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Tariffs and Ties: Navigating Fragmentation in an Interconnected World

Tariff headlines are once again making waves, but the real narrative is more nuanced. As global fragmentation moves to the forefront, deep economic ties mean a complete decoupling remains unlikely. Instead, markets and economies look to be recalibrating—pursuing greater independence and resiliency within an interconnected world moulded by years of cross-border economic collaboration.

Tempered Echoes of the Past

The initial imposition of tariffs at the beginning of April 2025 set off a sharp repricing across markets, with the S&P 500 declining by approximately 12% in the days leading up to the 90-day pause, a measure that ultimately tempered the pace of the selloff. Over this period, long-dated Treasury yields rose by approximately 40 basis points, while the dollar depreciated by approximately 5% from the start to the end of April. This rare, synchronized adjustment across asset classes signalled the emergence of the “Sell-America” trade, as investors re-assessed their exposure to US equities, fixed income, and the currency

Last week, the White House’s proposal to raise tariffs on eight European countries reignited volatility and renewed debate around this theme. While the initial moves in the S&P 500, the dollar, and US Treasury yields echoed the turbulence of last year’s “Liberation Day,” market swings this time were more contained, reaching only 15–20% of the magnitude seen during the original tariff shock, with a relatively swift recovery thereafter. This moderation highlights the importance of steady judgment amid rapidly shifting conditions.

Going forward, monitoring the 90-day correlation between the dollar and the S&P 500 should serve as a useful gauge. If it remains positive, it may indicate that investors continue to view US assets as a unified risk proxy.

Blunted Instruments of Leverage

While the immediate focus is on goods, the broader landscape is shaped by a constellation of interrelated risks. One such dimension is the potential for Europe to activate its Anti-Coercion Instrument (ACI), which could restrict US access to European markets for services and technology. The EU’s annual imports of US services, totalling roughly €483 billion in 2024, span critical sectors such as technology, telecommunications, and intellectual property. Any disruption here would reverberate across both economies, though the operational and political hurdles to implementation remain significant.

Another frequently cited source of leverage is Europe’s status as a major holder of US Treasuries. With an estimated $8 trillion, nearly 24% of the $34 trillion Treasury market, the EU stands as the largest foreign creditor to the United States. While the prospect of a large-scale divestment is occasionally floated in periods of heightened tension, the ramifications would extend well beyond US borders. A meaningful rise in US yields would likely reverberate through global funding markets, elevating borrowing costs for other sovereigns, including European members such as France, which faces over €3 trillion in outstanding government debt and a persistent fiscal deficit. To date, incremental adjustments, like the recent $100 million reduction by a Danish pension fund, have been readily absorbed by the market.

Looking ahead, the potential reactivation of €93 billion in European retaliatory tariffs remains deferred, with the measures now suspended for an additional six months. The deep economic ties between the US and EU should continue to serve as a stabilizing force, making a full-scale escalation appear less likely.

Questions persist, but considerations remain

  • Will Europe escalate? While the toolkit for retaliation exists, the economic and political costs of meaningful escalation remain a powerful deterrent.
  • Will the “Sell-America” trade persist? The evolving correlation between the dollar and US equities will be a key barometer of investor sentiment and risk appetite.
  • How will markets and corporates adapt? History suggests that both have demonstrated a capacity for resilience and recalibration in the face of shifting policy landscapes.

Navigating Uncertainty with Intent

The likelihood of the most disruptive outcomes, such as a sweeping services embargo or a disorderly liquidation of Treasuries, does not appear to be the base case. The mutual dependencies between the US and Europe should serve as a moderating influence, encouraging negotiation over confrontation.

European initiatives to modernize infrastructure and bolster strategic industries may create tailwinds for select regional leaders, while the US continues to offer compelling opportunities, underpinned by robust consumer demand, policy flexibility, energy self-sufficiency, and technological leadership. That said, US assets are not immune to global uncertainty, and periods of volatility may persist as events evolve.

Portfolio positioning for a fragmented world

Recent developments reinforce the imperative to build portfolios that are both resilient and adaptive in an era defined by global fragmentation, one of our three core outlook pillars. We continue to advocate for a multi-faceted approach:

  • Global National Champions: Companies with entrenched positions in sectors critical to national security, supply chain integrity, and infrastructure renewal, across industrials, energy, technology, and health care are poised to benefit as governments prioritize resilience and autonomy.
  • Gold: As a strategic asset, gold remains a credible store of value and a potential hedge against episodic volatility.
  • Hedge Funds: Flexible strategies spanning relative value, macro, and long/short approaches can help capture opportunities and manage risk in complex environments.
  • Bonds: High-quality fixed income offers attractive risk-adjusted returns and portfolio ballast, particularly as interest rates remain elevated. European credit, in particular, may stand out if growth moderates and spreads remain supportive.
  • Currency Diversification: Maintaining exposure to a range of currencies can help mitigate the impact of shifting capital flows and policy divergence.

Bottom line: While tariff headlines have reintroduced volatility, the underlying economic foundations remain broadly supportive. We believe that thoughtful diversification will be essential as the global landscape continues to evolve. Our team stands ready to help you navigate these complexities and position portfolios for both resilience and opportunity.

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All market and economic data as of January 2026 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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Index definitions:

  • S&P 500: The Standard & Poor’s 500 Index, a widely followed benchmark of the US stock market, representing 500 of the largest publicly traded companies in the United States.

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Fresh US tariff proposals on select European countries have amplified echoes of April, reviving volatility and debate over US asset allocation. As deep economic links intersect with rising fragmentation, we cut through the noise to focus on the underlying fundamentals and explore what this means for investors seeking resilience and opportunity.
Published Jan 26, 2026

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