Explore This Report With These Links
- U.S. Growth Slows in Final Quarter
- Fed Rate Cuts Remain on Hold In 2026
- Key Inflation Rate Stable in February But A Meaningful Increase Anticipated in March
- The Labor Market Loses Momentum
- Consumer Confidence Under Pressure
- Spending Remains Resilient Amid Slump In Sentiment
- U.S. Tariffs: Status As Of March 2026
- What PMI And Business Surveys Signal About The U.S. Economy
- The Fiscal Impact Of War
- Eurozone Recovery Falters Under Rising Energy Costs
- China’s Energy Exposure To The Middle East Conflict
- Eurozone Remains Resilient Despite Tariff Headwinds
- China Ends 2025 With Mixed Economic Signals
- Key Rates
- Market Commentary
- Selected Period Returns
- Navigating Conflict-Driven Volatility
- What Could Go Right In 2026?
Executive Summary
Geopolitical tensions have disrupted trade flows, unsettled commodity markets, and heightened investor risk sensitivity. Entering 2026, consensus expectations pointed to modest global rate cuts as inflation eased from pandemic highs despite remaining above central bank targets. While tariffs distorted goods prices and timing of demand, they had not sparked a broad inflation resurgence, leaving the path toward monetary easing intact.
That outlook shifted with the onset of war and renewed supply shocks. Energy markets have become the focal point, with disruptions spreading across commodities and raising the risk that what began as temporary shocks could become more persistent. Rising geopolitical uncertainty, combined with a cooling labor market that has shown more visible stress in recent months, has increased recession risks. Together, slowing growth and rising unemployment have revived concerns about stagflation.
U.S. economic growth slowed sharply in the fourth quarter of 2025, with real GDP expanding at a 0.7% annualized pace as consumer spending moderated, government expenditures declined, and net exports detracted from growth—a clear deceleration from the mid year surge. For the full year, real GDP grew 2.1%, down from 2.8% in 2024. Trade activity throughout 2025 was highly volatile, as tariffs and the anticipation of additional trade actions distorted the timing of consumer and business purchases.
Upcoming March CPI data is expected to reflect a meaningful uptick in headline inflation driven by higher gasoline, diesel, and utility energy costs. The Federal Reserve responded to the new developments with a “hawkish hold,” keeping rates unchanged, sharply revising inflation forecasts due to the energy shock, and pushing back the expected timing of rate cuts.
Equity valuations corrected broadly during the quarter, with U.S. large caps lagging as the “Magnificent 7” declined amid growing scrutiny of the return on accelerating AI capital spending. Small caps initially outperformed but ultimately broke down, briefly dipping into correction territory. Internationally, emerging markets continued to outperform developed peers. In fixed income, yields are higher across the yield curve, pressuring returns as higher energy prices reignited near term inflation concerns.
U.S. Growth Slows in Final Quarter
Real GDP grew at just 0.7% annualized in the fourth quarter of 2025, a sharp deceleration from Q3’s 4.4% surge, as consumer spending cooled, government outlays contracted following the shutdown, and exports reversed earlier gains. Fixed investment was the lone area of relative strength, but it was nowhere near sufficient to offset the broader slowdown. These figures reflect the second estimate of GDP, which was subject to data disruptions tied to the 43-day federal government shutdown; the final estimate is scheduled for release on April 9.
Consumer spending remained the largest contributor to growth, adding 1.33 percentage points to GDP, though this represented a material slowdown from the prior quarter. Spending on both goods and services softened, with the pullback most evident in discretionary categories.
Fixed investment stood out as a relative bright spot in Q4, providing one of the few offsets to weaker consumption. Inventory accumulation added roughly 0.3-percentage-point to growth, reversing the drag seen in the prior two quarters, consistent with firms rebuilding stockpiles after earlier supply disruptions and selectively increasing capital outlays. Residential investment remained weak but showed signs of stabilization after a prolonged period of decline.
