Earnings Matter More Than Davos

Political theater rattles markets, but earnings still drive portfolio’s success–or failure

KEY TAKEAWAYS

• Santa rally technically occurred but lacked momentum

• Low volatility bred complacency

• Headline risk drove short-term market moves

• VIX at 20 signals normal, not extreme, volatility

• Earnings matter more than political theater

MY HOT TAKES

• Markets were too comfortable heading into the year

• Political headlines amplified moves without changing fundamentals

• Volatility returning was inevitable, not alarming

• Systematic risk is being overstated

• Investors should refocus on earnings season

• You can quote me: “Headlines fade faster than fundamentals.”

Santa has left the building. Ok, so it was nothing to write home about, but we did indeed get our Santa Claus rally this year. Sorry to get technical on you, but most people define a Santa rally by the S&P’s performance for the last 5 trading days of the outgoing year through the first 5 days of the new year. Don’t check me on the math, but I think this one was positive, meaning it will show up as a rally–in perpetuity–when graduate students go back and do their historical market performance search. It may bring down the mean return of the period, but it will still be included as a rally. Well, that said, it didn’t last very long. 

Just a few days ago I responded to a press inquiry about the stock market’s bullish start to 2026 and whether I thought it could persist. At the time, based on all the information I had, I thought, well, sure it can. After all, the market had some stored-up energy from last year’s uneventful exit, and it appeared that traders were looking at headline risk through a positive lens. The President…er ex-President of Venezuela is eating lukewarm grits in a Brooklyn, New York jail cell and the US has taken over its oil production (in principle, at least), and the markets responded with a “meh.” Actually, it was more like a “woot woot!” Earnings season is here and the Street is expecting it to be fairly healthy. Whatever non-stale economic numbers we have gotten recently have been benign–meaning not bad but not crazy-good either–just right. Enough to keep the Fed on call but not enough to make it look like an asteroid strike is imminent. You couldn’t get a more perfect set up for a continued rally. I did caution that the perpetually low VIX Index was a concern of mine.

It wasn’t the actual level of the VIX as much as its recent docile posture. It was trading on or around 15 since Thanksgiving, despite all the extraordinary news swirling about. When the VIX does that, it is typically a setup for a more violent eruption. There is psychology behind that. Investors get lazy–complacent–sometimes, and when they do, bumps in the road tend to be more impactful. In other words, it could be the calm before the storm. But sometimes, storms never come and we can enjoy long periods of relative calm in which the secular trend–if it's positive–carries the markets higher.

Now, if I were a gambling man–and I am not, for the record–I would be looking at the calm in the markets and the fact that I came off a huge win in Venezuela (at least based on market response). I would look at the almost 16.5% gain in the books for last year despite an onslaught of tariffs earlier in 2025, the likes of which had remained unparalleled for decades. I would assess my chances of pulling off a crazy play are high. And “crazy play” is not just the proposed annexation of Greenland but actually threatening to tariff my NATO allies with 25% tariffs. What could possibly go wrong with that?

Would French President Macron get upset and don a pair of badass sunglasses and deliver a heated rebuke speech at Davos? Of course! How about Canada’s Mark Carney? Why not? Surely it would not go unnoticed if EU Chief Ursula von der Lyons excused herself from a speech where Howard Lutnick trashed the EU. No, all of this stuff is political spectacle. What really matters is what the market thought of President Trump's weekend proposal and clear decision to get into it with Greenland. And what did the market think?

Well, it would be simple to look at yesterday’s session in which stocks fell into the red for 2026, treasury notes yields climbed, gold found new highs, and the dollar declined, to come to the conclusion that markets disapproved of the President’s gambit. It wouldn’t take much for at least one analyst to come up with the total amount of US assets owned abroad. Assets which could be used to pressure the US into backing down. Scary thought that NATO members would get together in some secret meeting and decide to sell all their US Treasuries, stocks, and holdings in US investments in a coordinated effort to devalue the US stock market and force President Trump to say, “never mind.” Let’s say they did that and that President Trump “chickened out.” Where would that cabal of NATO activists put the proceeds from those sales? In a money market fund? That was actually a joke. Would they finally decide that the US Dollar was done as the world’s reserve currency and park their sovereign wealth in the Chinese Yuan, Indian Rupee, or Turkish Lira instead? Ok, you don’t have to answer those questions out loud; you know where I am going with this.

Now onto the VIX index, which certainly reacted to this weekend’s news cycle and the markets’ response. Indeed, the volatility index did close about 20 for the first time since late November when it spent several days with a 20-handle. Prior to that, you would have to point to a similar spike in mid-October, but before that, the most meaningful spike came last April around “liberation day.” Now that, my friends, was a spike worthy of the Presidential attention. I am not saying that it got Trump’s attention, but the messaging that he was open to negotiations just days after the VIX touching the 60s cannot be ignored. That affair cemented the moniker “TACO trade” as part of the trading lingua franca.

I bet you want to know what’s next! Well, let’s get some perspective–some current perspective. This morning the VIX is firmly around the 20 level. A VIX at 20 implies daily market fluctuation expectations around 1.26%, it’s just math, stupid (you divide it by the square root of 252 😉). That certainly is volatile relative to how markets have traded since Thanksgiving, but is it really that bad? The short answer is no. And it is also important to remember that volatility works in both directions! In other words, markets can go up by just as much on any given day. Is today that day? Maybe–maybe not. Well, that was a cheeky answer wasn’t it. Folks, if you are a longtime follower, you probably know what’s coming next.

Has any of the recent events affected the theses of your stock holdings? Some yes and some no, surely, but most–probably not. Is Netflix down in the premarket because of Emmanuel Macron’s defiant speech yesterday? The real answer to that is some yes and some no, but mostly no. It’s mostly down because of a weak earnings call last night, the result of "idiosyncratic risk”, or “company-specific risk.” Risk associated with the markets in general is referred to as “systematic risk.” If the President did not make his fateful remarks this past weekend, Netflix would still be down this morning, but perhaps not quite as much. 

Here is the message. Check your portfolio. Are any of your stocks down for the right reason–are these unfolding macro events challenging your investment thesis? If yes, then sell or trim those stocks, by all means. If no… … keep calm and carry on. 

Headline risk is very real right now, it’s reflected in the VIX, but headline volatility is short-lived. Whether the President chickens out or not should not be part of your investment decision framework if you have a long-term focus. Has this volatility gotten your nerves on edge? Use that nervous energy to focus on earnings season–which is barreling down the pike as we speak. What we learn from earnings announcements WILL indeed impact your portfolio tomorrow and beyond. This tempest in a teapot happening in Davos today is likely to be relegated to the footnotes in the future. Don’t get drawn into the political theater and saber rattling. I guarantee that you will regret it. Stay focused.

YESTERDAY’S MARKETS

Stocks declined yesterday erasing year-to-date gains as investors responded to the US overtures from the weekend. Full Stop. The saga continues to play out in Davos today as headline risk remains the primary market driver.

NEXT UP

• Construction Spending (October) is expected to have increased by 0.1%.

• Pending Home Sales (December) may have declined by -0.3% after gaining 3.3% in November.

• Important earnings today: J&J, Prologis, Citizens Financial, Truist, Halliburton, Travelers, Ally Financial, Charles Schwab, Knight-Swift, and Kinder Morgan.