Global Market Review and Outlook

The first quarter of 2026 was a stark reminder—again—that investment returns are rarely delivered in a straight line. The quarter began with a constructive economic backdrop and broadened equity participation, but it ended with a sharp rise in uncertainty as geopolitics drove a powerful energy shock, repricing inflation expectations and interest‑rate assumptions across global markets. In the end, U.S. equities fell 4% in the period, with technology and growth-related businesses faring even worse (Russell 1000 Growth -10%). International returns were impacted by the same late-quarter sell-off but suffered less than their domestic counterparts. MSCI EAFE (Developed International) was down 1%, while MSCI EM (Emerging Markets) was off fractionally (-0.2%). Fixed-income returns were also subdued (-0.1%), although higher-quality areas proved comparatively resilient among widening credit spreads.

Source: Factset

From a macro perspective, the U.S. economy entered 2026 with momentum. Growth expectations were healthy, inflation data was constructive, and a path to lower interest rates was becoming clearer. Much of the market discussion was taken up by who would be appointed as the next Fed chair; how many rate cuts could we expect to see this year; to what degree AI might be disinflationary; and how much debt tech companies were taking on to fund capex investment. All of that changed completely with the escalation of conflict in the Middle East and the disruption of shipping through the Strait of Hormuz—an event with real economic transmission channels because that chokepoint handles a meaningful share of global energy flows. By March the strait was effectively closed, sharply restricting oil tanker traffic. Not surprisingly, crude prices spiked and commodities broadly surged. The Bloomberg Commodity Index gained 24%.

As oil prices spiked, markets rapidly repriced inflation risk and policy expectations, contributing to broad “risk‑off” behavior across global markets and pressure on both stocks and bonds. Treasury yields rose meaningfully late in the quarter as investors pushed out (or removed) anticipated Fed cuts. By late March, the 10-year yield hovered near the mid-4% range after having been materially lower just weeks prior. The rapid change in inflation risk impacted valuations across asset classes simultaneously as discount rates rose while growth confidence became less certain.

In that environment, the Federal Reserve chose patience. At its March meeting, the Fed held the federal funds rate unchanged at 3.50%-3.75%, explicitly noting that the implications of developments in the Middle East were uncertain and emphasizing policy would remain guided by incoming data and the balance of risks. This “hold but watch closely” stance matters because it implies a higher bar for cutting interest rates if energy-driven inflation proves persistent. In the end, both higher inflation expectations and expected interest rates pressured stock and bond market returns at the end of the quarter.

Alongside geopolitics, the quarter also featured an important, more structural market debate centered on software businesses. Well before the Middle East shock dominated March, investors had begun to question whether rapidly improving AI capabilities—particularly autonomous, workflow-oriented “agents”—could undermine the importance and capabilities of offerings from software companies. Fears that AI may replicate core software functionality over time, dampen net revenue retention, and force pricing model changes ran rampant. In an equity market that shoots first and asks questions later, seemingly no software company was spared. The result was a 24% decline in the S&P 500 software index over the first quarter, the largest quarterly drop since the fourth quarter of 2008 during the depths of the great financial crisis.

The future of software businesses remains an overarching market question. At the moment, the market seems to be pausing to take a more objective view of what an AI future might actually mean for the industry (and others). Software is far from dead, but in the near term, the uncertainty itself is a feature: conviction on who the ultimate winners and losers will be is unclear, likely hinging on evidence that AI becomes an accelerant to revenue growth with clearer unit economics, rather than just a margin story or a competitive threat. The likely endpoint, however, is differentiation—not disappearance—where the market rewards businesses that translate AI into defensible distribution, durable pricing power, and measurable growth, while re-rating those that remain undifferentiated intermediaries in workflows most easily replicated or bypassed.

Looking ahead to the remainder of 2026, the central question for markets is whether the energy shock fades quickly or becomes more persistent. If disruptions in energy transport ease and crude prices normalize, the inflation impulse should cool over time and allow the market to refocus on the underlying growth and earnings backdrop. In that scenario, U.S. economic growth should remain constructive for equities, buttressed by a favorable environment for continued corporate earnings growth. The bond markets could also benefit as rate volatility declines and income once again becomes a helpful stabilizer in portfolios where appropriate.

If, however, the disruption persists and energy prices remain elevated, there is risk that inflation expectations become more embedded, which would keep yields higher for longer and raise the probability of a slower-growth, stickier-inflation regime. In that scenario, we would expect greater pressure on corporate profits and wider credit spreads, which can be challenging for both stocks and bonds (until growth slows enough to dominate policy actions and risk pricing).

Ultimately, while we cannot control the path of geopolitical events, we can control portfolio discipline. In periods like this, we believe diversification, quality, and a focus on long-term objectives are the most reliable tools for navigating uncertainty, and we will continue to evaluate both risks and opportunities as the year unfolds.

As always, we appreciate your trust and welcome the opportunity to discuss what these developments mean for your portfolio, liquidity planning, and long‑term objectives.

Warm regards,

John, Cam, and team