Q1 2026 Investment Review: Constructive outlook despite volatility
IN BRIEF
- The U.S. economy remains resilient despite a slowdown in momentum, with near-term inflation risks elevated by volatile energy prices.
- Equity multiples are lower and credit spreads modestly wider—but neither points to panic.
- The strong earnings outlook for 2026–2027 stands intact.
Market Comment
The ongoing conflict in the Middle East dominated the first quarter, causing historic disruptions to oil supply and driving heightened volatility across global markets. The Strait of Hormuz remained effectively closed, with tanker traffic rerouted and energy infrastructure repeatedly targeted. Brent crude surged to over $110 per barrel—an increase of more than 85% year-to-date—fueling global inflation fears and prompting central banks to reconsider rate cuts. Emergency oil releases and authorized sales of sanctioned Russian oil provided some relief, helping to prevent an even sharper move in prices
Changes in oil price:
Market reactions have been widespread, but not without bright spots. U.S. markets have held up best in the aftermath of the conflict, supported by the country's relative energy independence, while Asia—and to a lesser extent, Europe—have borne more of the brunt.
Interest rates have also been highly correlated with social media posts from the U.S. administration and news from the Middle East. The Federal Reserve kept rates steady, but markets repriced the number of expected cuts as inflation expectations rose. The FOMC's projections indicated one rate cut in 2026 and another in 2027, alongside higher GDP and inflation forecasts. The ECB and BoE also signaled caution, with long-term inflation expectations remaining well anchored even as short-term risks are elevated.
Global interest rate curves
The quarter was undeniably challenging, marked by worsening financial conditions and a volatile oil backdrop. However, the strong earnings outlook for 2026–2027 remains firmly intact. Investments in data centers and infrastructure continued to be robust, with growth in technology and capital equipment demonstrating notable resilience. Valuations have contracted amid fears of economic deceleration and higher inflation, but this repricing has created more attractive entry points for long-term investors.
The U.S. economy remains resilient, even as it moderates; near-term inflation risks have risen due to volatile energy prices, the labour market is softer but not broken, and central banks are navigating conflicting pressures with care.
Encouragingly, S&P 500 valuations have come down from previous highs to levels many investors now consider reasonable. Outlook forecasts remain positive, with expectations for low double-digit growth this year and next. As earnings season approaches, investors are closely monitoring company outlooks and executive commentary—and constructive results could serve as a meaningful catalyst for sentiment.
Credit markets remain stable, and spreads have not widened significantly—a reassuring signal of underlying market health. Key indicators to watch include the 10-year U.S. yield breaking above 4.5% and Brent oil rising above $120. While geopolitical risk, policy uncertainty, and the energy shock have meaningfully widened the range of possible outcomes, the constructive earnings backdrop and improving valuations provide a solid foundation. Patience, diversification, and selectivity remain essential—and are well rewarded in environments like these.
Asset class returns Q1
Key portfolio activity over the quarter
As we continue to focus on innovation, toward the end of last year we enhanced the precision with which we target our top conviction ideas across equities through our Equity Completion Funds—building on five years of successful implementation for our U.S. clients. This approach has proven particularly valuable in the current environment, enabling us to tactically capture opportunities across equity markets as they emerged during recent volatility, all while preserving diversification and maintaining cost efficiency.
In portfolios with liquid alternatives, we have meaningfully reduced our underweight to this asset class by increasing exposure to equity long/short, relative value, and diversified strategies—a timely decision given heightened market dispersion, and one that has contributed positively to portfolio resilience.
High-level positioning
We started the year with a moderately pro-cyclical approach, holding a slight overweight in U.S. equities and a 2% overweight in U.S. and European high-yield bonds. Our sector allocation thoughtfully balances high-quality growth and defensive areas with cyclical exposures. We favour the U.S. equity market relative to global peers, where we see a compelling earnings growth story driven by advancements in AI and greater energy independence. Technology and financials represent the largest portions of our equity exposure—and both sectors are expected to deliver robust earnings. Key overweight positions include semiconductors, hardware, and select software in U.S. technology; pharmaceuticals and life sciences in healthcare; U.S. entertainment; diversified banks in the U.S. and Europe; and European telecommunications.
