The 2026 market narrative flipped almost overnight. The year began on a positive note, with leading indicators pointing to improving economic data and a cyclical broadening including the manufacturing sector and housing.
The market finally began to broaden in January and February after years of technology-dominated performance. However, following the onset of the war in Iran, oil has almost exclusively dictated market direction.
Within the S&P 500 Index there was a large dispersion across sectors, with Energy rising 38.25% and Technology dropping more than 9% — a reversal of the last three years when Technology and Communication Services were consistently the top-performing sectors and Energy lagged. Utilities and Staples, classic defensive sectors, were both outperformers in the first quarter. Small and mid-cap indices managed positive returns due to strong performance from the Energy, Materials, Industrial, and Utilities sectors and much less exposure to poor-performing Technology stocks.
Bond yields rose alongside oil, leading to slightly negative returns for most bond categories while commodity price gains led the market. Gold gained 8.3% while the price of oil nearly doubled. The rise in gasoline prices has been a strain on consumers and investors with a national average of more than $4 per gallon.
Artificial intelligence (AI) risk dominated the news cycle over the past quarter. Skepticism has replaced excitement as investors consider the deleterious effects of AI on labor in addition to the obsolescence of current processes and technologies. Large-US, AI-related stocks (AMZN, GOOGL, META, MSFT) fell not because company earnings declined, but because the market assigned a lower valuation multiple due to their heavy spending on data centers which means less capital is returned to investors in the near term. Lenders of private credit also fell as fear spread regarding their exposure to the software industry. As is typical with new technology, AI will inevitably make certain jobs obsolete. However, history also suggests that new jobs will emerge. Contrary to headlines, software jobs are almost back up to their 2022 peak and with wage gains. It’s likely far too early to determine AI’s ultimate effect on the labor force.
The Fed remains on hold as they balance rising inflation expectations with signs the labor market is improving. Even before March’s strong employment report, there were declining unemployment claims and increasing regional manufacturing employment indices. The unemployment rate remains relatively low at 4.3%. Importantly, March’s unemployment data showed 20-to-24-yearolds’ jobless rate dropped sharply.
With high geopolitical tension and unpredictable policy, we rely on fundamental economic data, earnings data, and upcoming company guidance to direct our decision making. While we can’t predict what will happen in terms of the war, the earnings picture appears quite sound, and valuation multiples are now much lower because of the geopolitical turmoil. There has not been a sharp deterioration in the economy, yet the risk remains of a higher inflation paradigm resulting in lower stock valuation multiples and higher bond yields.
It’s important to note that prior to the unexpected Iran war, the economy was on solid footing due to supportive monetary and fiscal policy. If oil rises further and stays elevated for many months, then we will lower our growth expectations due to demand destruction. But given the likelihood of sudden changes to policy, we expect to remain patient and pragmatic in our approach, focusing on long-term capital appreciation.