During our outlook at the start of the year, we highlighted two key themes:
- Consumer spending and continued investment in artificial intelligence would remain the primary drivers of growth.
- While our outlook was constructive, risks and valuations were elevated, and volatility was likely.
So far, both have played out. The economy has remained resilient, supported by steady consumer activity and significant capital flowing into AI infrastructure. At the same time, markets have faced a steady stream of uncertainty, including the recent escalation involving the United States and Iran.
A Quarter Shaped by Headlines
The first quarter brought no shortage of potential disruptions. Geopolitical tensions, pockets of stress in credit markets, and rapid changes in technology all contributed to elevated volatility.
The conflict involving Iran was the most visible development, pushing oil prices above $100 per barrel and raising concerns about inflation and growth. Despite this, market reactions have remained relatively contained. Markets tend to respond quickly to new information, but they also adjust as the broader implications become clearer. So far, we are seeing a market that is absorbing uncertainty without a breakdown in underlying conditions.
Market Performance Beneath the Surface
While headline indexes appear relatively stable, there has been a notable shift in leadership. The S&P 500 has faced modest pressure to start the year, and the NASDAQ has declined more meaningfully as growth-oriented companies have repriced. Notably, the “Magnificent 7,” which led markets in recent years, have underperformed the broader index. This reflects a rotation in leadership rather than a deterioration in overall market health.
Smaller and international stocks, as represented by the Russell 2000 and EAFE indices, have held up better and are modestly positive year-to-date. This broadening of participation is a constructive development.
In fixed income, returns have been relatively flat. Interest rates have stabilized as the Federal Reserve has taken a more patient stance following rate cuts in late 2025, and overall liquidity conditions remain supportive.
The Drivers of Growth
The economic backdrop continues to be supported by two primary forces.
First, consumer spending remains resilient, particularly among higher-income households. While spending patterns have become more uneven, overall consumption continues to support growth.
Second, the investment cycle in artificial intelligence has evolved from early enthusiasm into sustained capital deployment. Companies are investing heavily in infrastructure, data centers, semiconductors, and energy to support long-term development. While parts of the technology sector have experienced volatility, the broader AI ecosystem remains a key driver of economic momentum.
A More Nuanced Economy
Rather than moving in a single direction, the economy is experiencing a more uneven, rolling cycle. Some sectors, including infrastructure, energy, and AI-related industries, continue to expand, while others face pressure.
The labor market reflects a similar pattern. Unemployment remains low, but hiring has slowed and job growth is more concentrated. This “low-hire, low-fire” environment suggests stability, but also a moderation in overall momentum.
Geopolitics and Market Reality
Geopolitical events, including the recent conflict involving Iran, have reintroduced uncertainty. While these developments are significant, history shows they tend to create short-term volatility rather than lasting shifts in market direction.
Energy markets are often the most immediate transmission mechanism. While oil prices have risen in response to recent events, global supply dynamics, including increased U.S. production, help mitigate longer-term impacts. At this stage, the move in oil appears driven more by uncertainty than structural change.
Final Thoughts
As we move into the second quarter, we expect some of the recent volatility to moderate as greater clarity emerges. The most likely path forward remains a continuation of the current environment, with varying levels of strength across sectors rather than a broad-based downturn.
While not our base case, a meaningful slowdown in AI-related investment would represent a key risk to monitor.
Periods of uncertainty reinforce the importance of discipline. The greatest risk is often not the event itself, but how investors respond to it. Our focus remains on helping clients navigate changing conditions with a long-term perspective, integrating investment strategy with thoughtful financial planning.
If you have questions about how current market conditions may impact your portfolio or overall plan, we are here to help.