above $4,800 per ounce as safe haven demand accelerates, while Treasury yields remain elevated near 4.3% on the 10-year.

President Trump speaks at Davos this morning, promising "a lot of messages to deliver" and suggesting it will be "a very interesting Davos." Sources on the ground describe the atmosphere as anxious and defensive, with Greenland dominating conversations both on and off the record.

While headlines focus on Greenland, sophisticated investors recognize that Japan's bond selloff poses the more significant risk to global markets. The 40-year Japanese government bond yield hit a record 4.213% on fiscal concerns, with the 10-year climbing to 2.38%, its highest since 1999, and the 20-year reaching 3.47%.

This matters far beyond Japan's borders because of the country's outsized role in global capital flows. Japanese investors own roughly $1.2 trillion in U.S. Treasury securities and have historically been among the most aggressive buyers of overseas debt, particularly American bonds, because interest rates were higher than at home. As domestic yields rise, those investors may be more inclined to keep money at home rather than recycling it into Treasuries. That potential shift in flows explains why U.S. 10-year yields jumped to 4.3% alongside the Japanese selloff.

The catalyst was a proposed 8% food sales tax cuts that could weaken Japan's fiscal position, combined with Prime Minister Takaichi's announcement of snap elections on February 8. When Ray Dalio starts discussing end of empires, you know the bond vigilantes have people's attention.

For those who followed our strategy through 2025's trade war, this week's pattern looks remarkably familiar. Friday brought cryptic signals, Saturday escalated threats, Sunday saw doubling down while markets were closed, and Monday night futures dropped on the emotional reaction. Tuesday continued the pressure campaign, and now we approach Wednesday, historically when dip buyers begin stepping in. The first step in is often faded but then the sophisticated investors make their move.

Treasury Secretary Bessent told reporters in Davos this morning that the administration is "not concerned" about yesterday's selloff, calling it "the same kind of hysteria we heard on April 2" during Liberation Day. Whether that proves accurate or not, investors who stayed invested after last year's initial tariff announcements are now up roughly twice as much as those who sold in April's panic. I called for people to buy stock with conviction on April 7th last year, which was not a popular opinion at the time and I received a lot of negative responses to the newsletter initially.

The EU is weighing up to €93 billion in retaliatory measures, with reports suggesting the summer's U.S.-Europe trade deal may be suspended. European Commission President Von der Leyen called Trump's proposals "a mistake" that would create "a dangerous downward spiral." French President Macron raised the possibility of triggering the Anti-Coercion Instrument, which could restrict American businesses' access to Europe's single market.

Paying a big bill is acceptable. Paying an open ended one isn't. That uncertainty, more than the tariffs themselves, explains market anxiety.

Johnson & Johnson delivered guidance above estimates this morning despite absorbing "hundreds of millions of dollars" in costs from the Trump administration's drug pricing deal. The company forecast 2026 operational sales of $99.5 billion to $100.5 billion, exceeding analyst estimates of $98.9 billion, with full year profit of $11.43 to $11.63 per share versus the $11.45 consensus.

Fourth quarter results beat across the board with adjusted EPS of $2.46 versus $2.44 expected and revenue of $24.56 billion topping the $24.16 billion forecast. The Innovative Medicine division grew 10% to $15.76 billion while devices rose 7.5% to $8.8 billion. CFO Joseph Wolk noted that excluding Stelara's biosimilar driven decline, the portfolio is growing 14-15%, the products J&J will rely on for the balance of this decade.

The broader earnings picture remains constructive. Current Q4 growth expectations stand at 8.2%, but history suggests actual results will be meaningfully higher. Over the past ten years, the earnings growth rate has increased by 5.7 percentage points on average from quarter end through earnings season completion due to positive surprises. Applying that historical pattern suggests actual Q4 growth closer to 14%, marking the fifth consecutive quarter of double digit expansion.

Of the 33 S&P 500 companies reporting through January 16, 79% have beaten EPS estimates with aggregate surprises of 5.8%. When companies continue executing at this level while markets panic over political noise, the divergence creates opportunity.

