2026 | 1st Quarter
2026 First Quarter Market Commentary
As we enter the second quarter of the year, the days have gotten longer, the weather warmer, flowers are in bloom, and Major League Baseball is back in full swing. Looking at the markets in the first quarter of 2026, the similarities to last year are striking: artificial intelligence (AI) concerns, tariff headlines, geopolitical conflict, and the S&P 500 down 4.3% once again to start the year. As Hall of Famer Yogi Berra would say, “It’s déjà vu all over again.”
Last January, the launch of a Chinese large-language model reportedly developed at a fraction of the cost of ChatGPT (the true cost was later disputed), stoked fears of the end of America’s dominance in AI and a subsequent sell-off in AI-related stocks. This January’s catalyst for tech’s decline was artificial intelligence company Anthropic’s launch of products focused on agentic AI, systems that can achieve complex goals without constant human intervention. The threat of software companies being replaced by automated agents sparked a sell-off in the Software industry (down over 20% for the quarter). The Technology sector also suffered from a general risk-off sentiment, as geopolitical tensions in Venezuela and Iran increased, as well as continued concerns of the massive capital being spent in the AI buildout. The end result was the Magnificent 7 stocks (NVIDIA, Microsoft, Apple, Amazon, Meta, Tesla, and Alphabet) falling 11% for the quarter, and accounting for 83% of the S&P’s 4.3% decline.
Oil prices spiked on the geopolitical tensions in Venezuela and Iran, driving the Energy sector up 38% for the quarter. Higher energy prices also helped the Materials (9.7%) and Utilities (8.3%) sectors post healthy gains for the quarter. The first quarter saw nearly identical returns for the Russell 1000 Value (+2.0%) and Growth (-9.8%) indices as Q1 ‘25. Mid Cap (+2.5%) and Small Cap (+3.5%) stocks both saw positive returns, driven by higher exposure to the Energy, Industrials and Materials sectors, as well as surprisingly positive performance in the Technology sector, a stark contrast to its Large Cap peer.
International Equities saw strong returns in the first two months of the year, with Developed and Emerging Markets posting double-digit returns through February. The launch of Operation Epic Fury on February 28th led to a stronger dollar and higher energy prices, which hurt countries reliant on commodity imports. A brutal March erased all the year-to-date gains for both Developed (-1.1% for Q1) and Emerging Markets (-0.1% for Q1).
Higher energy prices spurred inflation concerns and pushed Treasury yields up slightly, with the U.S. 10-Year rising from 4.18% to 4.3%. While concerns of a dying Software industry hit Private Credit and the Financials sector, the selloffs in Investment Grade and High Yield Bonds were limited, with credit spreads only widening slightly. That said, the slight rise in yield (prices fall as yields rise) was more than enough to offset the income generated by bonds. The Bloomberg Aggregate Bond Index outperformed due to its higher quality, falling just 0.05% for the quarter, while Investment Grade and High Yield Bonds fared worse (both down 0.5%).
Looking at the broader economy, the jobs market continues to be in a low-hire, low-fire state. Job growth has slowed from its post-pandemic levels, but a lower supply of labor, driven by less immigration, has kept the unemployment rate at a modest 4.3%. The long-term impact of AI on productivity and job growth remains unknown, but those fearful of massive layoffs due to AI replacing humans should look at past technological cycles where new technology spurred job creation even while eliminating some sectors.
Inflation still lies slightly above the Federal Reserve’s 2% target. In February, the Supreme Court ruled that tariffs imposed by the administration under the International Emergency Economic Powers Act (IEEPA) were illegal, lowering the average effective tariff rate on U.S. goods imports to 12% from 15.9%. As the year goes on, the expected one-time impact of tariffs on inflation will fade. The current wildcard for inflation is the war in Iran. Around 20% of the world’s supply of oil and liquefied natural gas pass through the Strait of Hormuz. Approximately a third of the world’s fertilizer supply also passes through this vital waterway. A prolonged shutdown of the strait that sustains higher energy prices will feed through to higher food and transportation prices as well. Given the large impact on the global economy, the situation is expected to be resolved in weeks, not months, but with damage to infrastructure and well shut-ins, energy supply will not recover immediately. While the energy supply shock is expected to eventually abate, a short-term spike in inflation will certainly complicate monetary policy for the Federal Reserve and other global central banks.
Economic growth continues to be driven by consumer spending and business investment. While the base case is for growth to continue in a range of 1.5% to 2%, higher energy prices disproportionately hurt lower income households and crowd out discretionary spending. Capital expenditures by the major AI-hyperscalers (Alphabet, Amazon, Meta, Microsoft, and Oracle) are expected to grow to $677 billion this year (up from $416 billion last year and $159 billion in 2023). Any slowdown in corporate spending would negatively impact growth.
While the labor market has slowed, inflation is slightly elevated, and the economy continues to be tied to the backs of consumer and business spending, corporate profits and margins remain healthy. Analysts expect earnings for the S&P 500 to increase 17.4% this year, following last year’s 14% growth. As earnings expectations have increased and equity prices have fallen, the stock market has become less expensive on a price-to-earnings basis. While geopolitical headlines, fiscal and monetary policy, and fears of AI disrupting certain industries can all move markets in the short term, over the long term, corporate profits are the main driver of returns.
Last year at this time, investors would have done well following another Yogi-ism: “It ain’t over ‘til it’s over.” The markets overcame a weak start and several negative headlines to finish the year up almost 18%. At the time of writing, markets have recovered on hopes of Mideast peace talks and are effectively flat for the year. While we don’t know how the situation will end up (“It’s tough to make predictions, especially about the future”), investors would benefit by applying some wisdom from America’s pastime. Keep your eye on the ball – focus on the long-term and avoid emotional responses to headlines. Play sound, fundamental defense – focus on quality and diversification. And don’t swing for the fences – avoid excessive risk taking, opting for a portfolio allocation aligned with your needs.
We hope you enjoy the warmer weather and have a joyful Spring. As always, please reach out to us with any questions.
Jonathan F. Kolle, CFA®
President, Chief Investment Officer
Timothy J. DeAngelo, CFA®
Portfolio Manager
Shawn R. Keane, CFP®
Vice-President
Cindy de Sainte Maresville, CFP®
Certified Financial Planner
Rusty Giles
Director of Marketing
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