Market Update: Fed Decision, Inflation Risks & Q1 2026 Recap

The first quarter of 2026 was defined by a resilient—but increasingly complex—economic and market environment. The economy continues to expand, but risks are rising, reinforcing the importance of diversification and a disciplined, long-term investment approach.

Geopolitical dynamics, particularly through higher oil prices, are contributing to increased market volatility and the potential for modestly slower growth. That said, we do not view a recession as the most likely outcome. Indeed, U.S. economic growth remains positive, with GDP expectations in the ~2%–2.4% range. Leading up to the conflict in Iran, consumer spending continued to support the economy, while business investment, especially in infrastructure and technology, provided an additional tailwind. Although the labor market has softened slightly, overall conditions remain stable.

As expected, the Federal Reserve held rates steady at its most recent meeting. However, there were a few notable updates. The Fed modestly increased its economic growth outlook, citing stronger productivity trends, while also raising its inflation forecast due in part to higher energy prices. Like the broader market, policymakers are navigating uncertainty around how long these supply-driven pressures may persist. At this point, a rate hike is not the base case. The Fed continues to balance a gradually cooling labor market with the risk of rising inflation. While inflation may move higher in the near term, particularly due to energy, the expectation remains that much of this pressure could prove temporary.

Global financial markets have experienced increased volatility following a strong 2025. Most recent oil price shocks have resulted in modest declines in equity markets, appreciation of the dollar, and higher rates reflecting bond investors’ concerns about rekindled inflation. Before the operation in Iran gripped market’s attention, the year began with concerns around elevated valuations, particularly in large-cap technology stocks and the potential for artificial intelligence to negatively impact legacy industries. The result was a significant divergence of returns and a rotation away from concentrated growth positions as well as budding concerns about private credit markets that had been significant funders of software startups.

Periods of volatility may persist, especially if energy prices remain elevated or geopolitical tensions escalate. However, historically these environments are short-lived and can create opportunities for long-term investors. At some point, hopefully not too far in the future, some sort of resolution will be reached with Iran. At that time, we anticipate markets to refocus on the capital investment in AI infrastructure and the trend of broadening market participation. Encouragingly, earnings growth has been, and is expected to remain, solid and has broadened beyond tech into other sectors. This earnings backdrop, along with a moderate interest rate environment, set the table for a more stable market environment to reemerge.