'Sell America' trade makes a comeback as U.S. stocks see biggest drop in months. Here's what investors need to know.

By Joseph Adinolfi

The S&P 500 is now in the red for 2026. The U.S. dollar and Treasurys sold off on Tuesday, too.

President Donald Trump's latest round of tariff threats, aimed at pressuring Europe to back a U.S. bid for Greenland, is stoking market instability.

The "Sell America" trade made a comeback on Tuesday following President Donald Trump's latest tariff threats against European allies, giving investors a taste of the volatility that rocked global markets back in April.

After a short-lived attempt at a recovery in late-morning trading, U.S. stocks moved lower in the afternoon as Trump doubled down during a White House press conference. The selling wasn't confined to stocks: Treasury yields jumped, touching their highest levels since the summer, while the U.S. dollar sold off. Nor was it limited to the U.S., with stocks and bonds around the world selling off on Tuesday while haven assets like gold and the Swiss franc (USDCHF) rallied.

The S&P 500 finished Tuesday in the red for 2026, the first time that has happened this year.

"'Sell America' is back in a new form," Gina Martin Adams, chief market strategist at HB Wealth, said during an interview with MarketWatch. "We came into this year with the market complacent on the idea that trade-policy risk was a 2025 story. It's clearly something we will need to contend with in 2026."

The S&P 500 SPX was off by 143.15 points, or 2.1%, at 6,796.86, its biggest percentage-point drop since Oct. 10, Dow Jones Market Data showed. The Nasdaq COMP was off by 561.07 points, or 2.4%, at 22,954.32. The Dow Jones Industrial Average DJIA was off by 870.74 points, or 1.8%, at 48,488.59, FactSet data showed. Big Tech stocks were hit particularly hard, with members of the "Magnificent Seven" group of megacap stocks shedding a combined $683 billion in market capitalization - the most in a single day since Oct. 10, when Trump escalated his trade rhetoric against China.

The Cboe Volatility Index VIX, better known as the VIX or Wall Street's "fear gauge," was up by 26.7% at 20.09, finishing above its long-term average of around 19.5, FactSet data showed.

The ICE U.S. Dollar Index DXY, a measure of the dollar's value against a basket of rivals, was off by 0.8% at 98.57 in recent trading after touching its lowest level of 2026. Tuesday's slump erased much of the buck's advance since Christmas Eve.

"The market is going to pay attention to the dollar as the harbinger of risk," Martin Adams said. "If the dollar is falling, it is viewed as the anti-U.S. trade."

Over the weekend, Trump said he would slap 10% tariffs on imports from eight European countries beginning next month. He later threatened tariffs as high as 200% on French wine and other products after French President Emmanuel Macron rebuffed Trump's offer to join his Gaza peace board. Trump will speak at the World Economic Forum in Davos, Switzerland, on Wednesday. Some European lawmakers have urged the European Union to abandon a trade deal with the U.S. An emergency leaders' summit has been scheduled for Thursday to discuss potential retaliatory measures.

Speaking during a press conference at Davos earlier, Treasury Secretary Scott Bessent dismissed the reaction to Trump's latest tariff threats. "I would say this is the same kind of hysteria that we heard on April 2nd," he said. He urged trade partners not to walk away from their deals with the U.S.

Yields on long-dated Treasury notes and bonds were moving higher, while the U.S. dollar was selling off. The yield on the 10-year Treasury note BX:TMUBMUSD10Y was up 6.4 basis points at 4.294%, according to FactSet data.

"I'm concerned on a lot of different levels that the president has pushed it way too far," Kent Engelke, chief economic strategist at Capitol Securities Management, said Tuesday morning.

The 30-year Treasury yield BX:TMUBMUSD30Y was up 8.1 basis points to 4.920%, the biggest one-day rise since July, Dow Jones Market Data showed. Engelke said he thinks the yield could "very easily" go up to 5%.

'Today is a warning'

While it is unusual for U.S. stocks, Treasurys and the dollar to all sell off at the same time, it does happen. Dow Jones Market Data showed 18 instances in 2025 when the S&P 500 and ICE dollar index finished lower while Treasury yields rose. Before Tuesday, the last time this happened was Dec. 1.

Richard Farr, chief market strategist at Pivotus Partners, cautioned that investors shouldn't read too much into Tuesday's selloff. A feared migration away from U.S. assets didn't pan out in 2025, even after Trump surprised global investors with his "liberation day" tariffs in April.

However, he warned that Trump's aggressive rhetoric toward Federal Reserve Chair Jerome Powell and Greenland risked undermining confidence in U.S. bonds and the dollar.

"Today is a warning," Farr told MarketWatch.

Others said there was more at play than just the revived threat of tariffs. Farzin Azarm, managing director of equities trading at Mizuho, said stretched positioning in hot stock-market trades like semiconductor names meant the market was primed for a pullback heading into Tuesday.

"I don't buy the tariff concerns. The market needed this," he said.

The reaction in markets has so far been modest compared with what investors experienced in April. Back then, the S&P 500 skidded right to the edge of bear-market territory before Trump announced a 90-day pause on his tariffs.

Internationally, the European STOXX 50 XX:SX5P fell for a third day on Tuesday, adding to its losses from Monday's session. The Japanese Nikkei 225 JP:NIK and Hong Kong's Hang Seng Index (HK:11)each fell for a fourth straight day. The iShares MSCI Emerging Markets ETF EEM retreated as well, FactSet data showed.

In Japan, local government bonds were selling off hard. The yield on the Japanese 40-year bond BX:TMBMKJP-40Y surged to 4.215%, the highest yield ever recorded, according to FactSet. Bond yields move inversely to prices.

The selloff in Japanese bonds was adding to the pressure facing riskier assets like stocks on Tuesday, Lukman Otunuga, senior markets analyst at FXTM, said in commentary shared with MarketWatch.

Fresh tariff threats could undercut expectations for global economic growth to accelerate in 2026, Otunuga added.

Bitcoin (BTCUSD) retreated below $90,000 on Tuesday shortly after the U.S. equity market opened for business. Prices for the pioneering digital currency were down 3% at $90,323 in recent trading.

Gold and silver hit a fresh round of intraday record highs as investors flocked to the smoking-hot metals trade. Most-active gold futures (GC00) gained $170.40 per troy ounce, or 3.7%, to settle at $4,765.80 an ounce.

Joy Wiltermuth contributed.

-Joseph Adinolfi

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(END) Dow Jones Newswires

01-20-26 1703ET