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Dear Friends,
Markets opened 2026 with a more uneven tone than many investors had hoped. After a strong finish to last year, the first quarter brought a combination of softer economic data, renewed geopolitical tension, rising energy prices, and continued uncertainty around the path of interest rates. That mix has created more day-to-day volatility, particularly in U.S. equities, but it has not yet meaningfully altered the broader economic picture.
Economic data during the quarter pointed to moderation rather than contraction. Labor market conditions softened, with payroll growth slowing through the first two months of the year and the unemployment rate moving modestly higher to roughly 4.35 percent quarter to date. While this reflects some cooling, it does not currently suggest a severe deterioration in employment trends. Growth expectations remain positive as well. The Federal Reserve’s median forecast for 2026 real GDP growth is 2.4 percent, and the Atlanta Fed’s GDPNow estimate for first-quarter growth is 1.3 percent as of April 9th. At this stage, the economy appears to be decelerating, but not breaking down.
Inflation has continued to improve from the elevated levels of recent years, although the path lower has become less smooth. February CPI rose 2.4 percent year over year, while core CPI was 2.5 percent. Those readings represent substantial progress, but they also make clear that inflation has not fully returned to the Fed’s target. Higher oil prices and firmer producer price data have added another layer of complexity, particularly as investors consider whether recent progress could stall. Against that backdrop, the Federal Reserve left rates unchanged at both its January and March meetings and continues to emphasize that future decisions will depend on incoming data.
Financial markets have adjusted accordingly. At the end of the first quarter, the S&P 500 was down 4.33 percent year to date, the Nasdaq Composite was down 6.96 percent, and the Dow Jones Industrial Average was down 3.19 percent. Performance in other segments has been somewhat more resilient. The MSCI EAFE Index was down 1.24 percent, and the MSCI Emerging Markets Index was down 0.10 percent. Fixed income has also seen limited movement overall, with the broad U.S. bond market down 0.05 percent year to date. The dispersion in returns has been an important reminder that not all parts of the market have moved in lockstep.
Geopolitical developments have played a meaningful role in shaping sentiment this quarter. Tensions in the Middle East contributed to higher oil prices, firmer Treasury yields, and renewed concern that inflation could remain stubborn for longer than expected. Even so, history shows that market declines driven primarily by geopolitical events are often temporary, particularly when they do not result in lasting economic disruption. In our view, the key issue is not the headline itself, but whether it materially changes the outlook for growth, inflation, or corporate profitability.
So far, corporate fundamentals have held up better than recent index performance may suggest. Earnings expectations for the S&P 500 remain favorable, with FactSet estimating first-quarter earnings growth of 12.5 percent year over year. That does not eliminate the possibility of continued volatility, but it does suggest the recent market pullback has been driven more by shifting rate expectations, energy-related inflation concerns, and valuation pressure than by a widespread weakening in business results.
For long-term investors, this distinction matters. Periods of volatility can be uncomfortable, especially when markets are reacting to a fast-moving mix of economic and geopolitical headlines. Still, these environments often reinforce the value of maintaining perspective. The economy today is more energy independent and less energy intensive than it was in earlier periods of sustained inflation pressure, and the current backdrop remains different in several important ways from the conditions investors often associate with past inflation-driven slowdowns.
Our investment approach remains centered on diversification, discipline, and alignment with long-term objectives. Rather than responding to short-term market swings, we continue to focus on portfolio construction that can navigate a range of economic and market environments. That includes thoughtful rebalancing when appropriate and a continued emphasis on maintaining exposure across asset classes and regions.
Looking ahead, we will continue to watch the labor market, inflation data, energy prices, and Federal Reserve policy closely. While uncertainty may remain elevated in the near term, the broader backdrop still appears consistent with slower growth, moderating inflation, and generally supportive corporate fundamentals. In that kind of environment, patience and consistency remain especially important.
As always, please reach out if you would like to discuss how current market conditions relate to your financial plan or investment strategy.
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Sincerely,
The IEM Investment Committee
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