Insights
Quarterly Commentary
1Q 2026
In early 2026, markets displayed surprising resilience given everything going on in the world.
US stocks and most developed international markets were down 5% or less over the course of the first quarter. With alarming headlines appearing daily since conflict broke out on February 28th, we’ve heard from many clients who expected something worse. It is natural to assume markets will reflect our concerns around current events and their implications for the future.
Acknowledging the situation in the Middle East and the economic hardships that will continue to be felt throughout the world, it is worth considering the relatively mild stock market reaction. While wars and other geopolitical shocks often trigger an initial selloff in risk assets, the depth of the decline depends more on the underlying health of the economy and current market valuations. The US economy appears to be chugging along, and Wall Street analysts have lately been raising earnings forecasts. The combination of moderately lower stock prices (the average US stock ended the first quarter 20% below recent highs) with strong earnings means that valuations quickly became more attractive.
Whether investors were tempted by cheaper stocks or were hopeful about a swift resolution to the war, they seemed to be looking past current affairs to a better future by the end of the quarter. There is no doubt that optimism pays over the long run – but it is always difficult to know exactly when you will be rewarded.
The Strait of Hormuz: Still the Key Variable
In mid-March, we outlined three potential scenarios for the status of the Strait of Hormuz, the most economically important aspect of the conflict:
- A full reopening
- A partial reopening
- An extended closure
At present, markets appear to be anticipating something close to a partial reopening, with some hope for a full restoration of normal traffic in the coming weeks. But the range of outcomes remains wide and the clock is ticking before shortages become more reality than speculation.
Even in a best-case scenario, where a ceasefire holds and ultimately leads to a durable resolution, the economic effects will linger. And oil is only part of the story. Supply chains tied to fertilizers, industrial gases like helium, and petrochemical derivatives such as plastics have all been disrupted. These dislocations are likely to persist well beyond the end of the actual war. This will weigh on profits, increase inflation, or both. And the impact will be felt unevenly throughout the world.
Looking Ahead
As optimism about a potential de-escalation has grown, investor attention has already started to return to February’s dominant theme: artificial intelligence. There seem to be daily fluctuations in the narratives around winners and losers. One big question keeps coming up: will AI meaningfully disrupt the traditional software businesses?
The answer is unlikely to be uniform. For some companies, AI represents a direct competitive threat by compressing margins and/or eroding moats. For others, it is an accelerant, enabling new products, efficiencies, and revenue streams.
Earnings season is just getting underway, and it should offer early signals. Not definitive answers, but hints both about the real-world impact of AI adoption and the economic toll of recent geopolitical events.
What Should Investors Do?
While it may be tempting to try to predict the outcomes of macro events, it is impossible to do so with any confidence. When extreme scenarios become more likely, caution is an appropriate response. But rather than act out of fear, we attempt to consider a full range of scenarios and their potential impact on asset prices.
The best course for individual investors is to ensure that their portfolios remain aligned with both financial goals and tolerance for risk. If changes are warranted, they will look different depending on the situation:
- For those holding excess cash or with a higher risk tolerance, periods of volatility can create opportunities to incrementally add to stocks or bonds.
- For those with near-term spending needs or lower risk tolerance, it may be appropriate to opportunistically trim exposures and increase stability.
As always, we prefer incremental adjustments over wholesale changes unless personal circumstances dictate something more drastic.
We spend a great deal of time discussing markets, companies, and macroeconomic developments. Every morning, we review our holdings, assess new information, and challenge our assumptions.
