After a strong finish to 2025, the first quarter of 2026 reminds us that markets rarely move in a straight line. A combination of geopolitical shocks and economic headwinds have shaken markets, leaving equities volatile as we close out March. Understanding what's driving this volatility — and where opportunities are emerging — is essential context as we look ahead.
The dominant story of the quarter has been the conflict in Iran, which erupted with little warning and reverberated through markets in various ways. Rising oil and gas prices have been the most direct consequence and have reignited an inflation debate that had mostly fallen into the rear-view mirror. This has forced investors to recalibrate their expectations for interest rate cuts, cuts which had been widely anticipated and priced into growth stocks. This in turn has put pressure on stock multiples, most notably in technology and growth sectors.
Adding to this pressure is a softening economic backdrop. The employment picture has weakened with GDP growth moderating from the robust pace we saw in the back half of 2025. The concern is not that recession is imminent, but rather that the economy's cushion has thinned at a time when external shocks are testing it. An additional layer is the ongoing debate regarding the durability of the AI trade — specifically, whether the enormous capital being deployed here will generate a sufficient return, and whether AI disruption could start to erode the economics of various business sectors.
Despite these headwinds, we think it's worth pausing to consider whether the market's response has been proportionate — or whether pessimism has overshot the underlying reality. There is a genuine case to be made for the latter. High-quality large-cap companies have seen their valuation multiples compress dramatically this quarter, even as their fundamentals remain largely intact. Earnings growth and margins have yet to show signs of eroding, yet their stocks are trading at valuation levels not seen in many years. If the AI disruption thesis proves to be slower-moving or more manageable than feared, then the current prices may represent a compelling entry point for long-term investors.
Beyond valuations, there are other constructive signals as well. AI infrastructure companies, including Nvidia, continue to forecast robust demand, suggesting that whatever the concerns about software disruption, the underlying investment cycle in hardware and data centers remains intact. Perhaps more encouragingly, we are beginning to see the benefits of AI investment show up in productivity outside of the technology sector entirely — in financial services, industrials, logistics, and retail, among others. This is a meaningful development because it broadens the foundation of the AI trade, reducing the market's dependence on a narrow set of mega-cap tech names. Sectors that had long played second fiddle are increasingly finding their footing, and that rotation is a sign of a market maturing rather than one breaking down. The resilience of Walmart is a great example of this.
As we close the quarter, the near-term path uncertain. The situation in Iran bears close watching, and the interplay between energy prices, inflation, and Fed policy will be the critical variable to monitor in the months ahead. At the same time, there are signs of a potential de-escalation that would remove much of the current overhang. Importantly, the economy has not broken — growth remains positive, the labor market remains functional, and corporate America has continued to deliver on earnings even in the face of rising skepticism.
For investors, this environment calls for discipline and selectivity rather than dramatic action. Periods of fear-driven selling have historically rewarded patient investors, and the fundamental case for many stocks has not changed as much as prices might suggest. Diversification remains the most reliable shock absorber, with the broadening of market leadership reinforcing the value of maintaining exposure across sectors. We’re seeing this benefit play out in our portfolios this year, with holdings in small caps, utilities, and staples helping to mitigate the downside in Technology.
While the current environment remains uncertain, we remain steadfast in the principles of long-term investing. Moments of volatility such as this provide opportunity to capitalize on. We will continue to monitor developments closely and remain ready to act thoughtfully on your behalf. As always, we are grateful for your trust and confidence, and we wish you and your families well.