Netflix beat Q4 estimates and disclosed 325 million global paid subscribers, its first membership disclosure in a year and a new milestone as the company pursues Warner Bros. Discovery. Revenue of $12.1 billion exceeded the $11.97 billion forecast, with adjusted EPS of $0.56 versus $0.55 expected.

More importantly, Q1 2026 revenue guidance of $12.16 billion crushed estimates of $10.54 billion by $1.6 billion, representing 15.3% year over year growth. Full year 2026 guidance targets 12-14% revenue growth with operating margins expanding to 31.5%.

The strategic shift to an all cash offer for WBD removes complexity arguments from Paramount's competing bid while providing shareholders certainty around deal value. Netflix pausing share repurchases to fund the acquisition demonstrates capital discipline. At 325 million subscribers growing revenue at double digits with expanding margins, Netflix proves streaming can deliver both scale and profitability.

Shares slipped in after hours trading on cautious forward commentary around content spending and acquisition costs, but the fundamental trajectory remains strong.

Berkshire Hathaway may exit its 27.5% stake in Kraft Heinz after a decade long investment that never delivered for Buffett. The 325.4 million share position registered for potential resale marks the unwinding of the 2015 merger Berkshire helped engineer with 3G Capital.

Meta's new AI lab has delivered its first high profile models internally, with CTO Andrew Bosworth calling them "very good" after just six months of work. The Meta Superintelligence Labs team shows the company remains committed to the AI arms race despite regulatory headwinds.

Nvidia CEO Jensen Huang plans to travel to China in late January seeking to reopen a critical market for AI chips, attending company events ahead of Lunar New Year and potentially visiting Beijing.

United Airlines issued upbeat guidance with Q1 adjusted profit of $1.00 to $1.50 per share versus the $1.13 consensus, and full year 2026 earnings of $12 to $14 per share. Premium revenue rose 9% in Q4 while loyalty revenue increased 10%, demonstrating how airlines increasingly rely on higher income travelers and premium cabins.

TE Connectivity projected Q2 profit above estimates as AI related demand surges, with the industrial solutions segment up 38% year over year. Quarterly orders exceeded $5 billion.

Interactive Brokers posted Q4 profit growth with customer margin loans up 40% to $90.2 billion and commission revenue surging 22% on a 27% jump in trading volumes.

Despite Tuesday's selloff, the rotation thesis I've emphasized continues playing out. Before the decline, the Russell 2000 closed at record highs three consecutive sessions. The equal-weight S&P 500 hit records on January 13.

This broadening directly contradicts bubble dynamics. When bull markets wind down, leadership narrows and investors crowd into the same handful of bets. The opposite is happening now. Two-thirds of stocks across all market caps trade above their 200-day moving averages. Global markets are diversifying rather than concentrating, with Japan, Brazil, China, and UK benchmarks nearly doubling U.S. returns year to date.

If this were a bubble about to pop, it would be acting very differently.

The market's 2.1% decline Tuesday demands perspective rather than panic. Japan's bond market, not just Greenland rhetoric, drove the selloff as rising domestic yields threaten to pull $1.2 trillion in Japanese capital away from U.S. Treasuries. That's a legitimate concern requiring monitoring, but it's also a known risk that markets can price and adapt to.

The VIX spike historically marks reset buttons before asset prices move higher. Across the Korean War, Gulf War, 9/11, Ukraine invasion, and other geopolitical shocks, the S&P 500 has gained 14.2% on average over the following twelve months. Political antics rarely translate into lasting damage to fundamentals.

Earnings continue accelerating toward a likely fifth consecutive quarter of double digit growth. Tax refunds averaging 18% higher this year inject $200 billion in stimulus. The rotation from mega cap tech to broader market participation has years to run as small caps trade at substantial valuation discounts.

While gold's record run continues to drive genuine safe haven demand, I see better opportunities in the equity market currently. The tariff playbook suggests we're approaching the point where smart money begins buying. Those who've been burned by overreacting to Trump policy learned last year that staying invested beats selling into panic.

Davos will amplify the noise today, but fundamentals, not political theater, ultimately drive long term returns. Use volatility as opportunity rather than signal.

As always, feel free to reach out with questions about positioning.

Dan Sheehan

[email protected]

This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.