Government spending subtracted approximately 1% from GDP, driven primarily by the fourth quarter federal shutdown, which led to a roughly 17% plunge in federal outlays. This was the single largest contributor to the quarter’s deceleration. After contributing positively earlier in the year, exports fell in Q4, producing a negative swing in trade that reflected softer global demand and lingering supply chain frictions.
Looking beyond the quarter, the roughly $31 trillion U.S. economy remains positioned for modest long-term growth, supported by continued corporate investment in AI and disproportionately strong spending by higher-income households. According to the Congressional Budget Office, potential growth is estimated to run around 2.1% over the remainder of the decade, as AI-driven productivity gains help offset slower labor force growth tied to population aging and reduced immigration. At the same time, the risk of a prolonged war, increasing pressure on consumers, and a labor market that cooled meaningfully in 2025—with job growth narrowly concentrated in health care and the public sector—have elevated concerns around inflation persistence and, at the margin, potential stagflation.
Fed Rate Cuts Remain on Hold In 2026
The Federal Open Market Committee (FOMC) met on March 18, roughly three weeks after the onset of the conflict in Iran, at a time when energy prices were rising and inflation risks were moving back into focus. As expected, the Fed held policy rates unchanged, but the tone of the meeting was decidedly hawkish. The dot plot shifted higher, inflation forecasts were revised upward, and Chair Powell downplayed early signs of labor market softening while emphasizing the risk that supply-driven price pressures could become more persistent. Markets interpreted the meeting as a clear “hawkish hold,” pushing futures pricing toward a tighter-for-longer outlook, with traders now assigning little probability to near-term rate cuts.
That market reaction is consistent with recent inflation data. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, rose at a 2.9% annualized pace in the fourth quarter of 2025, with core PCE running at 2.7%. More recent January data showed headline PCE easing modestly to 2.8% year over year, while core inflation remained near 3%, underscoring the persistence of underlying price pressures. This combination of moderating headline inflation and sticky core trends, now compounded by renewed energy-driven risks, helps explain the Fed’s growing caution around the timing and scope of future interest rate cuts.
A leadership transition at the Federal Reserve in May adds another layer of uncertainty to the policy outlook. With Chair Powell’s term concluding, markets expect the incoming chair to place a near-term premium on reinforcing inflation credibility, particularly in the face of renewed energy-driven price pressures. While the Fed’s policy framework and committee-driven decision-making process are unlikely to change materially, new leadership often brings a recalibration of communication, risk management, and tolerance for inflation persistence. As a result, investors should expect continued emphasis on inflation control, less willingness to “look through” supply side shocks, and heightened market sensitivity as the new leadership establishes credibility.
Key Inflation Rate Stable in February But A Meaningful Increase Anticipated in March
February’s Consumer Price Index (CPI) report delivered a steady, expectation-matching inflation reading. Headline and core CPI were unchanged from January, driven mainly by shelter, while food inflation quickened and energy prices started to rise. In hindsight, the report offered a final snapshot of relatively stable inflation dynamics before the March energy shock reshaped the near-term outlook. With energy markets tightening and fuel costs rising, the next CPI report, scheduled for April 10, is expected to show a meaningful pickup in headline inflation, reflecting higher gasoline and utility prices that are now beginning to ripple through the broader inflation landscape.
Energy prices are the primary transmission channel through which geopolitical conflict affects the broader economy. Higher oil and natural gas costs raise transportation and logistics expenses, pushing inflationary pressure through supply chains. More critically, disruptions to the global flow of oil and refined products constrain production capacity across a wide range of industries—from semiconductors to agriculture. Petroleum inputs underpin plastic resins, fertilizers, and mineral processing, amplifying the reach of the shock well beyond fuel prices. What begins as an energy supply disruption can therefore evolve into a broader growth and inflation challenge.
