When the conflict in Iran began, the US economy was in decent but softening shape. Investors were grappling with the dichotomy between a continuation of solid earnings growth and concerns about Artificial Intelligence (AI), private credit, and stretched equity valuations. A month into the war, economic conditions are weakening further but still exhibiting growth. Until the two-week ceasefire on April 8th, a recession still seemed unlikely, but the probability had risen and the risks to growth were skewed heavily downward. A long-term peace agreement would go a long way toward allowing the economy to continue along its slow growth path and calm the concerns of investors.
The Economy
The macroeconomic consequences had escalated from a geopolitical event into what the International Energy Agency has characterized as the “largest supply disruption in the history of the global oil market.” The Strait of Hormuz — through which roughly 20 percent of global oil and a fifth of global LNG normally passes — was effectively closed to traffic. The Strait is now open for a limited, tightly controlled number of vessels, and oil industry executives and analysts agree that continued disruption to traffic through the Strait would have real consequences for the global economy.
Brent Crude Oil $ per Barrell
Source: US Energy Information Administration (EIA), Oilprice.com
The war’s cascading economic fallout radiates well beyond the Gulf, affecting global energy markets, food transportation, industrial supply chains, financial conditions and monetary policies. In March, jet fuel, diesel, and heating oil prices surged. By the end of the month fertilizer prices were up about 36 percent since the war began. Global food prices are expected to rise around 6 percent in 2026 and harvests next year will be impacted as well. Central banks will likely be reluctant to cut rates considering these inflationary pressures.
The United States is positioned to weather the storm better than most countries. The US is now a net energy exporter and the top oil-producing country in the world. Its oil consumption per unit of economic output has fallen by almost 70 percent since 1980, and consumer spending on energy is now just one-third of what it was in the late 1970s.
Even with the turmoil caused by the war, the US economy’s resilience has been impressive. The labor market is weak but not broken — ADP private sector employment expanded by 62,000 in March, topping the 40,000 consensus, though 90 percent of sectors were essentially flat and two-thirds of regions posting outright job losses.
Retail Sales in February beat expectations at +0.6 percent versus January, with strength in apparel, autos, electronics, and building materials — the best topline reading since last July.
However, the US is not completely insulated from its effects as the headwinds for US consumers are real. Retail gasoline prices are up more than $1 per gallon this year. The total cost of the war to consumers, which includes increases in the costs of food, travel and heating costs, could exceed the benefits of the One Big Beautiful Bill Act. If the war resumes, these inflationary pressures could eventually lead to a recession since every US recession since 1973 (excluding COVID) was preceded by an oil shock.
Before the war, the Atlanta Fed’s GDP estimate stood at 3.6 percent; by mid-March it had fallen to 2.8 percent, and in early April it was at 1.9 percent before the ceasefire. A long-term peace agreement could cause growth estimates to be revised upward close to the original 3.6 percent, likely avoiding a recession in 2026.
Equity Markets
US stocks struggled to reach new highs in the lead up to the Iran war, weighed in part by geopolitical tensions but also historically extended valuations and brewing concerns over
the credit quality of consumer and corporate borrowers.
The war added a stagflationary shock to these pre-existing vulnerabilities, causing stock markets to sell-off off in March before rebounding on the news of the ceasefire. The binary nature of the outcome of the war in Iran makes its resolution the single most important variable that will determine which direction the stock market moves the rest of this year. A quick resolution opens the path to new equity highs by summer; a protracted conflict risks further downside.
In March, US equities were helped by strong energy-sector performance and global investors shifting into US assets. Spiking prices in oil, gas, and related products reflect constrained supply due to the closure of the Strait of Hormuz. Stocks in the United States held up better than most other regions in March but still lagged their foreign counterparts during the first quarter of the year. Investors view Europe and parts of Asian economies as more exposed to higher fuel costs than the United States.
Source: Morningstar
The S&P 500 Index’s total returns can be thought of as having three components: dividends, growth from earnings, and increases or decreases in valuation (Price to Earnings Ratio). This year through the end of March, dividends have returned 0.30 percent, and earnings have grown 5.29 percent. Meanwhile the S&P 500 has fallen -4.33 percent. This means the entire decline in the stock market has been caused by multiple compressions. It’s important to remember that while stock prices and earnings tend to move in the same direction over the long run, they can diverge in the short run when investors become nervous.
S&P 500 Index YTD Total Return Contributions From Dividends, Earnings, and P/E Multiple
Year To Date as of March 31, 2026
Source: Exhibit A, Factset Research Systems Inc., Standard and Poor’s
The Technology industry is under dual pressure — both from the war and from broader concerns about AI spending by the hyperscaler companies. Hyperscalers are large cloud service providers that operate huge, scalable data centers that offer computing, storage, and AI services. They enable organizations to reduce capital expenditures, innovate rapidly, and manage massive data demands.
