QUARTERLY MARKET UPDATE as of  April 2026

After a positive start to the year early in the first quarter, stock indices declined after the Iran war started, which brought uncertainty and a risk off sentiment back into the market. As a result, the S&P 500 ended the first quarter down 5%. The finance and consumer discretionary sectors were both down over 8%, while the energy sector increased 37% after a sharp rise in oil and gas prices. The consumer staples, utilities, and materials sectors were all up over 5%.  Elsewhere, the small cap Russell 2000 index rose 1%, while the MSCI EAFE international index was down a modest -1%.  Growth stocks, which have been the bread and butter of the market in recent years, took the brunt of the decline in the first quarter, but value stocks fared much better.

Interest rates increased moderately across the yield curve, with an average move up of 20 basis points (0.2%). The 10-year treasury yield started the quarter at 4.17% and ended at 4.32%. Mortgage rates also increased, but they remain lower today than a year ago.

Kevin Warsh was nominated to take over from Jerome Powell as the new Federal Reserve Chair. With the big jump in energy prices since the start of the war, the optimism of more rate cuts this year has been put on hold, as the outlook has pivoted from continued cooling of the inflation rate to expectations for a rising inflation rate this year.

Volatility has been on the rise since the start of the war with Iran. The conflict has increased uncertainty from its impact on oil and gas prices, and also the various derivatives like jet fuel, naphtha, plastics, and resins. Helium and sulfur are also facing significant supply disruptions. Helium is needed in high tech manufacturing, while sulfur is an important input for fertilizer production and industrial materials. Damage that has incurred to infrastructure throughout the Persian Gulf region may take several years to repair.

While the U.S. does not have supply constraints for most energy products, pricing is dictated by the global market.  As a result, gasoline prices in the U.S. have already risen on average $1 / gallon. As long as supplies of raw materials are limited, and shipping traffic through the Straits of Hormuz is held up, prices globally will likely remain elevated.

News headlines of the war seem to oscillate every other day with diplomatic progress. Sensational headlines sell stories and can move markets on a daily basis, but examining real data is needed to determine the impact on the underlying economic picture. Looking back at last year’s predictions after the major tariff announcements on “Liberation Day” is a case in point. The widely predicted economic downturn never occurred as tariffs were used as a negotiating tool, and by the end of 2025 the average effective tariff rate turned out to be much lower than initially proposed.

Over the past month, the sharp rise in gas prices has had a significant impact on sentiment. Rising prices are not painless, but the overall economic impact is more limited than the headlines generally imply, as gasoline represents only 1.9% of personal consumption expenditures. The latest data from February (ISM Services PMI) still showed consumer spending activity remains strong.  Weekly data on consumer spending on airline travel, hotel demand, and restaurant sales show no signs of demand destruction. The latest growth forecast by the Atlanta Fed’s GDPNow model for the first quarter shows a healthy 2% increase. The strong tailwinds from AI spending, refund checks from last July’s new tax bill, and the estimated cut in income taxes of $220 billion will continue to fuel the economy.

The energy sector could still have a significant negative impact on the economy if oil prices continue to rise and remain elevated for several months. However, it is in the best interest for most countries to be working against that scenario, and that possibility remains difficult to accurately forecast. That leaves us with known data rather than speculative possibilities. In decades past, energy was the largest sector in the S&P 500; in 1980 it represented 30% of the market, while today it only represents 4%. Energy prices do not have the impact that they may have had in the past.  Additionally, the U.S. is an energy powerhouse, producing 20 million barrels of oil, exporting excess liquified natural gas, and is the world’s largest gas producer.

Business investment has been healthy. Manufacturers’ new orders for core capital goods remain near historic highs.  Earnings and revenues are also expected to be robust. The most recent FactSet estimate for corporate earnings shows an expected increase of 13% in the first quarter, while revenues are forecasted to rise almost 10%.  The latter would be higher than both the 5-year and 10-year average revenue growth rates.

At the same time, recent monthly employment reports have been relatively weak.  Between March 2025 and March 2026, the economy created only 260k jobs, nearly all of them in healthcare related fields.  Along with the uncertainty surrounding inflation, interest rates, and the war in Iran’s impact on the global economy in the months ahead, the first quarter witnessed an increased risk to the economic and market outlook going forward.  Of course, we will be monitoring these risks closely in the quarter ahead.

The first three months of 2026 provided a vivid example of the value of diversification and maintaining a portfolio of reasonably priced investments. While the S&P 500 fell 5% largely due to declines in the largest technology companies, other equity market sectors along with small capitalization stocks and global equity markets fared better, and commodities performed relatively well.

This varied market performance amid the surge in volatility in the first quarter highlights the value of maintaining a diversified portfolio.  In the quarter ahead, we will continue to seek investments that offer value while actively maintaining a healthy asset allocation.