Multi-Asset Solutions
Mosaic Quarterly Communication
Market Recap – First Quarter 2026
There were many memorable moments during the first quarter of 2026, the capture of Nicolas Maduro, the perceived death of software due to AI disruption, upheaval within the private credit market, the US men’s hockey team taking the gold for the first time since 1980, and small caps and value stocks outperforming. However, the watershed moment occurred on February 28th with the launch of Operation Epic Fury. What had been a blistering two-month stretch for stocks, outside of US mega cap growth, was quickly neutralized by the ensuing drop in asset prices throughout March. The US stock market had been undergoing a welcome broadening, with the S&P 500 Equal Weight Index gaining +7.1% versus the traditional market capitalization based S&P 500 Index’s modest +0.7% showing through the end of February. But after a war-torn March, the equal weight index lost -6.0%, leaving it up just +0.7% at the end of the quarter, while the flagship index lost -5.0% to tumble -4.3% by March 31st.
The impact of a +50% increase in the price of oil hit international equities harder than the domestic market, owing to their much greater reliance on importing energy and commodity resources through the now closed Strait of Hormuz (the Strait). The developed markets MSCI EAFE Index jumped double digits to +10.1% through February, only to drop -10.3% in March. Emerging markets fell prey to a similar fate, rocketing up +14.8% in the first two months of the year before free falling -13.1%.
Fixed income markets were unable to escape the ravages of volatility, largely due to the pricing out of Federal Reserve interest rate cuts related to the reemergence of inflation fears due to the jump in oil. Like stocks, bonds had a nice run through February with rates falling, sending the Bloomberg US Aggregate Bond Index up +1.8%, before March came in like a lion sending rates higher and the index down -1.8%.
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Outlook & Positioning
Entering 2026, notwithstanding the seemingly stagnant labor market, the outlook for the US economy and capital markets appeared favorable. The equity market had already started broadening beyond a very small set of US mega-based growth companies, earnings estimates were solid and improving, manufacturing data had bottomed out, consumer spending remained buoyant, and interest rates were held in-check by moderating inflation and the expectation for an accommodative Federal Reserve.
Clearly, the joint US/Israel attack on Iran and ensuing closure of the Strait has put a dent in the expectations for lower interest rates, hurting bonds and rate sensitive equities alike. That said, the effects of events in the Middle East have cast a much longer shadow over the international economic outlook. After sizeable outperformance of non-US assets in 2025, international markets looked poised to benefit again from accelerating global growth and more “value” centric equity markets provided by the larger representation of cyclical industries relative to the US market. However, the high level of energy import dependency of key non-US economies will likely have lingering negative effects long after the “opening” of the Strait.
The duration of the conflict is the singular focus for investors; we believe volatility will remain until peak uncertainty is reached. Much like what we saw last year with trade policy leading up to, and shortly after Liberation Day. The risk to US growth has risen due to the Middle East tensions, yet we do not currently believe the conflict has materially increased recession odds for the economy. For this reason, we have not veered far from our pre-war positioning. We continue to monitor the daily developments and stand ready to change course as the situation in the Middle East evolves.
Looking across asset classes, we note that while credit spreads have widened since late January, risk compensation demands from corporate bond investors remain relatively tame and have loosened since mid-March. Within the oil market, the futures curve is incredibly steep at the front-end, meaning participants expect a quick drop in the price of oil in the coming months, currently pricing West Texas Intermediate Crude under $80 for the August 2026 contract. These observations serve as a positive counterbalance to the increased equity volatility and general market fear. These key markers help shape our level of concern around risk exposures and portfolio positioning.
As things currently stand, we see the back-up in interest rates and widening of corporate bond spreads as potential opportunities to reset our duration and corporate bond positioning incrementally higher. We are also encouraged by the improvement in US equity market valuations as prices have eased while fundamentals, measured by earnings expectations, have continued to improve through the end of the quarter. Lastly, we believe we’re likely to return to a more broadly performing stock market like we saw from November 2025 through February 2026 given the positive economic and market drivers in place once peak uncertainty due to the war has passed.
We truly appreciate your confidence and partnership.
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Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
Diversification does not assure a profit or protect against loss in a declining market.
Bond Spread is the difference between yields on differing debt instruments of varying maturities, credit ratings, and risk, calculated by deducting the yield of one instrument from another.
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The S&P 500® is an unmanaged index of large companies and is widely regarded as a standard for measuring large-cap and mid-cap U.S. stockmarket performance. Results assume the reinvestment of all capital gain and dividend distributions. An investment cannot be made directly into an index.
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The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 11% of the total market capitalization of the Russell 3000® Index.
The MSCI ACWI ex-USA Index captures large and mid cap representation across 22 of 23 Developed Markets countries (excl. the US) and 23 Emerging Markets countries. With 1,843 constituents, the index covers approximately 85% of the global equity opportunity set outside the US.
The MSCI EAFE (Europe, Australasia & Far East) Index is a free-float adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. and Canada.
Bloomberg U.S. Aggregate Bond Index is an unmanaged index of U.S. fixed income securities. The U.S. Aggregate Index covers the USDdenominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS sectors.