Market Insights

MARKET OUTLOOK / STRATEGY

First Quarter 2026

In a card game of Poker, a straight flush (5 sequential cards in the same suit) is a low occurrence that gives the holder significant confidence of a winning hand. Unfortunately for most of the world, including global financial markets, the Iranian regime’s present hold on the Strait of Hormuz may be perceived as its straight flush to survive and extract concessions. The significant closure of the Strait, where approximately 30% of the world’s seaborne crude transits, along with other critical raw materials, has increased the likelihood of a protracted conflict and tail risks to the global economy and risk assets, despite the United States’s superior military advantage.

Our base case remains for the U.S. economy to sustain moderate growth, supported by resilient consumption among higher-income households and continued corporate investment, particularly in AI related infrastructure. Additional income from tax refunds to lower- and middle-income families should help offset potentially rising costs stemming from the conflict in the Middle East. This base case produces an environment which is supportive of risk assets. However, the range of potential outcomes has widened. While a recession remains unlikely in our central scenario, the probability of adverse outcomes has increased, and the path forward requires vigilance. The distribution of risks and opportunities ahead demands that we remain nimble and dynamic in our positioning.

Inflation risks remain tilted to the upside near-term, driven by elevated energy prices and geopolitical uncertainty which are broadening supply constraints beyond energy. While short-term inflation expectations have moved higher, longer-term measures remain relatively well anchored, indicating that markets still expect price pressures to moderate over time. The Fed finds itself in a difficult position, balancing a gradually softening labor market against potentially persistent inflation. Monetary policy will remain data dependent with limited flexibility to act preemptively. The Fed leadership transitions has introduced additional uncertainty. We expect the Fed to maintain its cautious posture, with rate cuts delayed until there is clearer evidence that inflation is sustainably declining. We maintain our 12-month trading range for the 10-Year U.S. Treasury at 3.50% to 4.75% and a neutral stance on duration.

Yields continue to offer attractive risk/reward characteristics across the fixed income landscape. All-in corporate yields remain well above historical averages, providing a meaningful income cushion that supports total returns and helps absorb both rate and spread volatility. Demand for credit remains robust, with fund inflows helping to offset elevated investment grade supply. Corporate fundamentals are strong, with consistent earnings growth and margins buttressing solid balance sheets. Spreads have widened modestly from recent tights, offering a somewhat more attractive entry point, though valuations still leave limited margin for error. M&A activity is rising, underscoring the importance of security selection. We see sector and issuer-level diversification as critical to balancing risk and return.

Risks remain elevated and broad-based. While an extended Iranian conflict has emerged as the most significant tail risk, concerns around private credit, inflation, and AI disintermediation continue to evolve. Historically, credit spreads have widened only modestly during geopolitical shocks and have tended to retrace within weeks, which supports maintaining exposure and potentially adding risk opportunistically. In structured products, MBS spreads have widened alongside increased rate volatility, creating near-term headwinds while improving relative value. Elevated volatility may also present more attractive entry points in ABS and non-agency CMBS. In addition, taxable municipals and sovereigns may offer compelling alternatives to a portion of Treasury allocations, enhancing portfolio income.

We remain focused on diversification, security selection, and disciplined risk management as the primary tools for navigating the current landscape.