Q1 2026 Market Update: Stability Holds Amid Rising Tensions

The new administration’s broad initiatives across tax, trade, and immigration policies, most notably the significant increase in effective U.S. tariff rates, were widely expected to weigh on global growth, trade activity, and cross-border investment. Thus far, however, the global economy has demonstrated notable resilience. Supported by sustained technological investment, accommodative financial conditions, and steady private-sector capital spending, global GDP is projected to grow approximately 3.3% this year.

However, the ongoing conflict with Iran has introduced additional volatility, particularly within energy markets. Crude oil prices have risen roughly 45% since the outset of the conflict, prompting investors to reassess inflation expectations and evaluate portfolio risks. While these developments have created short-term uncertainty, underlying fundamentals, ranging from steady productivity gains to improving corporate earnings expectations, should help provide stability during this period of heightened geopolitical tensions.

A “K-Shaped” U.S. Economy and Uneven Growth Trends 

Domestically, economic performance remains reasonably solid, though increasingly “K-shaped.” Higher-income households and companies benefiting from the acceleration in artificial intelligence investment continue to perform well, while lower-income households and legacy industries remain pressured. Some estimates indicate the highest-earning 10 percent of households now account for roughly half of total U.S. consumption, up from one-third three decades ago.

The combination of elevated home prices and a doubling of the S&P 500 Index since late 2019 has contributed to the widening disparities. Even so, the post-pandemic labor market delivered substantial wage gains for lower-paid workers, particularly within service-oriented industries. Overall, the U.S. economy continues to move forward at a modest pace, characterized by low unemployment and stable inflation. Nonetheless, structural imbalances and emerging risks warrant ongoing attention.

Today, economic indicators remain uneven. While the unemployment rate stands at 4.4 percent, below long-term historical averages, recent job gains have been subdued. The latest employment report showed a decline of 92,000 jobs, led by notable weaknesses in healthcare and construction. Although much of this decline may be attributable to temporary factors such as adverse weather and labor disruptions, the trend warrants monitoring.

Conversely, the services sector continues to show strength, expanding at the fastest pace since mid-2022, supported by robust orders and elevated business activity. Fourteen service industries reported growth, led by mining, information technology, and real estate. The manufacturing sector, long a weaker point in the economic landscape, is also showing early signs of recovery. The new orders component of the manufacturing index, a key leading indicator, recently moved decisively into expansion and reached its highest level in four years. This improvement reflects increased technology-related construction, inventory normalization, and strengthening demand.

Housing and Policy Support 

Housing, while still challenged, is also showing early signs of stabilization. Affordability has improved modestly due to slightly lower mortgage rates and more stable home prices. However, builders continue to face elevated inventories of new homes, and existing home supply now sits at its highest level since 2020. In response, the administration has introduced several initiatives aimed at supporting homebuyers, including a ban on institutional investors purchasing single-family homes and a directive for Fannie Mae to purchase up to $200 billion in mortgages to help lower financing costs. These efforts will take time to influence the broader market. 

Markets and Outlook 

Financial markets have reflected these crosscurrents. For the quarter, the S&P 500 Index returned -4.4 percent, while mid‑cap and small‑cap U.S. equities delivered +2.5 percent and +3.6 percent, respec­tively. International equities, as represented by the MSCI All‑World Index, returned -3.5 percent. In fixed income, the Aggregate Bond Index returned -0.05 percent, and corporate bonds returned -0.5 percent.

Looking ahead, the economic backdrop remains constructive overall, supported by low unemployment, healthy consumer spending, and ongoing investment in productivity-enhancing technologies such as artificial intelligence. However, near-term uncertainty persists, particularly as geopolitical tensions, including the Iran conflict, continue to influence market sentiment. We expect these factors to keep investors cautious until clearer resolution emerges.