04.01.2026
First Quarter 2026: Market and Economic Commentary
The following commentary presents our assessment of global economic conditions and financial market dynamics.*
Economic Commentary
1. Iran Conflict / Strait of Hormuz
As of this writing, the United States and Iran remain in active negotiations, but oil flows through the Strait of Hormuz continue to be severely disrupted. The pace of military engagements has materially slowed, though — an encouraging sign a resolution is in reach. We do not know how this conflict will progress, much less the fallout and long-term consequences, so let’s focus on what we do know:
Global oil prices, 1960–2026 · U.S.$ (2026) per barrel, monthly, adjusted for inflation using U.S. core CPI · Sources: World Bank Commodity Price Data and U.S. Bureau of Labor Statistics
$100 a barrel for oil isn’t as scary as it once was. Adjusting for inflation, current prices remain well below the peaks experienced in 2008 and 1979 — a more useful frame than the nominal headline number.
The global economy is less sensitive to oil prices than at any point in modern history. Since 1975, the U.S., China, and Developed Europe have all reduced oil consumption per $1,000 of GDP by half or more. For the American consumer, energy-related spending now represents approximately 2% of household personal consumption — down from nearly 6% in the 1980s.
Approximately 20%–30% of the world’s seaborne oil and roughly 20% of its liquefied natural gas (LNG) transit the Strait of Hormuz daily. A prolonged closure would fall hardest on Southeast Asia — Japan, Taiwan, South Korea, and India are all heavily reliant on energy flows through the strait. China is comparatively better insulated through diversified supply, larger strategic reserves, and its deep relationship with Iran.
Key Risk: The longer the Strait of Hormuz stays closed, the greater the risk that the current short-term inflation spike becomes more structural and long-lasting. A prolonged blockage of oil, gas, and chemicals through the strait would severely disrupt global supply chains, raise costs across many industries, and damage economic growth — especially in countries that depend heavily on energy from the region.
2. Inflation, Interest Rates, & Employment
The Iran conflict has added a meaningful layer of uncertainty to the inflation picture. Headline CPI had appeared to settle into a range of 2.5%–3% — a relative steady state, though still modestly above the Fed’s 2% target. Analyst consensus points to a near-term uptick in headline CPI before gradually retreating, contingent on a durable resolution to the conflict.
The labor market finds itself in a holding pattern best characterized as “no-hire, no-fire.” Businesses are neither expanding payrolls aggressively nor shedding workers meaningfully. The unemployment rate has drifted gradually higher to 4.3%, reflecting a market that remains stable but tepid.
Uncertainty has effectively put the Fed back on their heels. Entering 2026, markets had priced in two rate cuts. Those expectations have since been walked back entirely — the consensus now anticipates the Fed holding rates steady through year-end. Interest rates across the curve have drifted modestly higher, mostly due to higher inflation expectations, with mortgage rates also rising and putting a damper on an already tepid housing market.
Market Commentary
1. Earnings
Despite the macro anxiety that has dominated headlines, corporate fundamentals have yet to show meaningful stress. If anything, the earnings picture has improved. According to FactSet, the number of S&P 500 companies issuing positive EPS guidance is at its highest level in five years — a notable data point that runs counter to the prevailing narrative of economic deterioration.
S&P 500 Change in Forward 12-Month EPS vs. Change in Price: 10 Yrs. · Source: FactSet
Consensus expectations call for S&P 500 earnings growth of approximately 16% in 2026. Information Technology is expected to lead the way with roughly 40% earnings growth, followed by Energy at 33% and Materials at 27%. The still-strong earnings cycle remains a meaningful counterweight to macro concerns — though a real risk is that growth which appears sustainable today disappoints.
2. Valuations
P/E of top 10 and remaining companies in S&P 500, next 12 months · Source: JP Morgan Asset Management
Valuations have compressed meaningfully this quarter. The forward P/E of the S&P 500 has returned to roughly 20x — equal to its 5-year average, but still above the 20-year average of approximately 17x. Even after the pullback, U.S. equities are not “cheap” in a longer-term context.
Much of this reset has been driven by a multiple contraction in the ten largest stocks, which entered the year trading above 30x and have since compressed to approximately 23x. Internationally, the valuation picture remains more balanced — European equities remain modestly above their 20-year average of 14x, while Japan and Emerging Markets are trading at their long-term averages of 15x and 12x, respectively.
3. Artificial Intelligence (AI)
Forward P/E: S&P 500 vs. S&P 500 Information Technology, 2006–2026 · Source: Bloomberg, Macrobond, Apollo Chief Economist
The digestion period for large-cap technology has arrived. Not one of the Magnificent 7 stocks finished Q1 in positive territory, with several declining meaningfully. Capital expenditure estimates were revised higher once more, and guidance pointing toward negative free cash flow appears to have been a bridge too far for the market to absorb. The valuation premium awarded to the technology sector — mostly due to the future promise of AI — largely disappeared in the first quarter.
Agentic AI moved from concept to real applications this quarter. These are autonomous systems capable of making sequential decisions, leveraging external tools, and completing complex tasks end-to-end with minimal human intervention — a meaningful leap beyond the conversational chatbots most are familiar with. The rise of Agentic AI represents a step-function increase in compute demand, and so far, older chips have not depreciated as newer alternatives arrived — a signal that AI demand is not plateauing, but accelerating.
At the frontier model layer, revenue growth has been extraordinary — but so have the costs. Annualized run-rate revenue at leading AI companies has surged, yet despite exceptional growth trajectories, these businesses continue to operate on fragile financial foundations. Should one or both encounter existential difficulty, the downstream implications for the broader market and the AI buildout would be profound and difficult to fully anticipate.
Key Risk — Cybersecurity: The risk of a widespread cyberattack on critical software and infrastructure grows with each new model. Recent examples illustrate that frontier AI systems are capable of identifying deeply buried vulnerabilities across widely used operating systems — reinforcing the stakes if these capabilities fall into the wrong hands.
Key Risk — Infrastructure Bottlenecks: The buildout of compute is fragile and interconnected, with potential bottlenecks at many layers of the ecosystem. Approximately half of data centers planned for 2026 are expected to be delayed or cancelled due to shortages in electrical equipment. Transformer delivery times have extended from 24–30 months in 2020 to up to five years today. The world also relies on a single company in Taiwan (TSMC) for essentially all advanced AI chips, and a single company in the Netherlands (ASML) for the specialized equipment needed to manufacture them — concentration risk of the highest order.
*Disclaimer: This material is intended for informational purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person. This material may contain estimates and forward-looking statements, which may include forecasts and do not represent a guarantee of future performance. This information is not intended to be complete or exhaustive and no representations or warranties, either express or implied, are made regarding the accuracy or completeness of the information contained herein. Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which in certain cases may not have been updated through the date of the distribution of this document. The opinions expressed are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. Past performance is no indication of future results.