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Geopolitical tensions triggered sharp volatility, with the S&P 500 falling 5% in March.
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Markets showed mixed performance, with Energy rallying strongly while Technology and Financial sectors struggled amid AI concerns and private credit risks.
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U.S. economic data remained resilient, with strong earnings, expanding manufacturing, and steady spending, though lower-income households showed increasing financial stress.
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Elevated oil prices are driving inflationary pressures, dampening hopes for rate cuts and suggesting a longer pause by the Federal Reserve.
A month ago, as the first bombs were falling on Iran, we cautioned that unpredictable results would likely spell market volatility (and higher gas prices). Amid the fog of war, the S&P 500 steadily retreated, dropping nearly -8% through March 30 before a massive one-day rally of 2.9% on March 31. If nothing else, this one-day return illustrated the pitfalls of stepping away from a dropping market, locking in losses while potentially missing sudden upswings. The index ended March with a -5.0% loss for the month and a year-to-date -4.4%. While losses are always painful, a look at a 3-year S&P 500 chart hardly shows the recent downturn with a sensational 18.3% annualized return through March 31.
Within the market, mega-caps and growth stocks in general have been weak so far this year, while a hearty start for small stocks was largely mitigated by March losses. This year’s leading sector, Energy, advanced 10.4% in March, driven by rising oil prices. Concerns over the long-term impact of AI on technology firms, particularly software companies, hurt the Technology sector, which produced a year-to-date -9.1% loss. The Financial sector saw a similar drop of -9.4% over potential issues in private credit.
While all eyes were justifiably focused on the Middle East, much of the domestic economic news was considerably more uplifting. Corporate earnings were strong, and the AI build-out supported relative strength in the Industrials and Materials sectors. GDP growth slowed in the fourth quarter of 2025, but much of this could be attributed to the government shutdown. Manufacturing data remained in expansionary territory, and consumer spending retained its strength. Upper-tier households accounted for much of the spending, while the bottom half of households showed more stress. The recent rise in gas prices is likely to exacerbate this situation, while a -7.3% March dip in the Consumer Discretionary sector reflected worries over how a sustained downtrend in stock prices could create a reverse wealth effect and mute spending.
The uncertain resolution of the Iran war and the closing of the Strait of Hormuz have had a direct effect on economic projections. This can be seen in the dipping stock markets of Europe and Asia, whose nations have a heavier reliance on Persian Gulf oil. Here in the U.S., where we have the security of energy independence, we still face the inflationary impacts of expensive oil. Costs for everything from agricultural fertilizer to diesel-driven shipping costs are rising. This inflationary effect has legs even in the most optimistic Iranian resolution. As a result, expectations for further Federal Reserve rate cuts in 2026 have evaporated, with some outlier speculation over hikes. An extended hold seems more likely.
As April opens with hope over a quick war resolution, we are more cautious. The earnings strength of strong U.S. corporations remains our focus, particularly as valuations for some of the strongest earners have touched recent lows. In such an environment, we like the mid- and long-term prospects for our holdings, even as we brace for the possibility of troubling news and more volatility.