Following three strong years, equities began 2026 slightly up for Jan & Feb before pulling back about 5% in March once the US-Israeli attacks on Iran began. Fixed income returns were also slightly negative
down about 0.6% during the quarter. The modest magnitude of these pullbacks so far, especially considering the roughly 70% increase in the price of oil, suggests that investors are not currently expecting a lasting impact on the global economy from Iran’s closure of the Strait of Hormuz.
However, the economic impact will increase with the length of time oil (and other resources) are not flowing through the Strait. The supply shock will increasingly affect global growth, inflation and interest
rates as it is allowed to continue. This will negatively impact virtually every country in the world except for Iran’s oil-producing ally, Russia. For now, investors are viewing these economic pressures as bumps that the global economy will navigate once the Strait is opened.
Other business-related uncertainties surfaced and became more impactful during Q1. New AI models developed by Anthropic and others set off a significant repricing of the enterprise software industry as maturing AI capabilities are expected to replace legacy software services. Some leading software companies argue that this thinking is wrong and that AI will drive higher revenues and profits for the best positioned companies. Nevertheless, the price declines are real for now and are also impacting private equity and private debt funds which own or lend to many early-stage, private software companies. We don’t believe this to be a systemic risk throughout the private credit industry but recognize there is investor concern.
We are sensitive to the investment risks that the Iran War and the disruptive nature of AI pose, yet we are also seeing continuing indicators of (1) a solid underlying domestic economy, (2) a thriving tech sector with ongoing massive AI capital investments supporting economic growth, and (3) continued expectations for higher productivity and profit growth. The US leads the global economy in the development and implementation of AI which is a foundational technology expected to drive the next global, secular growth cycle.
Prior to the onset of the war, corporate management teams and analysts forecast 2026 S&P500 earnings growth near 15% with further confidence of double-digit earnings gains for 2027. These levels are well above historical averages and will be tested over the next few weeks as management teams report Q1 earnings and provide updates on any changes to their forward-looking guidance.
We encourage our clients to take a long-term perspective when judging investment risk. Despite the near-term uncertainties outlined above and the current volatility impacting asset prices, the main drivers of long-term investment returns are interest rates and earnings. These investment fundamentals remain at historically attractive levels today with the real possibility that greater productivity across the economy will be disinflationary and drive higher earnings growth. We continue to expect equity appreciation to track earnings growth over time.
Disclosure Statement
SFE Investment Counsel is a Registered Investment Adviser. This presentation is solely for informational purposes and not a solicitation to invest. The results reflect thededuction of fees and the reinvestment of dividends and other earnings. Advisory services are only offered to clients or prospective clients where SFE and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by SFE unless a client service agreement is in place. Please contact a financial advisory professional before making any investment.
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