Markets entered 2026 on solid footing following a strong 2025, but volatility returned during the first quarter. U.S. stocks were mostly flat through February before selling pressure accelerated in March alongside rising geopolitical tensions tied to the Iran conflict. By quarter-end, the S&P 500 and Nasdaq had declined 4.63% and 5.98%, respectively, while the Russell 2000 managed a modest gain of 0.89%.
Corporate earnings have remained relatively resilient, helping support markets despite growing uncertainty. However, rising energy prices have introduced concerns that inflation could remain elevated while economic growth slows, a scenario often referred to as stagflation. As a result, expectations for additional Federal Reserve rate cuts in 2026 have become more limited.
Even with earnings holding up well, we continue to believe the economy is in the mid-to-late stages of the business cycle. That outlook supports a more balanced and risk-conscious approach across portfolios. While valuations for U.S. large-cap stocks have come down somewhat, they still remain above long-term historical averages. Because of this, we continue to favor a modest tilt toward value-oriented investments rather than relying heavily on further growth-driven market expansion. Adjustments made earlier this year, building on changes implemented in late 2025, have held up well during the recent market pullback.
Economic data continues to paint a mixed but generally stable picture. Inflation has gradually eased from prior highs, although March showed a slight uptick and some categories — particularly services and tariff-sensitive goods — remain sticky. Meanwhile, the labor market has softened modestly, with unemployment moving into the mid-4% range. Even so, businesses largely appear to be maintaining staffing levels in what many describe as a “no hire, no fire” environment as companies evaluate the impact of artificial intelligence and shifting economic conditions.
Consumers also remain an important source of economic stability. While confidence surveys continue to reflect caution, consumer spending has remained relatively healthy, particularly among higher-income households. Debt burdens have risen since the pandemic but still remain below long-term averages overall. At the same time, delinquencies on credit cards, auto loans, and student loans have increased, although these trends have not yet significantly impacted broader consumer spending data. Taken together, the economy appears to be slowing but still growing at a sustainable pace.
Outside the United States, international markets continue to stand out as an area of opportunity. Developed international and emerging market stocks outperformed U.S. markets in 2025 and have continued to show strength in 2026. More attractive valuations, improving earnings trends, fiscal support in Europe, and corporate governance reforms in Japan continue to support the case for global diversification. Even after their recent gains, international equities still appear attractively valued compared to many U.S. stocks.
Despite ongoing geopolitical uncertainty and challenging headlines, we are not making broad portfolio changes based solely on short-term events. We remain confident in our current positioning, while making only modest adjustments to maintain balanced exposure between value and growth opportunities.
Within fixed income markets, bond yields continue to normalize as longer-term Treasury yields remain elevated compared to short-term rates. Credit markets remain stable overall, with relatively tight credit spreads signaling continued confidence in corporate balance sheets and low expectations for defaults. Because of this, we continue to favor exposure to higher-yielding credit opportunities and strategic income investments rather than extending into longer-duration bonds that remain more sensitive to interest rate movements.
Our shorter-than-benchmark bond duration positioning has added value over the past year and continues to align well with the current interest rate environment. Looking ahead, our base case still includes one Federal Reserve rate cut this year, which could provide additional support for fixed income markets moving forward.