Market Summary

Markets experienced a volatile start to 2026 as investors balanced a still-resilient economy against signs of slowing labor market momentum, disruption concerns in software and private credit, and escalating geopolitical tensions in the Middle East late in the quarter.

Early in the quarter, investor focus centered on the growing competitive threat posed by artificial intelligence (AI) to traditional software business models. Leading AI firms introduced increasingly sophisticated capabilities, raising concerns about long-term revenue durability across parts of the software sector. These concerns extended into private credit markets — an asset class that has grown rapidly in recent years and maintains meaningful exposure to software borrowers. As scrutiny increased, several high-profile, semi-liquid private credit vehicles experienced elevated redemption activity, highlighting emerging liquidity and valuation risks within the space.

Geopolitical developments further contributed to market volatility in March, when the United States, alongside Israel, launched coordinated airstrikes against Iran. In response, Iran effectively closed the Strait of Hormuz — a critical choke point through which roughly one-quarter of global oil supply transits — triggering a sharp spike in energy prices and renewed inflation concerns.

Against this backdrop, the Federal Reserve held its policy rate steady during the quarter, emphasizing that while economic activity remained solid, labor market conditions showed signs of softening and inflation remained above target. The most recent data showed CPI rising 2.4% year-over-year through February, while payrolls declined by 92,000 and the unemployment rate held at 4.4%. The Fed also acknowledged increased upside risks to inflation stemming from geopolitical developments.

Looking ahead, we expect near-term volatility to persist amid ongoing geopolitical uncertainty and structural disruption across key industries. However, periods of dislocation can create attractive opportunities for long-term investors. Valuations in several areas of the market improved meaningfully during the quarter. Large-cap technology stocks, for example, are trading at their most compelling levels in several years. Small- and mid-cap equities continue to trade at a notable discount to large caps, while international equities offer diversification benefits, particularly in a weaker US dollar environment. In fixed income, bonds remain a source of income and portfolio ballast despite interest rate volatility.

Equities

The US equities began the year on solid footing before sentiment deteriorated amid AI-driven disruption concerns, stress in private credit markets and escalating tensions in the Middle East. Broadly, equities declined during the quarter, though performance varied significantly by style and capitalization.

The S&P 500 Index fell 4.3% during the quarter. Growth stocks underperformed sharply, with the Russell 1000 Growth Index declining 9.8%, while the Russell 1000 Value Index gained 2.1%. This marked a notable rotation away from the narrow, mega-cap growth leadership that has dominated returns in recent years. The Technology sector declined 9.1%, while Energy surged 38.3%, benefiting from higher oil prices.

In contrast, smaller capitalization stocks showed relative resilience. The S&P MidCap 400 Index and S&P SmallCap 600 Index returned 2.5% and 3.5%, respectively, supported in part by more attractive starting valuations and less direct exposure to mega-cap technology.

International developed markets performed well early in the quarter, supported by earnings growth and US dollar weakness, but reversed course amid geopolitical escalation. The MSCI EAFE Index finished the quarter down 1.2%. Emerging markets followed a similar trajectory, with strong early gains offset by declines later in the quarter — particularly in energy-importing countries. The MSCI Emerging Markets Index ended the quarter down 0.2%. South Korea was a notable outlier, experiencing significant volatility driven by AI-related technology stocks. The Korea Composite Stock Price Index (KOSPI) surged 48% through February before falling 24% in March, ultimately ending the quarter up 20.7%.

Fixed Income

Fixed income markets were modestly negative as investors recalibrated expectations for the timing and magnitude of future rate cuts. The Federal Reserve held rates steady at both its January and March meetings, citing persistent inflation and elevated uncertainty despite continued economic expansion.

The Bloomberg US Aggregate Bond Index was flat for the quarter, while the Bloomberg US Corporate High Yield Index declined 0.5%, reflecting modest spread widening.

Municipal bonds outperformed on a relative basis as investors rotated toward higher-quality, tax-advantaged income amid rising uncertainty. The Bloomberg Municipal Bond Index returned -0.2%, while the High Yield Municipal Index gained 0.7%.

Commodities

Commodities were a standout performer during the quarter, driven primarily by geopolitical tensions in the Middle East. The Bloomberg Commodity Index rose 24.4%.

Oil prices surged 76.8% during the quarter, reaching levels not seen since 2022, as the disruption in the Strait of Hormuz constrained global supply. Crude oil rose more than 50% in March alone, ending the month at $101.38 per barrel —its largest monthly increase since May 2020.

Gold also posted strong gains earlier in the quarter before retracing in March, finishing up 7.1% overall. Looking ahead, commodities are likely to remain both a source of volatility and a potential inflation hedge, particularly if geopolitical tensions and supply disruptions persist.