Quarter Market Recap – A Resilient Market: Domestic and International markets were not a “safe space” for the risk-averse investors in Q1 2026. The quarter was defined by a sharp shift from early optimism to pronounced volatility, as geopolitical shocks and macro uncertainty rattled global equities.
Markets entered the year supported by solid earnings expectations, AI-driven growth themes, and hopes for easier monetary policy, but sentiment deteriorated quickly after a January selloff tied to renewed tariff tensions and escalating conflict in the Middle East. By March, major U.S. indices had fallen into correction territory, with the S&P 500 down notably from its peak and the Nasdaq off more than 10%. Rising oil prices, inflation fears, and shifting rate expectations compounded the risk-off tone, even as corporate fundamentals remained relatively strong, with S&P 500 earnings still projected to grow in the low double-digits.
The Market During Geopolitical Events: Markets look at geopolitical events solely through the lens of the impact of critical resources (i.e., oil), and unless the event is going to reduce the supply of oil (and make the price rise, slowing global growth), then markets will largely ignore the event. Yet, the current debacle has resulted in the “closing” of the Strait of Hormuz, a major global oil transit for 20% of the world’s oil, which will create a negative impact on markets as oil prices have risen sharply in response. What does that mean for markets? Historically, markets have proven surprisingly resilient in the face of global instability. As shown in the adjacent chart, selloffs triggered by oil shocks and geopolitical crises tend to be brief. Since 1941, data from twenty major events, including wars and military conflicts, reveal a trend that is far more encouraging than typical news cycles suggest. Despite the initial uncertainty these moments cause, the S&P 500 has been up 79% of the time one year later, boasting a median gain of +13.8%.
Why Has the Market Remained So Resilient? Three separate forms of economic stimuli are hitting the economy and markets: Combining these factors increases expectations for economic growth and corporate earnings sustainability.
Monetary stimulus: In September, the Fed cut rates, but more importantly, signaled that a rate-cutting cycle had started. That matters because it means monetary stimulus is now occurring, which is positive for the economy and, peripherally, risk assets. It tends to take 12 – 16 months for rate cuts to flow into the economy.
Fiscal stimulus is occurring via the passage of the One Big Beautiful Bill, which solidified and boosted tax cuts, as well as unleashed billions in Federal dollars across various industries.
Private stimulus, meanwhile, is occurring through massive AI-linked capital expenditures from major tech companies such as META, MSFT, AMZN, ORCL, and others (remember, these mega-cap tech firms could spend more than $700 billion on AI infrastructure in 2027!).
March 2026 FOMC Meeting: The FOMC kept rates idle at the most recent FOMC meeting, keeping the target range of 3.50%-3.75%, as expected. Most of the guidance provided by the statement, SEP, and policy implementation note was unsurprising. The FOMC indicated one additional cut in 2026. The FOMC is now dealing with a third substantial shock in the past year: 1) tariffs limiting trade; 2) reduced immigration limiting U.S. labor supply; and 3) conflict in the Middle East causing energy prices to spike. The textbook says banks should look through a supply shock unless it affects inflation expectations – that’s why the duration of the shock(s) matters. It is becoming increasingly difficult for the U.S. central bank to look through all these shocks with any confidence. As such, many committee members preferred to remain on hold at the meeting. Given flat nonfarm payrolls in the U.S. since early 2025, a concern is that the oil price shock hits real income enough to sink economic growth and cause unemployment, which has already been trending up, to spike. But the Fed’s March real GDP projections were revised upward, so there’s no immediate issue. Nonetheless, this was a constructive Fed meeting disguised by an ugly geopolitical tape. The FOMC acknowledged stronger trend growth, kept its basic easing bias alive, and implicitly recognized that the U.S. economy is more productive than it thought three months ago.
Bull Markets Last Longer than Investors Think: It’s likely too early to cleverly call a market top, stating that the bull market is over. In fact, looking at the 11 bull markets since World War II, the average one lasts more than five years. Not only that, the current bull market is up a very impressive 91% in just three years – which sounds like a lot – but in the context of historical rallies (the avg. bull market is +191%), perspective may state that the bull market is younger than many would think.
What to Focus on Right Now: When markets feel like they’re chaotic, remember to focus on the basics, i.e., economic growth.
Profit Growth Continues to Trend Higher – With Q4 earnings season now in the rear view, the fundamental backdrop for equities remains supportive as investors navigate a mid-term election year. As of the end of February, the next twelve-month earnings growth stands at 14.3%, the highest level since January 2025. If there’s one area of fundamental risk, it’s the continued concentration within the index – it can drive markets higher or lower. The top 10 companies now account for about one-third of total net income, meaning a miss from any major large-cap contributors could materially affect the overall earnings outlook. For now, though, growth remains robust.
Understanding the 2026 Narrative – Today’s narrative largely centers on two themes: continued AI-related capital expenditures, albeit at a slower pace, and the potential for an economic reacceleration supported by fiscal stimulus and Federal Reserve policy. While AI Capex growth will naturally moderate after such outsized investment levels, a key question is whether companies that issue debt to fund this spending will continue to receive the same valuation multiples they enjoyed earlier in the cycle. As for the prospect of an economic reacceleration, the question now is whether consumer momentum can be sustained through year-end before the fiscal stimulus starts to take effect in 2026.
S&P 500 EPS: ’26 (Exp.) EPS = $320.16 (+17.0%). ’25 (Exp.) EPS = $273.66 (+11.6%). ‘24 EPS = $245.16 (+11.5%). 2023 = $220 (+8.6%). 2022 = $219 (+0.5%).
Valuations: S&P 500 Fwd. P/E (NTM): 19.7x, NASDAQ: 21.7x, EAFE: 15.2x, EM: 11.2x, R1V: 16.4x, and R1G: 23.5x. *
*Source: Bloomberg and FactSet, Data as of 03/31/26
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The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
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The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries*around the world, excluding the US and Canada. With 902 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI Emerging Markets Index captures large and mid-cap representation across 26 Emerging Markets (EM) countries*. With 1,387 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
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