Financial markets began 2026 on a mixed note, with elevated volatility across asset classes and a divergence in performance beneath the surface. In the first quarter, U.S. large-cap stocks, as measured by the S&P 500, declined 4.6% (excluding dividends), while developed international stocks (MSCI EAFE) fell 1.9% and emerging market stocks were down 0.5%. The broader MSCI ACWI Ex USA index declined 1.2%. Small-cap U.S. stocks, as measured by the Russell 2000, were one of the few equity categories to post a modest gain, rising 0.6% in the quarter. Fixed income was more stable, with the Bloomberg Barclays U.S. Aggregate Bond Index roughly flat and the Bloomberg Barclays Municipal Bond Index down 0.2%. After a challenging year for bonds in 2022, fixed income has since provided a measure of stability within diversified portfolios, particularly during periods of equity market volatility.
| Equity Indexes | Q1, 2026 | 2025 | 2024 | 2023 |
|---|---|---|---|---|
| S&P 500 | -4.6% | 16.4% | 23.3% | 24.2% |
| Russell 2000 (Small Cap) | 0.6% | 11.3% | 10.0% | 15.1% |
| MSCI EAFE (Developed) | -1.9% | 27.9% | 1.1% | 15.0% |
| MSCI Emerging Markets | -0.5% | 30.6% | 5.1% | 7.0% |
| MSCI ACWI Ex USA | -1.2% | 29.2% | 2.9% | 12.6% |
Note: All returns exclude dividends
| Fixed Income Indexes | Q1, 2026 | 2025 | 2024 | 2023 |
|---|---|---|---|---|
| Bloomberg Barclays US Agg Bond | 0.0% | 7.3% | 1.3% | 5.5% |
| Bloomberg Barclays Municipal Bond | -0.2% | 4.2% | 1.1% | 6.4% |
In our year-end letter, we noted that the past three years had been unusually strong and that history suggested a fourth year after such a run was essentially a coin flip, though one that is rarely boring (meaning a big move in either direction is more likely). That framework already appears relevant. The opening months of 2026 have brought a meaningful shift in the risk backdrop, and we believe the range of potential outcomes has widened materially.
The most immediate concern is the Middle East conflict with Iran, which has already led to a sharp rise in oil prices and the partial closure of one of the world's most important energy chokepoints. That matters because higher energy prices tend to work their way through the economy in the form of higher inflation, and higher inflation can keep interest rates elevated or push them higher still. The longer this conflict continues, the greater the risk that it becomes more than a short-term geopolitical shock and instead develops into a broader economic problem. At a minimum, it adds another layer of uncertainty to a point in the cycle when markets already appeared priced for an optimistic outcome.
A second concern is the developing stress we see in private credit. This area of the credit market has grown rapidly in recent years, as nonbank asset managers have created funds to lend directly to companies outside the traditional banking system and public bond markets. More recently, that growth has been accompanied by a rising number of headlines related to credit quality deterioration, sudden asset write-downs, opaque valuations, and restrictions on client withdrawals.
While we do not believe private credit is large enough, by itself, to create a systemic problem, we do believe these developments may be indicative of the beginning of a broader credit cycle. Such a cycle could lead to a repricing of risk or a pullback in lending activity, both of which could tighten financial conditions and weigh on the broader economy.
The third issue we continue to watch closely is the sustainability of AI-related capital spending. Artificial intelligence has been a key support for both recent economic growth and market enthusiasm, particularly through spending on semiconductors, software, networking equipment, and data-center infrastructure. We continue to believe the technology itself will prove important in the long run, but that does not mean every dollar currently being invested will earn an attractive return. In fact, one of the questions increasingly on our mind is whether the scale of current spending can be justified economically. We also note that a surprising amount of planned data-center buildout is expected to occur in the Middle East, in part because the U.S. currently lacks sufficient electrical grid and energy infrastructure to support the full scope of current plans. Given the growing concentration of planned AI-related infrastructure in the Middle East, rising tensions and military conflict involving Iran raise further questions about timing, execution, security, and the durability of this investment cycle.
That said, there are still meaningful positives in the current backdrop. The economy has proven surprisingly resilient in the face of recent shocks, including the uncertainty and disruption associated with tariffs. In addition, equity valuations have become less stretched. The forward P/E ratio on the S&P 500 has declined to 19.7x from 22x at year-end 2025 and from more than 23x at its peak, which reduces at least some of the valuation risk that concerned us coming into the year. Corporate fundamentals also remain solid. Current consensus expectations call for earnings growth to accelerate to more than 16% in 2026 from roughly 13% in 2025. Of course, these estimates are not immune to the risks noted above, but they do suggest that the market is entering this period from a position of fundamental strength.
Taken together, these issues leave us with a more defensive posture. When the outcome is highly binary, the stakes are high, and the market does not appear to be pricing in enough risk, we think the prudent course is to reduce exposure and wait for better clarity.
Accordingly, during the first quarter we reduced equity exposure, eliminated our exposure to riskier emerging market bonds, and raised cash across portfolios. These were not dramatic all-in or all-out decisions, but rather measured steps to reduce risk and improve flexibility. If conditions stabilize and opportunities improve, we want to be able to redeploy capital from a position of strength.
We would also note that our positioning entering the year was already reasonably well aligned with the changing backdrop. We were overweight energy and materials ahead of the outbreak of war with Iran, and both sectors were among the best performers in the quarter. We were also underweight technology, which was one of the two worst-performing sectors during the period. That helped offset some of the weakness elsewhere in our portfolios and reinforced the value of maintaining diversification and a valuation-conscious investment process. We also have no meaningful exposure to private credit.
As always, we remain focused on managing risk, preserving flexibility, and making disciplined decisions based on evidence rather than headlines. Markets will continue to respond to a wide range of factors in the months ahead, and the path forward may remain volatile. While we do not know exactly how these issues will unfold, we do believe patience and selectivity are warranted here. In our view, protecting capital and maintaining the ability to act when risk/reward becomes more favorable is the right approach in the current environment.
As always, please do not hesitate to contact us with any questions or concerns you may have regarding your individual investment portfolio.
Your Whitney Advisor Team
Disclaimer: We recommend you review and consider any recent market news. All expressions of opinion are subject to change without notice in reaction to shifting market or other conditions. Its accuracy, completeness or reliability cannot be guaranteed. Nothing contained in this message should be construed as a recommendation.
