Summary, Last Quarter:
Markets began the year with a noticeable shift in leadership—away from the “Magnificent 7” mega-cap stocks and toward the broader market, often referred to as “the other 493” companies in the S&P 500. Value stocks and small- to mid-sized companies participated more meaningfully, signaling improved market breadth. AI-related sectors continued to drive U.S. earnings growth, while international equities also performed well. In late February, however, geopolitical tensions escalated as the U.S. and Israel declared war against Iran. Markets reacted quickly: oil prices surged to nearly $120 per barrel, supply chain concerns resurfaced, and inflation once again became a central focus.
Our Commentary
Periods of war often introduce uncertainty and volatility, and this environment has been no exception. Even before the conflict began, markets had already started to rotate away from mega-cap growth stocks and toward more traditional “blue chip” and dividend-paying companies—a shift consistent with a “flight to safety.” Since the onset of the conflict, however, some of that trend has reversed, with the Magnificent 7 attracting flows again as investors seek companies with durable growth and strong fundamentals.
While volatility has increased—driven in part by rising oil prices—markets have remained relatively orderly, and the U.S. economy has shown resilience. Earnings expectations have been revised higher, which is notable given the backdrop. If tensions ease or key supply routes like the Strait of Hormuz remain open, oil prices could begin to decline.
Despite being viewed as part of the “old economy,” oil still plays a critical role. The recent rise in prices is being felt by consumers and adds pressure to inflation, leaving the Federal Reserve in a difficult position: cutting rates risks fueling inflation, while raising rates could slow growth and increase job losses. As a result, holding rates steady may be the most prudent course until there is greater clarity.
The Fed also faces a leadership transition, with Chairman Jerome Powell expected to step down in May and Kevin Warsh viewed as a potential successor. Warsh is generally considered more dovish and supportive of a more limited role for the Fed, and would be stepping in at a challenging time.
Finally, artificial intelligence continues to reshape markets, with clearer winners and losers beginning to emerge. Some software companies have faced pressure, while areas such as cybersecurity, memory manufacturing, and even industrials, which are needed to build AI infrastructure, are benefiting. While AI’s long-term impact is expected to be transformative, the full picture is still developing.
In the meantime, we are adjusting portfolios where we see opportunity and remaining patient with potential winners through near-term volatility. We expect further changes as the decade unfolds, with new leaders likely to emerge.
Until next quarter,
-Investment Committee
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