A Note on the War in Iran

This letter covers the first quarter of 2026, which we will do in the sections below. However, the biggest development of the quarter – and of the year so far – is the U.S.-Israeli military campaign against Iran that began on February 28. On that date, the U.S. and Israel launched surprise airstrikes across Iran, assassinating Supreme Leader Ali Khamenei and dozens of senior officials. The strikes evolved into a sustained air campaign across the country. Iran retaliated with missile and drone attacks against Israel and U.S. bases, and on March 4 closed the Strait of Hormuz – a waterway handling roughly 20% of global oil supply – sending oil prices above $100 per barrel for the first time since 2022 when Russia invaded Ukraine.

As of this writing in early April, the conflict shows no signs of ending. Oil prices remain elevated near $100, which has rattled stock markets and reignited inflation concerns. The S&P 500 sold off sharply in March, erasing earlier gains to finish the quarter down about 4.4%. Higher energy costs are feeding into inflation just as the Federal Reserve was hoping to resume rate cuts, and global growth forecasts are being revised downward.

As unsettling as these developments are, history shows that geopolitical conflicts – even major ones – tend to create sharp but temporary market reactions. Your portfolios are diversified across asset classes and geographies for exactly these types of situations. Please reach out if you would like to discuss your portfolio and the best course of action going forward.

Q1 Markets and Events

The S&P 500 declined approximately 4.4% in the first quarter. The quarter had two distinct halves. In January the index rose about 1.4% and briefly crossed 7,000 for the first time in history, while the equal-weighted S&P 500 gained 3.4% as market participation broadened. February was transitional and March was brutal – the S&P fell roughly 5% as the Iran war sent oil soaring, stoked inflation fears, and crushed risk appetite.

Beyond the war, there were many other significant developments. The Federal Reserve held rates steady at both its January and March meetings, with the March projections showing just one rate cut expected in 2026, down from two previously. Chair Powell’s term expires in May; he has said he will remain until a successor is confirmed. The record 43-day government shutdown that began in Q4 2025 was resolved early in the quarter. Midterm election positioning intensified with Democrats favored to flip the House.

On the corporate front, AI spending continued at a breakneck pace with Alphabet, Amazon, Microsoft, and Meta projected to collectively invest around $650 billion in AI infrastructure in 2026.

Asset Classes

The quarter was a tale of two halves for most asset classes (Exhibit 1). During January and into February, gold and international stocks were standout performers while U.S. equities treaded water. Then the Iran war reshuffled the deck.

Oil was the biggest story. Brent crude went from around $55–60 at the start of the year to above $100 following the Strait of Hormuz closure. Gas prices in the U.S. jumped 17% in two weeks. Gold had a volatile but ultimately strong quarter. It hit an all-time high near $5,600 per ounce in late January before selling off during the initial war reaction.

Bitcoin had a difficult quarter, declining roughly 23%. The U.S. dollar had a U-shaped path – weakening in February before rallying sharply on safe-haven demand by quarter-end. Bonds did their job as a portfolio ballast during the sell-off, though the inflation implications of higher oil capped their upside; Treasuries were roughly flat for the quarter. Riskier high yield bonds held up better than expected at -0.4%, suggesting credit markets are not yet pricing in a recession.

Sectors and Stocks

On the sector side, the first quarter was dominated by the war and its ripple effects (Exhibit 2). Energy stocks were the clear winners, up roughly 38% year-to-date. Materials also did well (+10%), benefiting from commodity price inflation. Utilities and Consumer Staples held up as investors rotated into defensive areas. On the losing side, Financials and Consumer Discretionary each dropped about 9%, hurt by recession fears and the risk-off mood.

Digging into individual stocks, Exhibit 3 shows the best and worst performers in the S&P 500. The top panels rank by dollar change in market value (largest actual impact on the cap-weighted index) while the bottom panels normalize for company size with percentage change. Energy companies and stable consumer names dominate the top of the left side, while Magnificent 7 stocks dropped a lot. Microsoft alone gave up $845 billion(!) in market cap and the group of five lost a massive $2 trillion in value accounting for 70 percent of the overall index decline. On the right side, two AI buildout names, two chemical companies and Moderna (vaccine company of COVID fame) were standout performers. A slew of software names were the largest decliners driven by concerns of AI reducing the need for their products.

International Markets

International stock markets had a fascinating and volatile quarter (Exhibit 4). The year started with a bang for foreign markets – the developed markets rose 5.2% in January, and emerging markets surged 8.9%. Investors were rotating out of expensive U.S. stocks into cheaper alternatives. Norway (+27%) and Brazil (+21%) led the pack on commodity strength.

Then the Iran war changed everything. By late March, many markets had erased their 2026 gains as soaring energy costs raised inflation and growth concerns. Oil-importing nations in Asia were hit hardest – Indonesia, India, and South Korea each fell more than 10% in March – while commodity exporters held up better. European defense stocks surged but broader indices suffered.

The longer-term trend of foreign outperformance remains intact. In 2025, foreign markets beat U.S. stocks by the widest margin in years, and the structural case for international diversification – cheaper valuations, faster earnings growth expectations, and a still-expensive dollar – continues to hold.

Economy and Rates

The U.S. economy entered 2026 on solid footing, but since then several cracks have appeared. The labor market has softened but is not falling apart. Unemployment sits around 4.4–4.5% with monthly job gains averaging roughly 50,000 – much lower than the 250,000+ pace of 2024. Companies are increasingly discussing AI-related efficiencies, and the risk of a “jobless growth” scenario is a plausible alternative path.

Inflation had been gradually declining toward the Fed’s 2% target, but the Iran war throws a major wrench into that trajectory. With oil above $100 and gas prices spiking, the outlook has deteriorated meaningfully. The Federal Reserve held rates at 3.50–3.75% at both the January and March meetings. Some analysts now think the Fed may not cut at all this year if inflation pressures worsen.

Looking ahead, the biggest economic uncertainty is how long the Iran conflict and Strait of Hormuz closure persist. If resolved quickly, the inflationary impact should fade and the underlying economic strength will reassert itself. If prolonged, we could see a genuine stagflationary scare – slowing growth combined with rising prices. We will be monitoring this closely.