As of quarter-end, U.S. crude prices stood at $101.8 per barrel, with the international benchmark Brent crude at $103.9, marking the highest levels since July 2022, when Russia’s invasion of Ukraine disrupted global energy markets. Prior to recent conflict in the Middle East, WTI crude was trading around $65 per barrel. As a rule of thumb, economists estimate that every sustained $10 increase in oil prices adds roughly 0.2 percentage points to consumer inflation and approximately 25 cents per gallon to gasoline prices. Gasoline is one of the most volatile components of CPI and responds quickly to changes in crude pricing, while utility energy services, including natural gas and electricity, tend to adjust with a short delay. Over time, these effects can fade as prices stabilize at a higher level, which is why central banks often attempt to “look through” temporary energy shocks when assessing inflation and setting monetary policy.
The inflation outlook has, however, become more uncertain as the war in Iran has sharply disrupted global oil and gas flows. Traffic through key shipping routes, most notably the Strait of Hormuz, which normally handles roughly one-fifth of global oil supply, has been severely curtailed, limiting the movement of crude, refined fuels, and liquefied natural gas to global markets. With few alternative routes available, major producers have been forced to cut output, pushing energy prices higher despite emergency releases from strategic reserves. While these measures can help smooth near-term dislocations, they cannot fully replace disrupted supply, leaving energy prices elevated and volatile.
The stakes extend beyond fuel costs alone. Energy is a foundational input across transportation, manufacturing, agriculture, and petrochemicals, meaning sustained disruptions to oil and product flows can ripple through global supply chains and gradually lift core inflation. History suggests central banks often try to look through temporary energy shocks, but the risk rises if higher prices persist long enough to influence inflation expectations or constrain production capacity. Against a backdrop of already sticky core inflation, renewed energy driven pressures increase the likelihood that inflation will prove slower to normalize, complicating the path toward monetary easing and reinforcing a more cautious policy stance in the months ahead.
The Labor Market Loses Momentum
As of February 2026, the U.S. labor market is clearly cooling. Payroll growth has slowed materially, the unemployment rate has edged up to 4.4%, job openings have fallen below pre-pandemic norms, and employer leverage has increased. Beneath this slowdown, however, the market remains structurally tight for certain skilled roles, with persistent hiring challenges in a handful of key sectors.
Payroll growth has decelerated sharply, with average net job gains over the past ten months running near 5,000 per month, well below levels seen earlier in the cycle. Economists have characterized this as a “controlled cooling” rather than a recessionary contraction. Despite much weaker hiring, unemployment has not risen more sharply, in part because the economy now requires fewer monthly job gains to keep the unemployment rate steady, reflecting slower labor force growth and reduced immigration.
The labor market is increasingly bifurcated. Demand remains firm for specialized, credentialed roles, while hiring has weakened for entry-level and routine positions. Health care and education continue to account for a disproportionate share of job gains, while employment growth in interest sensitive and cyclical industries has softened. Job openings per unemployed worker have fallen below the 1:1 threshold, a notable shift from the exceptionally tight conditions of 2021–2023. Time-to-hire is lengthening as employers grow more selective, and while layoffs remain contained, overall job creation is tepid by historical standards.
Consumer Confidence Under Pressure
Consumer confidence weakened materially in March, reflecting rising inflation anxiety and growing concern about the economic consequences of the war in Iran. The University of Michigan’s Consumer Sentiment Index fell to 53.3, its lowest level since late 2025, driven primarily by higher gasoline prices, financial market volatility, and deteriorating short-term expectations. Year-ahead inflation expectations rose sharply to 3.8%, the largest monthly increase since April 2025, underscoring the sensitivity of household sentiment to energy driven price pressures. Notably, the decline in sentiment was broad-based across income and demographic groups, with middle and higher-income households showing weakness as equity markets pulled back and fuel costs surged.
