Markets weathered significant geopolitical headwinds, though volatility has been elevated.
The conflict with Iran has been the defining story of the quarter, driving oil from $57 to above $100 per barrel. The most likely path forward is a resumption of shipping through the Strait of Hormuz, though a prolonged disruption cannot be ruled out. Against that backdrop, the U.S. stock market’s year-to-date decline of just 4%1 is a resilient result, given active conflicts in the Middle East and Europe and elevated valuations among the market’s largest companies. The trailing twelve-month return of 18.1%1 remains well above long-term historical averages.
Our emphasis on smaller companies and attractively priced stocks proved beneficial this quarter.
Smaller U.S. companies gained 2%2 during the quarter, a notable contrast to the 4.3% decline in large-company stocks.3 “Value” stocks—those priced modestly relative to earnings and assets—gained 2%,4 while “growth” stocks, priced on expectations of future earnings, fell 9.8%.5 Rising energy costs and economic uncertainty prompted investors to reassess the premium they had assigned to higher-valued companies.
International markets outperformed the U.S., even though many foreign economies face greater exposure to oil price increases.
Developed international markets declined just 1.2%6 for the quarter, and emerging markets slipped only 0.2%.7 Over the past twelve months, developed markets returned 21.3%, and emerging markets gained 29.6%,7 both well ahead of the U.S. market’s 18.1%.1 International diversification has served portfolios well.
Rising oil prices pushed interest rates modestly higher, adding pressure to bond markets.
The U.S. economy entered 2026 on solid footing, with near-full employment and moderating inflation. Rising oil prices have complicated that picture, increasing the risk of a re-acceleration of inflation. The 2-year U.S. Treasury Note’s yield rose from 3.5% to 3.8% during the quarter, while the 10-year Treasury Note climbed more modestly, from 4.2% to 4.3%. The direction of rates from here will depend on how quickly oil supplies normalize, whether demand for U.S. dollar-denominated debt holds up, and whether AI-driven productivity gains materialize. We continue to position client fixed income portfolios with less interest-rate sensitivity than the broad bond market.
Relatively flat returns may mask the impact of low-probability future events.
One challenge of investing is to position for the most likely scenario while protecting wealth if a rare event occurs. While it is likely that oil and other commodities will start to flow through the Strait of Hormuz in the coming months, they may not. While it is probable that defaults in private credit funds will be limited, there is a small possibility that they may impact bank profitability or the availability of credit to fund AI.
To maximize the probability of achieving your financial goals, we position portfolios to benefit from the probable scenarios while protecting your wealth if a rare event occurs.
Notes: 1) Russell 3000 Index; 2) Russell 2500 Index; 3) S&P 500 Index; 4) Russell 1000 Value; 5) Russell 1000 Growth; 6) MSCI EAFE Index; 7) MSCI EM Index