After a fairly strong start to the year for stocks, a war broke out and stock prices weakened. Geopolitical uncertainty has increased, as has tariff uncertainty, unnerving investors. Add in the short-term risks from potentially higher inflation and slowing labor growth, and you get volatility that has been higher than normal. Experienced investors know that volatility is part of investing in the stock market. Since 2017, the S&P500 index has had four corrections ranging from -18% to -31%, yet each time the index rebounded, and recently traded near all-time highs. Why? What ultimately drives stock prices are company earnings, and the earnings picture has been and continues to be healthy. Q4’25 earnings were up +13% y-y, and full year ’26 earnings are expected to be up by +12-13% vs last year. Given this, we would not be surprised if stock prices resumed their climb higher, but the news headlines change daily, and our expectation is largely based on the assumption that the Iran war does not drag out for several months. The longer the war drags on, the more we should probably continue to expect elevated short-term volatility.

AI concerns regarding concentration, circular investments, capex amounts, valuations, and returns on investments could expose weaker companies but should continue to benefit the leaders in growth industries such as semiconductors, infrastructure, and applications. In addition, AI spending serves as catalysts for economic growth and future earnings growth. The Atlanta Fed’s model was expecting GDP growth of 3.1% at the beginning of March, which is quite healthy for our economy. The uncertainty of the Iran war has lowered that expectation slightly to 2.0% as of this writing. Add to this the effect of One Big Beautiful Bill Act helping businesses and the consumer, and deregulation potentially leading to acquisitions that could spur economic activity. All of these tailwinds keep us optimistic that recent stock market volatility will eventually give way to improving corporate fundamentals. Those investors willing to ride out the volatility have been rewarded in the past, and we think that will be the case again this time.

Sincerely,

Gary Orf, CFA®
Chief Investment Officer