Hyperscaler companies, including AWS, Microsoft Azure, Google Cloud, and IBM, are expected to spend around $678 billion on capital expenditures in 2026. Those capital expenditures must continue growing at roughly 80 percent per year, but their free cash flow is plummeting because revenues are only growing at 15 – 16 percent.
Investors worry that AI becomes ubiquitous rather than scarce, meaning access to it improves everyone’s efficiency without conferring competitive advantage on any particular company. Electricity is often cited as an analogy. Investors are essentially being asked to trust that an unprecedented deployment of capital will generate uncertain returns on a timeline that no one can forecast, funded increasingly by debt, in an energy-constrained environment. With these companies accounting for about 16 percent of the capitalization of the S&P 500 index, this issue will have a major influence on stock market returns in the future.
Source: Bloomberg
Considering everything that is happening now, the current investment environment represents one of the most complex macro backdrops since the 2008 financial crisis. Despite this turbulent environment, Wall Street expects strong corporate earnings growth in the broad economy to continue, and a long-term peace agreement would further boost the earnings outlook.
Fixed Income Markets
The first quarter of 2026 was dominated by two stories. Through February, continuing concerns about private credit and AI (and particularly the intersection of those two) spurred investor concerns. Investment grade corporate credit spreads widened six basis points, and Treasury yields fell more than 20 bps across the intermediate to long end of the curve, driving solid fixed income performance.
However, in March the story shifted to geopolitics. Brent crude prices rose 60 percent in March following the closure of the Strait of Hormuz and damage to Middle Eastern energy infrastructure. This disruption in global energy markets led to a material repricing of inflationary fears. Treasury yields increased between 30 and 44 bps across the curve as investors reversed expectations for the Federal Reserve, from an anticipated 50 bps cut by the end of 2026 to briefly price in Fed increasing rates. Most core fixed income strategies declined in this environment, erasing gains from the first two months of the year.
Implied U.S. Overnight Rate for December 2026
Source: Bloomberg LP; World Interest Rate Probability (WIRP) U.S. Target Rate Futures model
The Fed held rates steady at its previously established policy range of 3.50 percent to 3.75 percent, in both January and March. Most Fed officials have resisted aggressive easing, cautioning that their policy rate is closer to neutral than some market participants suggest and indicated that the path forward must balance risks across their dual mandate. During January’s post meeting press conference, Chair Powell said, “We still have some tension between employment and inflation, but it’s less than it was (in 2025)”. Labor market data released in March disappointed as the non-farm payrolls report showed a revised net loss of 133,000 jobs in February, and despite a recovery in March (+178,000 jobs) the three-month average job gain was only 68,000.
Meanwhile, annualized inflation metrics have remained above the Fed’s two percent target for the past five years. Fed members have expressed concern that the fight against inflation is not won and has become more challenging due to energy disruptions from the Iran war. Caught between weakening economic data and stubborn inflation, the bar appears higher for the current committee to take additional interest rate action in the near term.
U.S. Consumer Price Indices
Source: Bloomberg LP; Bureau of Labor Statistics: US CPI Urban Consumers (white line), Less Food & Energy (yellow line)
Corporate credit spreads tightened to near historical lows early in the quarter before widening in both February and March to end the quarter 11 basis points higher. Credit spreads have remained very resilient since 2022, with brief selloffs followed by renewed rallies pushing spreads ever lower. Bond investors have been quick to buy corporates during spread-widening environments, demonstrating continued confidence in business balance sheets and the attractiveness of absolute yields, yet raising questions as to whether markets are too sanguine about underlying stress. As we turn to the second quarter, we expect circumstances in Iran to continue impacting markets, with a wider range of possible outcomes the longer uncertainty remains.
Option Adjusted Spread- Bloomberg US Corporate Index
Source: Bloomberg LP
We believe that interest rates are attractive at their current levels as nominal yields remain above current and future expected inflation rates. Fixed income securities offer compelling income return with further opportunity for price appreciation if inflation recedes and/or economic activity stalls.
Despite a highly uncertain economic environment, several realities remain clear. The US economy has proven more resilient than many expected, corporate earnings continue to show strength in most sectors, and fixed income yields offer attractive real returns relative to inflation expectations. However, elevated equity valuations, concerns about AI capital deployment efficiency, and persistent inflationary pressures from energy disruptions create a complex risk landscape that requires careful navigation.
In environments like these, portfolio positioning matters more than market timing. Maintaining appropriate diversification, focusing on quality in both equity and fixed income holdings, and ensuring your asset allocation aligns with your long-term objectives and risk tolerance become the primary defense against volatility. As conditions evolve, we continue monitoring developments.
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