2026 First Quarter Stock Market Update
Topsy-Turvy
April 2026
It’s hard to write a letter these days. Any attempt to prepare thoughts in advance risks quickly being obsolesced (we hope this letter is still relevant when you read it!). Topsy-turvy is the best way to describe the first quarter of 2026. The year started on a decent note with gains in January. However, renewed tariff concerns, waning enthusiasm for AI-related stocks and war in Iran ultimately became headwinds. The S&P 500® Index finished the quarter down 4.3% while the Russell 2000® Index finished up 0.9% (having been up 9.6% at one point).
We initially witnessed a rotation within the market. Technology stocks and names linked to artificial intelligence (AI), which were so popular for much of last year, began to see declines. In fact, technology was one of the worst performing sectors this quarter (down 9%). Two potential risks that we discussed at year end started to manifest themselves. Number one was the potential for AI to fuel disruption among the large technology incumbents. This was on full display in Q1, with the various AI participants forming a circular firing squad of sorts. Many prior “winners” became “losers” for fear of disruption and/or loss of leadership status. This disruption narrative was most acute in the software space. The second risk we previously highlighted was the potential for investors to question the massive capital expenditures going into computing power for AI. Indeed, investors started to wince as tech behemoths dramatically increased spending plans while having uncertain paybacks.
Meanwhile, investors started to look for value elsewhere. Cyclical, value-oriented and small cap stocks broadly outperformed for a bit. Interestingly, the equal-weighted S&P 500 meaningfully outperformed the cap-weighted index, which is dominated by large cap tech bellwethers including the so-called “Magnificent 71”. As the tech sector was declining, sectors such as energy, materials and industrials started the year on a strong note as investors began to discount an improving economic environment alongside fiscal stimulus and the potential for further interest rate cuts. We also think there was an element of investors gravitating towards businesses that were deemed more immune from the AI-disruption narrative. Ironically, it started to pay to be outside of the AI fray despite the promise of the new technology.
Then, conflict in Iran took over the headlines. The Strait of Hormuz effectively closed (20-25% of seaborne oil passes through the Strait), oil prices spiked and market dynamics changed as investors began to fear an economic slowdown. While energy stocks gained due to higher commodity prices, we shifted from a market rotation to a market where almost everything was going down. Technology continued to struggle, but consumer, cyclical and interest rate-sensitive stocks were also hit hard. The economic risks of war in Iran are fairly straightforward. For one, higher oil prices mean higher gasoline prices (up $0.75-$1.00 per gallon since the war commenced), which could weigh on consumers’ wallets. Higher oil also means upward pressure on overall inflation, which in turn puts upward pressure on interest rates and financing costs. Relatedly, it also decreases the odds of monetary stimulus in the form of Fed rate cuts. Finally, many companies that have a presence in the Middle East are dealing with disruption to their businesses and/or supply chains.
Where now? We were looking forward to the potential benefits of both fiscal and monetary stimulus. The waters are now murkier and higher gasoline prices, should they persist, will offset much of the benefit of Trump’s Big Beautiful Bill. However, the President seems very sensitive to both economic conditions and markets, especially with mid-term elections approaching. We aren’t sure how easily this conflict can be resolved and the Middle East has always been a quagmire, but any semblance of a resolution, including re-opening the Strait, could prompt a relief rally (we got a taste of this on the last day of the quarter). Remember, we were thrown a Trump curveball this time last year in the form of Liberation Day and tariffs. Uncertainty initially weighed on investor sentiment, but it ultimately paid to lean into fear and be buyers of stocks as worst case outcomes never came to fruition.
Speaking of fear, the CNN Fear & Greed Index resides at 14 out of 100 as of this writing, indicating “extreme fear” on the part of investors. What’s more, valuations have become more reasonable with the S&P 500 trading at 19.3x forward earnings and the equal-weighted S&P at 15.6x. Assuming a reasonably swift resolution to Iran (or at least a going from a boil to a simmer), we think many stocks now offer compelling deals. A volatile political environment has brought many surprises and made our job a little more difficult, but we do indeed see value in certain areas. We continue to focus on avoiding disruption at the hands of AI and remain hopeful that economic improvement can continue, thereby benefiting cyclical and consumer-oriented businesses. Thank you for your partnership and please refer to our portfolio letters for a discussion of themes and ideas.
Sincerely,
George L. Smith III, CFA®
Chairman, Investment Policy Committee
| Market Returns | Q1 2026 | 2025 |
| U.S. Large Caps | -4.3 | 17.9 |
| U.S. Mid Caps | 1.3 | 10.6 |
| U.S. Small Caps | 0.9 | 12.8 |
| International Developed Markets | -1.2 | 31.2 |
| Emerging Markets | -0.2 | 33.6 |
| Intermediate Term Bonds | 0.0 | 7.0 |
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Important Disclosures
1The Magnificent Seven (“Mag 7”), stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla
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