Measures that place greater weight on current labor market conditions paint a slightly less severe, though still cautious, picture. The Conference Board’s Consumer Confidence Index edged higher in February to 91.2, as perceptions of present employment conditions improved modestly, even as expectations for the future remained well below levels typically associated with sustained expansion. Taken together, these surveys suggest that while consumers continue to benefit from a still functioning labor market, rising energy costs and heightened geopolitical uncertainty are weighing heavily on confidence, raising the risk that spending growth moderates as 2026 progresses.
Spending Remains Resilient Amid Slump In Sentiment
Despite the recent deterioration in confidence, consumer spending has remained more resilient than sentiment alone would suggest, though that resilience has become increasingly narrow and concentrated among higher-income households. While aggregate spending has held up amid moderating growth and a cooling labor market, research using Federal Reserve credit card and retail transaction data shows that since 2022, real spending growth has been driven primarily by affluent consumers. In contrast, lower and middle-income households, who report the steepest declines in confidence, have already become more cautious.
Estimates suggest the top 10% of U.S. households now account for roughly 45–50% of total consumer spending, leaving overall demand increasingly sensitive to the behavior and confidence of higher-income consumers. This concentration helps explain why spending may remain resilient in the near term even as confidence erodes more broadly. At the same time, it amplifies downside risk. Should declining confidence among affluent households translate into reduced discretionary spending, whether due to equity market weakness, higher energy costs, or tighter financial conditions, the resulting pullback could have an outsized impact on overall growth. In this context, the recent deterioration in consumer confidence bears close watching as a potential leading indicator for slower spending ahead.
U.S. Tariffs: Status As Of March 2026
The U.S. tariff landscape shifted materially in February following a landmark Supreme Court ruling that significantly curtailed the executive branch’s use of emergency powers in trade policy. In a 6–3 decision, the Court ruled that the International Emergency Economic Powers Act (IEEPA) does not authorize the president to impose tariffs, invalidating a broad set of duties imposed since early 2025 on imports from China, Canada, Mexico, and numerous other trading partners. The Court concluded that tariffs constitute a form of taxation reserved for Congress, not an executive action permitted under IEEPA. As a result, all tariffs imposed solely under IEEPA are no longer legally valid, and U.S. Customs and Border Protection has ceased collecting those duties.
Importantly, the ruling did not unwind the U.S. tariff authority more broadly. Section 232 tariffs on steel, aluminum, and related products remain in place, as do Section 301 tariffs targeting Chinese imports tied to unfair trade practices. In addition, the administration has moved quickly to replace the invalidated IEEPA tariffs with new levies under Section 122 of the Trade Act of 1974, initially set at 10% and expected to rise to 15% on select countries. While the Supreme Court decision removed a major pillar of the recent tariff escalation, trade policy uncertainty remains elevated, and tariff levels remain historically high.
The ruling also opened the door to what could become the largest tariff refund process in U.S. history. More than 330,000 importers are estimated to have paid roughly $165–170 billion in duties under the now-invalidated IEEPA tariffs. While the Court did not mandate automatic refunds, the U.S. Court of International Trade has directed Customs to unwind nonfinal entries and establish a refund mechanism, though implementation has been temporarily paused while new administrative systems are built. From a macroeconomic perspective, the refund process represents a potential, though uncertain, liquidity tailwind for corporate balance sheets rather than a meaningful boost to consumer demand. Refunded tariffs would primarily reverse prior cost pressures, making the net effect modestly disinflationary over time, with the largest near-term implications tied to earnings, investment decisions, and trade exposed sectors rather than headline inflation or growth.
What PMI And Business Surveys Signal About The U.S. Economy
Recent readings from Purchasing Managers’ Indexes (PMIs) and other U.S. business surveys point to an economy that is slowing but not stalling. PMIs remain near the threshold separating expansion from contraction, signaling moderation in activity rather than a broad downturn. Importantly, forward-looking components such as new orders and business expectations have shown signs of stabilizing, suggesting that growth concerns are being reassessed rather than accelerating. At the same time, pricing components indicate that cost pressures are easing, and inflation is becoming more contained, a combination more consistent with a soft-landing environment than with recessionary dynamics.
