The first quarter of 2026 was a challenging start for equities. The S&P 500 declined roughly 4%, driven largely by geopolitical tensions surrounding the war in Iran. As is often the case, markets reacted quickly to uncertainty—particularly when it affects energy supply and global stability.
Since quarter-end, however, markets have recovered meaningfully. Optimism around a potential peace agreement has helped improve sentiment, and corporate earnings have been a key support. First quarter earnings have been strong, with profits up 27% year-over-year and approximately 84% of companies exceeding expectations. This level of earnings strength reinforces the underlying health of the market despite short-term volatility.
Energy and Inflation Remain Key Variables
Oil prices briefly surged above $100 per barrel during the quarter, which has been the primary macro concern. Elevated energy prices tend to ripple through the economy, contributing to higher inflation and tighter financial conditions.
At present, inflation is running at approximately 3.3%, largely influenced by rising energy costs. While this remains above the Federal Reserve’s target, we expect inflation to ease over the course of the year—potentially trending toward 2.5% by year-end. That would put inflation below the long-term historical average of 3% and well below the peak of 9.1% seen in 2022.
A resolution in geopolitical tensions—particularly if a peace agreement is reached—would likely put downward pressure on oil prices and provide additional relief on inflation.
Fixed Income Awaiting a Catalyst
Fixed income markets were essentially flat during the quarter. Rising inflation expectations have reduced the likelihood of near-term Federal Reserve rate cuts, limiting bond performance in the short run.
That said, we believe the outlook for fixed income improves in the second half of the year. As inflation stabilizes and the Fed regains flexibility, bonds should begin to play a more supportive role in portfolios.
Economic Backdrop Remains Resilient
The labor market continues to be a bright spot. Unemployment has declined from 4.6% to 4.3%, and there are still approximately 6.9 million job openings. Hiring has slowed, but overall employment conditions remain stronger than expected.
This resilience in the job market is an important factor supporting the broader economy and reducing the likelihood of a near-term recession.
Looking Ahead: Volatility Likely, Trend Still Positive
Our base case for 2026 remains intact: continued economic expansion without a recession. We believe the current bull market, which we view as having begun on October 12, 2022, remains in place.
That said, volatility should be expected. Historically, midterm election years see average market pullbacks of around 18%. We experienced a 19% correction in 2025, and it would not be unusual to see another meaningful pullback this year.
Importantly, periodic corrections do not prevent the market from delivering positive returns over the full year. They are a normal part of long-term market progress.
Staying Invested Matters
One common concern we hear is whether it makes sense to invest when markets are near all-time highs. Historically, investing at new highs has actually led to better outcomes over 1-, 3-, and 5-year periods compared to investing on average days. Markets tend to reach new highs during healthy economic and earnings environments—which is exactly what we are seeing today.
Artificial Intelligence and Market Valuations
There has been increasing discussion around whether we are in an AI-driven market bubble. At this stage, we do not believe that is the case. The difference today is that earnings growth is supporting valuations. The strong earnings results this quarter—particularly in technology and AI-related sectors—highlight that fundamentals, not speculation, are driving the market higher.
Final Thoughts
While the year began with geopolitical uncertainty and market declines, the underlying foundation remains solid. Earnings growth is strong, the labor market is resilient, and inflation—while still elevated—is trending in the right direction.
We do expect continued volatility, particularly given the election cycle and global dynamics, but those periods often create opportunity rather than risk for long-term investors.
As always, our focus remains on staying disciplined, focusing on fundamentals, and helping clients navigate uncertainty with a long-term perspective.