Could a single presidential post and a handshake in Davos undo days of market stress? For a few hours on Wednesday and into Thursday, it looked that way.
The Dow Jones Industrial Average jumped roughly 505 points (about 1%) as U.S. stocks reclaimed losses tied to earlier tariff threats and geopolitical jitters. The S&P 500 rose near 0.8% and the Nasdaq added about 1.1%, with megacap names such as Nvidia, Microsoft and Meta among the leaders. Small caps were especially buoyant: the Russell 2000 notched a record close, signaling a broader risk-on mood beyond the biggest tech names.
Why the abrupt swing
President Donald Trump — speaking at the World Economic Forum in Davos and later on his social platform — said he would not follow through with new tariffs on a group of European countries and that he "formed the framework of a future deal with respect to Greenland" after talks with NATO Secretary General Mark Rutte. He also explicitly said he wouldn't seize territory by force.
Investors treated the comments as a de-escalation. Tariff threats had catalyzed a "sell America" reaction earlier in the week: the U.S. dollar and equities had come under pressure while Treasury yields climbed. With that immediate threat dialed down, markets moved to price in less policy-driven disruption to trade and supply chains.
What's driving the gains under the surface
The rebound wasn't only about headlines. Traders pointed to solid underlying data and pockets of strength across the economy: recent revisions showed robust GDP growth, jobless claims remained low, and the Fed's preferred inflation gauge had been close to expectations. Those fundamentals made the overnight political pivot feel more like the removal of a short-term shock than a change to the growth story.
Analysts say the market reaction also reflects how concentrated the headline indices have become. Eric Parnell, chief market strategist at Great Valley Advisor Group, noted that look-beneath-the-surface buying persisted — investors were adding to positions outside the megacap-dominated S&P 500, which is why small caps surged.
Tech’s twin tailwinds: AI optimism and relief
A good portion of Thursday’s advance centered on technology. Nvidia and other chip-related names rallied as investors sustained a bullish view of AI-driven demand. Microsoft rose alongside peers, helped by the same optimism around cloud and AI spending — a dynamic that has been reshaping markets for months. For a snapshot of the kind of in-house AI work stoking investor enthusiasm, see Microsoft’s recent text-to-image model announcement in Microsoft Unveils MAI-Image-1.
Similarly, developments in AI research and tools are broadening the narrative that big tech will keep growing even if short-term policy noise returns. Google’s deep research initiatives — which aim to make AI more useful across productivity apps and enterprise workflows — are part of that backdrop and help explain why software and cloud names are seen as defensive-growth plays now (Gemini’s Deep Research May Soon Search Your Gmail and Drive).
Diplomacy, sovereignty and a fragile calm
Despite the market relief, European leaders signaled caution. Denmark’s prime minister reiterated that sovereignty over Greenland is non-negotiable and framed talks about Arctic security as conditional on respect for territorial integrity. In practice, that means the White House’s Davos handshake buys only breathing room; lengthy negotiations — and political pushback in allied capitals — are likely.
What traders are watching next
Volatility could return if negotiations stall or new tariff rhetoric reappears. Investors will also keep an eye on corporate earnings and macro prints: inflation measures, consumer spending, and capital expenditure trends that will ultimately determine whether this is a transient bounce or the start of a steadier recovery in risk assets.
For now the market breathes easier. But relief rallies born of policy pivots can be fickle: the headlines that removed fear can also, if reversed, bring it back just as fast. That uncertainty — not the price move itself — will probably keep traders alert in the coming weeks.