Taken together, PMI data and corroborating measures, such as hiring intentions, capital spending plans, and corporate guidance, suggest that businesses are becoming more selective and efficiency-focused, rather than retrenching outright. Manufacturing activity remains subdued, but services tied to consumer spending continue to expand, reinforcing the picture of a two-speed economy rather than systemic weakness. Historically, this type of backdrop has been associated with elevated dispersion across sectors and styles, but also with markets beginning to look through near-term uncertainty. For investors, the message from business sentiment indicators is one of caution without capitulation, reinforcing the case for disciplined positioning in areas with durable demand and earnings visibility as the cycle continues to normalize.
The Fiscal Impact Of War
The war has introduced a material upside risk to an already large U.S. budget deficit. As of early 2026, the Congressional Budget Office (CBO) projects a fiscal year 2026 deficit of roughly $1.9 trillion under current law, before accounting for any additional conflict-related appropriations. War spending, unless explicitly offset with new revenues or spending cuts, adds dollar for dollar to the deficit in the year the funds are spent, regardless of whether Congress classifies the funding as “emergency” or supplemental.
Reported military outlays underscore the potential scale of the impact. Pentagon briefings to Congress indicate that operations cost more than $10 billion in the first week alone, with some estimates approaching $1 billion per day as the conflict intensified. In response, the Department of Defense has discussed the possibility of a large supplemental funding request, potentially on the order of $100–200 billion, to cover ongoing operations and replenish depleted munitions stockpiles, though officials have emphasized that the final figure remains uncertain. Even more modest supplemental funding would represent a meaningful increase relative to baseline deficit projections.
From a macro perspective, the near-term economic effects are less about stimulus and more about financing and second-order consequences. Defense spending has limited short-run multiplier effects compared with household transfers or infrastructure investment, particularly when it is focused on overseas operations. As a result, incremental war spending is unlikely to provide meaningful domestic growth support, while it does increase Treasury borrowing needs. Over time, higher deficits and rising interest costs add to fiscal pressure, potentially contributing to upward pressure on rates, especially if elevated energy prices simultaneously weigh on growth. In this context, war related spending should be viewed primarily as a fiscal headwind to an already strained budget outlook, reinforcing longer-term concerns around debt sustainability rather than altering the near-term growth trajectory.
Eurozone Recovery Falters Under Rising Energy Costs
The war has delivered a negative, energy-driven shock to an already fragile Eurozone recovery. Europe’s heavy reliance on imported energy, particularly oil and liquefied natural gas transiting the Strait of Hormuz, has made the region especially vulnerable to the conflict. Since late February, disruptions to shipping and energy infrastructure have driven oil and gas prices materially higher, pushing up input costs, eroding household purchasing power, and weighing on business confidence across the region. High frequency data already show the impact: Eurozone PMI readings fell sharply in March, hovering just above contraction, as firms reported rising costs, supply delays, and weaker demand.
Reflecting these developments, the European Central Bank (ECB) revised its outlook in March, explicitly citing war as a source of higher inflation and weaker growth. ECB staff projections now warn that higher energy prices will lift inflation in 2026 while dampening real incomes and consumption, resulting in a softer growth profile than previously expected. Under the ECB’s baseline assumption, where energy prices peak in mid-2026 and gradually ease, growth slows near term but stabilizes later. However, the ECB emphasized that risks are skewed to the downside, especially if energy disruptions persist or confidence deteriorates further
On balance, Eurozone growth in 2026 is now expected to be modest, with rising stagflation risks. The European Commission has warned that even a short-lived conflict could shave ~0.4 percentage points off EU growth next year, while a more protracted disruption could reduce growth by up to 0.6 percentage points in both 2026 and 2027, relative to earlier forecasts. In practical terms, this implies Eurozone growth closer to 0.8–1.0% in 2026, down from prewar expectations near 1.3–1.4%, with inflation simultaneously running higher due to energy price passthrough. The combination of weaker growth and renewed inflation pressure complicates the policy outlook, limiting the ECB’s ability to ease and reinforcing Europe’s sensitivity to further geopolitical or energy shocks.
