Market Commentary

• We continue to see the Iran war being of limited duration and the price of fuel falling back as the Strait of Hormuz tanker traffic builds back toward normal over time.
• Our U.S. growth estimate is affected by higher prices as consumer spending has been impacted and higher inflation likely negates the probability of Federal Reserve (Fed) rate cuts this year.

The early months of this year have been volatile for the stock and bond markets. In short, while there are monetary-policy and global-conflict impacts for financial markets, we do not believe these will derail the positives that we have been focused on since we entered 2026. We see this as a year where earnings and the S&P 500 Index (SPX) climb once again to record highs while longer-term bond yields rise modestly.

The current 800-pound gorilla in the room is the Iran war. Oil prices have surged, and the price at the pump for U.S. drivers has increased substantially as the national average for a gallon of gasoline has risen from $3.52 to $4.80, a 36% increase, since the conflict began on February 28 according to the latest Bloomberg data. Over the same time, the price of diesel fuel in the U.S. has risen nearly 42%. These substantially higher prices for fuel can affect everything from consumer discretionary spending to the prices paid for staples like groceries.

However, we continue to see the Iran war being of limited duration and would expect to see the price of fuel fall back as the Strait of Hormuz tanker traffic builds back toward normal over time. Even if this baseline case is correct, the spike in oil prices should take time to work through supply chains. For example, higher prices for some fertilizers may not register in the consumer’s wallet until the next harvest. Fortunately, other trends in place, such as disinflation in rental prices, should moderate the inflation gain, so we are boosting our year-end Consumer Price Index (CPI) expectations to 3.1% from the prior 2.8%.

Our U.S. economic growth estimate is also affected by these higher prices as consumer spending has been negatively impacted and higher inflation likely negates the probability of Fed interest-rate cuts this year. Our domestic growth estimate falls to a still-robust 2.6% versus the prior 2.9% forecast. We have also removed the two expected rate cuts from our forecast and see the Fed standing pat in 2026.

The factors we are focused on that we believe will support the economy, earnings, and employment over the balance of the year continue to include strong artificial intelligence-related capital expenditures, tax rebates coming to consumers this spring as they file their returns, and substantial accumulated deregulation. These meaningful factors are already at work. The economy has also benefited from the rate cuts we have seen from the Fed thus far.

We have also used recent performance trends to make adjustments to sector allocations. Information Technology (Tech) has underperformed the SPX in the recent pullback, and we believe the sector offers an attractive entry point. As a result, we have upgraded the Tech sector to favorable from neutral. Meanwhile, we have downgraded the Energy sector, which appears to have outrun its fundamentals in the last month. We suggest that investors reallocate into favored equity sectors from those we currently rate as unfavorable and from those neutral-rated sectors that are now above market weight.

Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation, and other risks. Prices tend to be inversely affected by changes in interest rates. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility.

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