Quarterly Market Update

The year began well, with the S&P 500 reaching a new all-time high in January. But three forces combined to pull markets lower as the quarter progressed: a shakeout in technology stocks driven by AI competition and valuation concerns, shifting expectations around Federal Reserve rate policy, and a significant geopolitical shock in the Middle East.

By quarter’s end, the S&P 500 had declined 4.3% and the NASDAQ fell 7.0%, entering correction territory. Importantly, the weakness was concentrated in mega-cap technology and software. The equal-weight S&P500was roughly flat, and small caps posted a modest gain. Outside of tech, energy surged more than 38%, and defensive sectors like utilities and consumer staples held up well.

The Middle East Conflict and Energy Markets

The most consequential development of the quarter was the outbreak of military conflict involving the United States, Israel, and Iran in late February. Iran’s assertion of control over the Strait of Hormuz—through which roughly 20% of global crude oil transits—led to a near-standstill in shipping for the month of March, removing a substantial volume of crude and refined products from global markets.

WTI crude oil finished the quarter up nearly 77% and remains elevated around $110 per barrel. National average gasoline prices jumped from roughly $2.94 in February to $3.99 by the end of March. The surge in energy costs is acting as a tax on consumers and businesses, and the key question going forward is whether oil continues to flow out of the Gulf. If it does, the global economy can likely absorb the shock. If flows remain restricted for a prolonged period, the risk of a stagflationary environment becomes more serious.

The U.S. Economy: Bending but Not Breaking

Despite the turbulence, the U.S. economy has shown resilience. The March jobs report was notably strong, with 178,000 positions added—nearly triple expectations—and the unemployment rate ticking down to 4.3%. Corporate earnings remain a bright spot as well, with Q1 2026 S&P 500 earnings projected to grow roughly 13% year-over-year, and full-year estimates continuing to move higher.

Inflation, however, has reaccelerated. Core PCE has moved back above 3%, and the upcoming March CPI report is expected to show a sharp increase driven by gasoline prices. As a result, expectations for Federal Reserve rate cuts have been pushed out significantly—markets are now pricing no cuts until 2027, and the Fed has signaled a “higher for longer” stance.

How We’re Thinking About Portfolios

Periods like these are exactly why we emphasize diversification, discipline, and a long-term perspective. The instinct involatile markets is to react—to sell what’s fallen, chase what’s risen, or move to cash until things “calm down.” Experience shows that these reactive moves rarely produce good outcomes. Several principles are guiding our thinking:

Market breadth is improving. The dominance of a handful of mega-cap stocks has given way to a broader market. This favors the kind of diversified approach we have long advocated.

Valuations have become more reasonable. The selloff in technology has compressed multiples from late-2025 extremes, creating potential opportunities for patient investors.

Quality matters in fixed income. Credit spreads remain historically tight, meaning investors are not being well compensated for taking on additional credit risk. We continue to favor higher-quality bonds to provide genuine portfolio ballast.

Geopolitical events are notoriously difficult to trade around. History has repeatedly shown that investors who sell into crises tend to lock in losses and miss subsequent recoveries. The worst fears often do not materialize, though it would be complacent to assume every shock is temporary.

The Bottom Line

The market environment has become more complex. But the economy continues to grow, earnings are expanding, the labor market is healthy, and productivity trends remain encouraging. We built your portfolio for environments like this—not just for the easy stretches.

Our recommendation is straightforward: stay the course. If your financial circumstances or goals have changed, or if you have questions about how current events relate to your specific situation, please do not hesitate to reach out. That is exactly what we are here for.

We recently made a few minor adjustments to the model portfolios. We have rebalanced the equity positions to add back growth. This is to bring things back in line from the recent volatility. We also removed our individual small cap positions and added a broader small/mid cap position to help navigate the environment in the smaller company space. Finally, we added a market neutral fund that should help diversify both equity and fixed income volatility going forward.

We appreciate your confidence in us. As always, if any questions arise or you would like to discuss any of this in more detail, please don’t hesitate to reach out.