China’s Energy Exposure To The Middle East Conflict
China faces greater strategic exposure to a Middle East war than Europe or the U.S., with roughly 45–50% of its oil imports tied to Gulf supply and the Strait of Hormuz, making disruption a potential supply risk rather than merely a price shock. To date, however, the impact has been muted, as large strategic reserves, diversified sourcing toward Russia and Central Asia, and reduced oil intensity from electrification have limited near-term damage. Still, higher energy costs arrive at a fragile point in China’s cycle and reinforce expectations for slower, policy managed growth in 2026, with expansion moderating toward the mid-4% range.
Key Rates
Market Commentary
The first quarter of 2026 felt uncomfortably familiar for markets. As in early 2025, sharp swings and elevated volatility dominated, this time driven by the conflict in the Middle East rather than tariff concerns. In both periods, the core issue was the same: renewed upside risk to inflation, which weighed on returns and compressed valuations across asset classes. Following the escalation of the conflict in late February, most assets gave back earlier gains, with commodities the notable exception. Within equities, U.S. large caps lagged as the “Magnificent 7” declined sharply amid growing scrutiny around the payoff from accelerating AI capital spending. The large-cap S&P 500 index was down 4.3% for the quarter. Small caps initially proved more resilient on expectations for stronger earnings growth, but that strength faded as the quarter progressed. The Russell 2000 was up 0.9%. Overseas, emerging markets initially continued to outperform developed peers, led by AI-exposed markets such as Korea and Taiwan. The Emerging Markets index faded from up 15.4% in late February to end at -0.2%. The developed international Europe, Australia, and Far East (EAFE) index finished the quarter -1.25%. Commodities were the top-performing asset class, though returns were highly dispersed; energy surged alongside oil prices, while precious metals lost momentum.
Against that backdrop, U.S. equities delivered a mixed and volatile quarter as investors balanced slowing economic momentum, persistent inflation uncertainty, geopolitical risk, and shifting expectations for monetary policy. After a strong finish to 2025, markets weakened through February before stabilizing and partially recovering in March, as fears of an energy-driven inflation spiral eased and attention shifted back toward earnings fundamentals and long-term productivity themes. Market leadership remained narrow and growth-oriented, with large-cap technology and AI-linked companies providing most index support, while value, rate sensitive, and more cyclical segments lagged. Strategically, the quarter reinforced a familiar lesson: in a higher rate, policy constrained environment, earnings durability matters more than multiple expansion. While volatility and concentration risk remain elevated, history suggests periods of stress are often shorter than feared, and that recent dislocations may present opportunities to reposition portfolios toward durable structural growth themes extending well beyond the current geopolitical episode.
The divergence between the Russell 2000 and the S&P 500 was a defining feature of the quarter. Small caps began the year as early leaders, rallying into late January on optimism around Fed rate cuts and expectations for a broadening of market leadership beyond mega cap technology. That narrative reversed quickly. The Russell 2000 became the first major U.S. index to enter correction territory, pressured by rising energy costs, fading rate-cut expectations, tighter financial conditions, and growing concerns around domestic growth. By contrast, the S&P 500 has held up materially better despite notable weakness among its largest constituents. While declines in the “Magnificent 7” drove much of the index’s drawdown, broader diversification, stronger balance sheets, and superior pricing power helped large caps avoid a deeper contraction. In short, large caps bent; small caps broke.
