Executive Summary
The investment landscape has become meaningfully more complex over the past quarter. What began as a slowing but resilient economic backdrop has been compounded by rising geopolitical risks. While continued economic growth remains plausible, the margin for error has narrowed.
The war with Iran and the associated surge in oil prices represent a tangible macro headwind. Higher energy costs threaten real incomes, complicate the inflation outlook, and limit policymakers’ flexibility at a time when global growth is moderating. At the same time, equity valuations remain elevated, earnings expectations appear optimistic, and private credit markets are showing early signs of strain after years of rapid expansion.
Against this backdrop, we believe the outlook is unusually opaque. The investment environment is changing rapidly, often on a daily basis, making it difficult to justify large directional bets. In such an environment, we continue to emphasize quality, disciplined diversification, prudent risk management, and portfolio resilience.
Macroeconomic Outlook: Slowing, Not Stalling Yet…
Economic growth has cooled from the pace of recent years, but current data do not yet point to an imminent recession. Labor markets are softening but remain intact, and consumer spending, particularly among higher‑income households, continues to provide support.
The most immediate concern is the oil shock following the escalation of the Iran conflict. History suggests that sharp and sustained increases in energy prices often precede economic downturns. Higher oil prices act as a tax on consumers and businesses, squeezing discretionary spending and margins while raising inflation uncertainty. While the U.S. is more energy‑independent than in past cycles, higher gasoline, utility, and transportation costs still represent a potential drag on growth if prices remain elevated.
Beyond energy, policy support appears more constrained than in prior cycles. Elevated government debt levels, persistent fiscal deficits, and the inflationary implications of tariffs limit the scope for aggressive stimulus. Monetary policy easing may still occur later in 2026, but central banks appear increasingly cautious, particularly if energy‑driven inflation proves sticky.
Taken together, the economy remains on a narrow path: growth can persist, but the buffer against shocks has thinned.
Equities: Valuations Leave Little Room for Disappointment
Equity markets continue to reflect a relatively optimistic outlook, though leadership dynamics began to shift during the first quarter. After a prolonged period of narrow market participation, performance broadened modestly beyond the largest technology and AI‑related companies. More defensive sectors and businesses with stable cash flows began to contribute more meaningfully to returns, a development we view as constructive from a market health perspective.
That said, valuations across U.S. large‑cap equities remain elevated by historical standards, even after recent bouts of volatility. In many cases, markets appear to be pricing in earnings growth that may prove difficult to sustain in a slowing economic environment. This creates an important asymmetry: should growth and earnings meet expectations, prospective returns are likely to be moderate; however, any disappointment (higher input costs, weaker demand, or tightening financial conditions, for example) could result in increased volatility.
In this environment, our equity positioning continues to emphasize quality and diversification. We favor companies with durable business models, strong balance sheets, pricing power, and consistent free cash flow generation. While higher‑quality companies are not immune to broader market drawdowns, they have historically been better positioned to navigate periods of economic uncertainty and capital market stress. Given rising idiosyncratic stock risk, we have taken steps to lower individual stock exposures in client portfolios, adding positions to the broad market index and an S&P 500 Quality index, to enhance diversification.
Despite modest improvement in market breadth, concentration risk remains elevated, and expectations embedded in equity prices remain high. As a result, we continue to maintain a modestly underweight allocation to equities relative to long‑term targets, paired with an emphasis on diversification and disciplined risk management.
Credit and Private Markets: Cracks Beneath the Surface
After years of favorable conditions, credit markets are beginning to show signs of fatigue. Public credit spreads remain tight relative to historical default rates, suggesting limited compensation for risk.
More notably, private credit, a rapidly growing segment over the past decade, appears increasingly vulnerable. Higher interest rates have strained interest coverage ratios, deal structures have become more aggressive, and the use of payment‑in‑kind features has increased. While these dynamics are unlikely to pose systemic risks comparable to past financial crises, they could weigh on growth through reduced lending, slower deal activity, and more cautious capital allocation.
Private markets overall remain an important component of long‑term portfolios, but selectivity and manager discipline are especially critical at this stage of the cycle. Our due diligence focuses on private managers with a demonstrated track record of disciplined investing, an emphasis on value creation, and a portfolio construction approach designed to manage investment risk.
Fixed Income: Stability and Optionality Matter
Fixed income continues to play a crucial role as a source of income, diversification, and liquidity. The yield curve reflects expectations for eventual policy easing alongside concerns about long‑term fiscal sustainability.
We continue to manage duration below benchmark levels, balancing the potential benefits of rate cuts against the risk that long‑term yields remain elevated. Emphasis remains on high‑quality bonds and shorter‑dated Treasuries to preserve liquidity and flexibility in an uncertain environment.
Gold: A Strategic Asset in an Uncertain World
Gold remains an important portfolio ballast amid rising geopolitical risk, elevated government debt levels, and uncertainty around real interest rates. While the metal has already delivered strong performance, the structural drivers supporting gold, including central bank demand, fiscal imbalances, and geopolitical fragmentation, remain intact.
We view gold not as a short‑term trade, but as a strategic diversification tool that can help offset risks elsewhere in the portfolio. Periodic rebalancing remains appropriate, but its role as a store of value and source of resilience is increasingly relevant.
Portfolio Implications: Emphasizing Resilience Over Prediction
At present, we believe the most prudent course is not to attempt to forecast a specific economic or market outcome, but to prepare portfolios for a wide range of possibilities. The investment landscape is shifting rapidly, and the risk of false precision is high.
Key portfolio themes include:
As we stated last quarter, we remain focused on what we can control: maintaining discipline, investing in quality and managing risk.
We appreciate the continued trust you place in us and remain committed to navigating what comes next with diligence and perspective.