Shareholder Resources

Equity Markets: New Leadership

Prior to the Iran strike, we saw a dramatic shift in the drivers of stock market performance. The market rotation that began in the late stages of 2025 pulled leadership away from the dominant winners of 2023-2025, particularly mega-cap technology, and into more defensive and cyclical areas. Value outpaced Growth, small and mid caps led large caps, and the “Magnificent 7” fell back to earth. The rotation to value sectors such as Utilities, Materials, Industrials, reflected two forces: investment in the physical portion of the AI buildout and a preference for asset-heavy companies perceived as less vulnerable to disruption by AI. On the contrary, asset-light companies like Software sold off as investors reassessed business models that carry greater AI-related obsolescence risk. The re-rating of Software-related companies also put pressure on the private credit lenders that had funded their growth in recent years. More on this later.

Still, the broadening of market participation across sectors and market cap ranges indicated that underlying economic conditions remained sound prior to the March geopolitical shock.

Within international markets, which extended their relative strength over the U.S. early in the year, the energy shock has created new headwinds. Major net energy importers such as Japan, China, and India face rising input costs and heightened uncertainty.

Fixed Income: Inflation Worries Drive Yields Higher

In the bond market, yields rose to close the quarter as investors come to terms with potentially “higher for longer” inflation and interest rates. At the March Federal Open Market Committee press conference, Chair Powell acknowledged that goods inflation has remained elevated in part due to tariffs and that near-term inflation expectations have risen alongside the spike in oil prices and supply disruptions in the Middle East. January and February Producer Price Index reports were both much hotter than expected, and skyrocketing energy prices will only add to future price levels.

Given this pricing pressure, despite signs of slowing in the labor market, any prospect for another cut to the Fed Funds rate has effectively vanished. In fact, a rate hike is now a realistic possibility.

Within credit markets, the energy disruption and inflation concerns have been a non-factor. Corporate credit spreads remain tight as investors appear comfortable looking through near-term risks, which also include a softening labor market and record new issuance to fund AI-related investment.

Signs of strain are more visible in private credit. Investors in this rapidly expanding, less regulated segment are increasingly focused on liquidity risk, as several large funds have capped withdrawal requests. Because private loans are not marked to market, underlying credit deterioration can go unnoticed for longer. Naturally, when noise in highly-levered industries like software becomes louder, investors will look for larger cracks in the financial system and the banks exposed to these risks. We don’t see this as an existential threat at this stage, but if stress continues to build in these pockets, the risk of a broader spillover will rise.

Outlook

Through three months, the story of 2026 is one of contrast: a healthy broadening of equity markets and declining interest rates before the Iran conflict began, followed by a flight to safety in large cap growth, rising inflation concerns, and higher yields afterward. Volatility has increased meaningfully across both stocks and bonds, which should serve as a reminder of the importance of diversification.

While the coming months will likely feature elevated uncertainty, our focus remains on fundamentals:

• The U.S. economy remains resilient.
• Inflation is elevated.
• The labor market show signs of cooling yet remains stable.
• Consumers have continued spending, albeit bifurcated across income levels.
• Housing activity is stagnant, with mortgage rates hovering between 6%-6.5%.

We do not believe the energy shock marks the beginning of a broad downturn—at least not yet. Oil is the key variable. The longer prices remain elevated, the greater the strain on energy-importing economies and on U.S. consumers. Should oil approach $150-$200 per barrel (West Texas Intermediate), we would need to reassess our economic outlook and risk expectations.

We live—and invest—in an interconnected global economy, as evidenced by the events in the first three months of 2026. In this environment, we continue to emphasize diversification, disciplined security selection, and long-term perspective.

This piece was authored by Patrick Ryan, CFA®, Chief Investment Strategist, Head of Multi-Asset Solutions, and Portfolio Manager for Madison Investments. He also serves as a member of the Investment Risk Oversight Committee and is a Madison Investments Foundation board member.