The term “fog of war” describes the gap between what soldiers and commanders on a battlefield think they know and what is actually happening. The concept of combat uncertainty —if not the actual term— was coined by Prussian army officer and military theorist Carl von Clausewitz early in the 19th century. During the first quarter of 2026 the combatants in the Iran conflict experienced the fog of war literally while much of the global economy experienced it figuratively.  

As of this writing, a tenuous ceasefire is in place in the Iranian theater. While military action in the Middle East may or may not be at an end for now, the ultimate impacts on the global economy remain to be seen. The price of WTI crude oil currently stands 67% higher than at year-end 2025. Supplies of commodities as diverse as sulfur, aluminum, liquefied natural gas and helium remain constrained by the closure of the Strait of Hormuz. While prices have already risen substantially, stockpiles have so far minimized widespread shortages of these commodities. Should the flow of shipping through the Strait not resume soon, the impact of supply constraints will spread with negative repercussions for the global economy.

Despite elevated headlines, the U.S. economy entered the second quarter on relatively solid footing, supported by consumer spending, stable labor markets, and resilient corporate earnings. 

Economic Backdrop: Slower, Not Stalling 

Economic growth cooled from late-2025 strength but did not stall. Manufacturing activity stabilized and returned to expansion by February and March, aided by onshoring, inventory rebuilding, and demand tied to data centers, infrastructure, and health care. Services activity remained the primary engine of growth, with broad expansion across professional services, finance, transportation, and technology-related industries. 

Consumers continued to spend, though unevenly. Higher-income households drove most discretionary growth, while lower-income consumers faced mounting pressure from food, rent, and energy costs. Labor markets softened modestly but remained stable: job growth slowed in line with modest labor force expansion, unemployment held steady, layoffs did not meaningfully accelerate, and wage growth—while moderating—continued to support spending. 

Inflation and Monetary Policy 

Inflation trends were mixed. Core inflation measures moved closer to the Federal Reserve’s 2% target early in the quarter, helped by easing shelter costs. Late in the quarter, however, energy prices surged following escalation of conflict in Iran and disruptions near the Strait of Hormuz, reviving inflation risks. Producer price data pointed to renewed pressure in services, raising questions about potential pass-through to consumers. 

The Federal Reserve held policy rates steady throughout the quarter, emphasizing patience and data dependence. Market expectations for rate cuts were pushed further into the future as growth remained resilient and inflation risks reemerged. The key question moving forward is whether recent energy-driven and other commodity cost pressures prove temporary or persistent. 

Corporate Earnings and Investment 

Corporate earnings remained a clear area of strength. Expectations for 2026 earnings stayed firm through quarter-end, supported by stronger than expected 4Q25 profit growth. That strength, however, remains concentrated in technology-related sectors, particularly semiconductors, communication services, and companies tied to artificial intelligence infrastructure. 

AI-driven capital spending continued to rise, benefiting a wide range of industries. At the same time, investors became more focused on the sustainability of returns from this investment wave, contributing to increased volatility within technology stocks throughout the quarter. 

Financial Markets 

Equity markets were choppy, with declines driven primarily by valuation compression rather than weakening earnings. Market leadership broadened, as equal-weighted indices and smaller-cap stocks outperformed market-cap weighted large-cap peers. The technology-heavy NASDAQ 100 and Magnificent 7 suffered the largest drawdowns in the quarter and as of this writing have yet to revisit all-time highs set early in 4Q25.  International equities outpaced U.S. markets, despite their greater sensitivity to energy prices and trade disruptions. 

Fixed income markets were volatile as inflation expectations and geopolitical risks shifted. Treasury yields moved higher late in the quarter but remained below levels typically associated with economic stress. Credit markets showed some strain, particularly in the realm of private credit where pessimism around credit quality continued to expand. Overall credit conditions remained within historical norms and investment-grade credit stayed resilient. 

Looking Ahead 

As we enter the second quarter of 2026: 

• Growth is slowing but remains positive. 

• Core inflation remains stable.

• Earnings growth remains solid, though still concentrated. 

• Markets are volatile but supported by fundamentals. 

We believe this environment favors diversification, quality, and disciplined risk management. While near-term volatility may persist, long-term investment outcomes continue to be driven by earnings growth, productivity, and prudent portfolio construction. We will continue to monitor economic, inflation, and geopolitical developments closely and adjust portfolios as conditions evolve. 

Kurt Funderburg
Chief Investment Officer