The dispute between the United States and Europe over Greenland, perhaps absent from most investors' risk assessments this year, is now tangibly impacting the markets. Wall Street appears prepared to "sell stocks first and ask questions later."
US Treasury Secretary Scott Bessent is calling for global calm and caution against panic, but so far, rational voices have not gained the upper hand. Citigroup downgraded its rating on European equities, citing potential damage to corporate profits—this marks the firm's first downgrade of European stocks within a year, even though they had outperformed US stocks in 2025.
Mike Wilson, Chief US Equity Strategist at Morgan Stanley, stated that President Trump's latest tariff threats against the EU have a relatively limited direct cost impact on major US stock indices. Sectors with lower index weightings, such as automobiles/transportation equipment, consumer staples, raw materials, and healthcare, face the greatest risks.
For Wilson, the most concerning risk from the Greenland crisis is "whether the EU will activate its 'Anti-Coercion Instrument' and target the services sector. Such a move could pose greater headwinds for large US tech stocks."
Wilson is not alone in this view. Trump's tariff threats have sparked widespread discussion among strategists, with many speculating whether Europe will deploy what some call a "trade heavy weapon." The EU's Anti-Coercion Instrument, first introduced in 2021, is essentially a deterrent tool.
Sven Jari Stehn, Chief European Economist at Goldman Sachs, told clients on Monday, "Activating this instrument is not the same as imposing sanctions—the latter involves multiple steps—but it signals that the EU could take action and allows time for negotiations. The Anti-Coercion Instrument covers policy measures well beyond tariffs, including investment restrictions and taxes targeting US assets and services, such as digital services."
The core market concern is that large US tech companies would clearly become the primary targets of any EU countermeasures. Some believe this anxiety is already reflected in Nasdaq 100 futures, which led declines in US pre-market trading, just one week before major US tech companies are scheduled to report earnings.
Christopher Granville, Managing Director at TS Lombard, expressed a similar view, stating, "Equity markets would only face significant downside risks if US-Europe tensions escalate beyond tariff increases into more intense confrontation—for example, if Trump weaponizes liquefied natural gas exports or if the EU invokes the Anti-Coercion Instrument to restrict market access for large US tech firms."
One asset class Wilson is relatively optimistic about is small-cap stocks. Although market expectations for Federal Reserve rate cuts have cooled as Kevin Warsh is seen as a leading candidate for Fed Chair, Wilson noted that "the fundamentals for small-cap stocks are improving, which is driving their relative outperformance."
The small-cap sectors most favored by Morgan Stanley include consumer discretionary, regional/mid-sized banks, short-cycle industrials, and biotech stocks.
