After building on strong momentum from 2025, equity markets pulled back as the quarter progressed.
Markets Start Strong, then Drop
After building on strong momentum from 2025, equity markets pulled back as the quarter progressed. On a total return basis, the S&P 500 declined 4.3%. Notably, in the 1st quarter of 2025, the markets also declined by 4.3%, only to post double-digit returns by year-end. This reinforces the importance of staying invested despite market volatility – short-term drawdowns are often embedded within longer-term uptrends.
Iran Conflict Causes Market Uncertainty
Coordinated military strikes by the United States and Israel began on February 28th, resulting in increased market volatility. Concerns over supply disruptions through the Strait of Hormuz—responsible for roughly 20% of global oil transport—drove a sharp spike in energy prices, which in turn pressured inflation expectations and contributed to a modest rise in interest rates. These developments contributed to heightened investor uncertainty and a risk-off tone across markets.
Inflation & the Federal Reserve
Inflation remains a central concern, though the data present a mixed picture. Inflation, as measured by CPI, remains elevated at 3.3% year-over-year. The recent surge in oil prices introduces additional upside risk to inflation, particularly through energy and transportation costs. Adding another layer of uncertainty, a new Federal Reserve Chairman, Kevin Warsh, has been nominated to succeed Jerome Powell. Warsh spent many years on Wall Street and also served on the Federal Reserve Board. Warsh is widely viewed as a positive choice by many economists, CEOs, and members of central banks (U.S. and foreign).
AI May Be Catalyst For Growth
Despite near-term challenges, artificial intelligence remains a compelling long-term growth driver. Ongoing investment in automation, productivity enhancement, and data infrastructure has the potential to support corporate earnings and economic growth over time. As with prior innovation cycles, leadership may broaden beyond a narrow group of mega-cap companies, creating opportunities across industries. In the past, advancements in technology, such as the adoption of PCs, the rise of the internet, and the proliferation of smartphones, led to improved productivity and economic growth.
Looking Ahead for 2026
The first quarter serves as a reminder that markets rarely move in a straight line. Periods of volatility—whether driven by geopolitics, inflation, or policy uncertainty—are a normal part of the investment cycle. Our focus remains on maintaining well-diversified portfolios, managing risk thoughtfully, and positioning clients to participate in long-term growth opportunities.