The risk we are taking in our portfolios is well-diversified, avoiding concentrated beta exposure while maintaining flexibility to adjust risk as opportunities emerge. This is achieved through a combination of U.S. equity overweight and carry strategies. In fixed income, we are underweight core bonds in favour of high yield, with portfolio duration held neutral at around 6.2 years. While corporate spreads remain tight even after latest events, our slight overweight is well supported by solid corporate fundamentals and attractive valuations on a risk-adjusted basis.
For portfolios including hedge funds, allocations are aligned with our strategic targets, with a purposeful tilt toward relative value and equity long/short—strategies that have demonstrated their value during periods of elevated dispersion.
Returns
March was undeniably one of the more challenging months for multi-asset portfolios, as inflation fears resurfaced amid the energy supply disruption. That said, there were pockets of strength—those invested in oil and long USD saw meaningful gains, and non-USD base currency accounts benefited from the natural protection of unhedged equities and their long USD exposure.
It is worth remembering that intra-year sell-offs are entirely normal—we have seen them in each of the previous 15 years—and in 80% of those years our Balanced portfolios went on to deliver positive returns by year-end. For those sitting in cash, the recent pullback has provided a compelling entry opportunity to put capital to work in long-term portfolios.
Encouragingly, on a relative basis, several of our positioning calls added value. Overweights to selected energy, and defence names supported portfolios, as did overweights to US pharma, US farm machinery, and German industrials. The overweight to US equities proved defensive in March, offering a degree of resilience relative to European markets. High Yield was a drag on performance, though we continue to see value in the asset class over the medium term. In our opinion, the number of hikes currently priced in for this year in Europe and the UK is not realistic, and this should prove supportive of bond returns as the market begins to price them out. Notably, portfolios that included hedge funds or liquid alternatives outperformed those without in absolute terms—reinforcing the value of diversification in volatile environments.
Outlook
Uncertainty is fueling inflation and testing investor confidence. As tensions persist, "gap risk"—the threat of sudden market drops—remains elevated, contributing to volatility and a more cautious investor stance. However, it is important to recognise that equities have proven remarkably resilient through this period. S&P 500 valuations have normalised to levels many consider attractive, and earnings forecasts continue to point to low double-digit growth this year and next. As earnings season approaches, investors are closely watching company outlooks and executive commentary—where constructive results could provide a meaningful catalyst for renewed confidence.
Market behaviour is being shaped by technicals and fragile investor psychology, but the underlying fundamentals remain sound. Patience and vigilance are essential, as conditions could shift rapidly if the conflict escalates or if inflation and growth dynamics deteriorate further.
Importantly, the signals from markets are measured, not alarming. Equity multiples are lower and credit spreads a touch wider, but neither is signalling panic. Investors are exercising appropriate caution rather than overreacting—a healthy sign for the durability of this market. Thoughtful portfolio construction—avoiding concentrated betas while maintaining the flexibility to act as opportunities emerge—remains the most effective path forward in this environment.
KEY RISKS
Benchmark definitions
Indices are shown for illustrative purposes only. An index is unmanaged, is not an investment product, and may not be considered for direct investment. Index returns do not reflect the deduction of any fees or expenses, and assume reinvestment of dividends and interest. All indices are denominated in U.S. dollars unless noted otherwise. Indices are an inherently weak predictive or comparative tool. Indices provide a hypothetical representation for use as a benchmark.
The index might not be a meaningful comparison to the composite returns for the Strategy. For example, the Strategy could invest in far fewer securities, so that it is more volatile and subject to more risk than an index. Index returns and composite returns could materially differ. Past performance of an index does not guarantee future results.
S&P 500 INDEX: The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market, includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large-cap segment of the market, with 75% coverage (based on total stock market capitalization) of U.S. equities, it is also an ideal proxy for the total market. (Source: Standard & Poor’s)
Important Information
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