Economic Commentary

If the last few months have felt unpredictable, it’s not your imagination. Markets entered the year on a healthy trajectory. Growth expectations were improving, inflation appeared manageable and corporate earnings were trending higher. Then, in late February the onset of war in Iran introduced a new layer of uncertainty. Stocks approached correction territory as oil prices spiked more than 70% in a shock reminiscent of the 2022 Russian invasion of Ukraine. Elevated oil prices and a multitude of risks remain as the conflict evolves but markets have quickly recovered as investors came to appreciate structural differences between 2026 and 2022.

We gave a nod to the potential for ‘Middle East Conflicts’ on the risks slide at our year end seminar but can’t say we were anticipating effective closure of the Strait of Hormuz before the end of the first quarter. Geopolitical conflicts often ripple through markets in a similar way: energy prices spike, inflation concerns rise and investors begin to question growth. That is exactly what happened in March. Oil prices surged, stocks briefly sold off (the S&P 500 dropped roughly 9%) and bonds declined as well – an uncomfortable combination for diversified portfolios.

Fortunately, this isn’t 2022 and there are important distinctions to highlight between that episode and the present day. During the Russia–Ukraine conflict, inflation was already running hot due to post-pandemic stimulus and reopening demand. Central banks responded aggressively with rate hikes, which compounded the market downturn.

Today, the backdrop is different. The labor market has softened, interest rates are already moderately restrictive and core inflation – while elevated – is far from crisis levels. While rate cuts may now be off the table in 2026, the Federal Reserve is less likely to respond with additional rate hikes under these circumstances – reducing the risk of a prolonged, policy-driven downturn.

If March came in like a lion, it went out like a lamb. Markets recovered substantially in April with the S&P 500 minting multiple new highs throughout the month. On again, off again reports of peace talks and potential ceasefire negotiations have helped markets rebound. These dynamics reinforce an important pattern: markets tend to react quickly to geopolitical shocks – we saw this in March – but they also adjust quickly (recovery or further deterioration) as new information emerges.

In this case, the “new information” has been favorable. One of the biggest concerns in any economic shock is the consumer. Since the conflict began, gas prices have moved from around $3 per gallon to over $4 per gallon while consumer sentiment dropped sharply, hitting historically low levels in recent surveys. At the same time, tax refunds are providing a cushion as benefits from the OBBBA drove an 11% increase in average tax refunds to over $3,500. Further, high-frequency indicators across restaurants, travel, and retail remain stable.

Additionally, corporate earnings growth expectations have actually moved higher since the start of the Iran conflict. Starting the year, forecasts called for strong corporate earnings growth of approximately 15%. Today, full year earnings are expected to grow more than 18% with stronger growth in Energy, Tech, and Materials sectors more than offsetting modest compression in Consumer sectors.

So where does that leave the broader economy? All else equal, the Iran conflict is likely to act as a drag on growth. Higher energy costs ripple through supply chains and reduce purchasing power. While that’s unavoidable, we continue to see more tailwinds than headwinds for the economic growth profile and believe the probability of recession remains low this year.

While monetary policy expectations have shifted toward neutral from accommodating, fiscal policy – underpinned by the OBBBA – remains solidly pro-growth and trade policy dynamics have trended favorably. In addition, business investment – particularly in artificial intelligence infrastructure – is accelerating rapidly. In fact, AI-related capital expenditure projections have surged well beyond initial expectations, representing hundreds of billions in incremental investment – a powerful tailwind.

At the end of the day, the conflict in Iran has introduced new risks. It will likely weigh on growth and keep inflation somewhat elevated in the near term but the bigger picture hasn’t fundamentally changed. Economic expansion remains intact, earnings growth is trending favorably, policy remains supportive and markets have rebounded. While we are constantly monitoring real-time data and making adjustments as needed, we should not lose sight of the fact that investment plans are built with volatility in mind. We hope you can enjoy the upcoming summer months less tethered to the daily headlines. On behalf of our entire investment research team, thank you for your continued trust.