Style and sector performance reflected this dynamic. Value stocks outperformed growth across all size categories, and mid and small cap equities outperformed large caps overall despite their late quarter weakness. From a sector perspective, energy was the clear standout for the quarter, while materials, utilities, and consumer staples also delivered positive returns. In contrast, financials, technology, and communication services lagged the broader market, reflecting pressure from higher rates, margin concerns, and valuation compression.
Although bonds would normally be a safe-haven trade in the initial stages of global disruption, U.S. Treasury yields have risen in anticipation of worsening inflation-related to energy price shocks.
Since the onset of the war in Iran, the U.S. Treasury yield curve has maintained an upward slope, signaling economic growth in the quarters ahead. But it also has shifted a bit with nuanced implications for the economy and interest rates. First, the curve has pushed higher. Back in late February, the 2-year Treasury note yield was 3.4%, and the 10-year yield was 4.0%. Now, those rates are 3.8% and 4.3%, respectively. This shift higher in the yield curve implies inflation may be poised to make a comeback, likely driven by higher energy prices. Second, the upward slope of the yield curve has flattened a bit. In late February, the spread between the 2-year and 10-year bonds was 60 basis points. Now, that is down to 52 basis points. This tightening of the yield curve points toward a potential slowdown in the rate of economic growth, though we note that the curve is nowhere near an inverted state which has long been associated with economic weakness.
Bond returns for the quarter were flat due to the upward shift in yields. The Bloomberg U.S. Aggregate bond index was -0.05% while the 1-3 Year US Treasury index was 0.27%. The Bloomberg Municipal Index lost 0.18% for the quarter.
Selected Period Returns
Navigating Conflict-Driven Volatility
While much of the recent economic and market news has been negative, history provides important perspective. Periods of geopolitical conflict, from the 1973 oil embargo and the Gulf War to 9/11, the Iraq War, and more recently Russia’s invasion of Ukraine, have repeatedly produced elevated volatility, cautious sentiment, and short-term equity market drawdowns, often driven by energy prices and inflation fears. In most cases, however, the direct impact on equity markets proved temporary, with markets stabilizing and recovering well before geopolitical uncertainty was fully resolved. Equity markets have consistently demonstrated their forward-looking nature, discounting near-term disruptions faster than economic fundamentals change and eventually refocusing on earnings growth, innovation, and productivity. Against this backdrop, current conditions appear less a break from long-term trends than a familiar, if uncomfortable, phase of adjustment that markets have historically navigated successfully.
For diversified, multi asset portfolios, periods of conflict have typically reshaped relative performance rather than long-term outcomes. Past episodes have often driven short-term rotations, supporting commodities and inflation sensitive assets, pressuring both equities and bonds simultaneously, and temporarily increasing correlations, without undermining long-term return potential. Over time, diversification benefits have reemerged as markets absorbed new information and adjusted pricing. Viewed through this lens, today’s environment reflects another cyclical reset in asset leadership rather than a structural regime shift, reinforcing the importance of discipline, diversification, and maintaining focus on durable long-term objectives amid near-term uncertainty.
What Could Go Right In 2026?
A number of potential tailwinds are already emerging. Large tax refunds and continued spending by higher-income households provide a cushion for consumption, while corporate fundamentals remain solid, with S&P 500 earnings still expected to grow. Capital investment tied to technology and infrastructure continues to support productivity gains, and despite recent volatility, inflation expectations remain well anchored. Perhaps most importantly, innovation, from AI deployment to efficiency gains across sectors, continues to reshape growth prospects. Taken together, these forces offer a reminder that today’s challenges coexist with meaningful opportunities. For investors, this argues not for retreat, but for disciplined, forward-looking positioning, staying focused on quality, diversification, and the structural drivers of long-term growth as markets work through near-term uncertainty. Through periods of uncertainty and opportunity alike, we remain committed to guiding you with clarity, discipline, and perspective.
First Business Bank – Ready When You Are.
Updated: 4/2/2026
