Market Commentary – April 2026

In my January commentary, I noted that a 10% correction would not be surprising given the strong gains of recent years. What I did not predict was the particular shape of the quarter. Between a Supreme Court ruling that upended trade policy, a war in the Middle East that sent oil above $110 per barrel, and a Federal Reserve caught between competing pressures, the first quarter of 2026 gave us plenty to work through together.

The S&P 500 finished Q1 down -4.3% (including dividends), its worst quarterly start since 2022. The Nasdaq declined 7.0%. For clients with long memories, this may feel familiar. For newer investors, it may feel alarming. It is neither a surprise nor a cause for alarm. It is a market doing exactly what markets do.

A Rocky Start and What History Says About It

The S&P 500 entered 2026 having delivered three consecutive years of double-digit returns: 26% in 2023, 25% in 2024, and roughly 18% in 2025. After that kind of run, a pause or a pullback should not be surprising. In fact, it is healthy.

History offers some reassurance here. Going back to 1950, there have been 26 years in which the S&P 500 finished the first quarter in negative territory. Of those, 17 (roughly two-thirds) ended the full year in positive territory. The average full-year return across all such years was approximately +5.5%, well below the long-run average but still positive.

The worst outcomes were clustered around well-defined crises: 1974, 2001, 2002, and 2008, years where the negative Q1 was a symptom of something deeper. Years like 2003, 2009, and 2025, by contrast, all began with down quarters and delivered strong double-digit recoveries. Last year is the most recent example: the S&P 500 fell roughly 4.6% in Q1 2025 and finished up nearly 18%.

None of that makes a declining account balance feel good in the moment. But it is the context our clients deserve when evaluating what they are seeing.

Valuations Have Come Down, and That Is a Good Thing

One underappreciated development from the first quarter is that equity valuations have reset meaningfully. At the end of 2025, the forward price-to-earnings ratio on the S&P 500 stood well above its five- and ten-year averages, reflecting the market’s optimism about earnings growth. After Q1’s decline, the forward P/E has pulled back to approximately 19.9, now roughly in line with the five-year average.

The reset has not been uniform. Technology and AI-related names, which carried the most stretched valuations coming into the year, have seen the largest compression. The Magnificent 7’s aggregate P/E, while still elevated relative to the broader market, has come down noticeably. Meanwhile, sectors that were already reasonably priced, including energy, financials, and select industrials, have held up relatively well and in some cases moved higher.

This kind of differentiated repricing is healthy. It narrows the valuation gap between the AI leaders and the rest of the market, reduces the concentration risk that has been a recurring concern, and creates a more rational foundation for earnings to do the work going forward. The market is, in a sense, digesting the gains of the past two years and asking companies to prove their value again.

The Fed: Patient, But Not Idle

The Federal Reserve held rates steady at both its January and March meetings, keeping the federal funds rate at 3.50% to 3.75%. The decision at each meeting was not a surprise, but the commentary around it grew more cautious as the quarter progressed.

February’s CPI report, released in mid-March, showed inflation at 2.4% year-over-year, in line with expectations and lower than January’s 2.7% reading. That looked like progress. Then oil prices surged following the outbreak of conflict in Iran, and the picture changed. The Fed acknowledged the uncertainty explicitly in its March statement, noting that developments in the Middle East and their economic implications were being closely monitored.

The Fed’s quarterly projections, released at the March meeting, still point to one rate cut in 2026, likely in the second half of the year. But seven of twelve committee members indicated they see no cuts at all this year. Jerome Powell’s term as Fed Chair expires in May, and his nominated successor, Kevin Warsh, brings a different policy temperament. That transition is worth watching.

Oil, Iran, and the Geopolitical Surcharge

The outbreak of conflict involving Iran in late February introduced a new variable into an already complicated economic picture. Iran sits astride the Strait of Hormuz, through which roughly 20% of the world’s oil supply passes. Disruptions there sent crude oil prices sharply higher, into the $110 to $120 per barrel range for much of March, and insurance and shipping costs followed.

For investors, this matters in several ways. Higher energy prices are inflationary, which complicates the Fed’s path. They also act as a tax on consumers and businesses alike, compressing margins and discretionary spending. And they introduce a layer of geopolitical uncertainty that markets struggle to price efficiently.

We have seen this dynamic before. Oil shocks are disruptive but not inherently catastrophic for long-term investors. The Fed has historically looked through energy-driven inflation spikes, focusing instead on whether they filter into broader core prices. That is the watch item for Q2. As of April 1, there are early signs of potential de-escalation, and WTI crude has begun to pull back toward $100. To put price in perspective, crude oil at $100 per barrel remains below the average price over the past 25 years when adjusted for inflation. For more insight, visit our recent blog on oil prices here.

The AI Trade: Still Powerful, Still Concentrated

In January, we wrote that we expected a broader group of stocks to contribute to returns as 2026 progressed, with non-AI companies beginning to benefit from the productivity gains that AI enables. That broadening has continued in 2026 as technology stocks are down -9% through the first quarter while six non-tech related sectors posted positive performance led by Energy.   

Despite negative Q1 performance, the technology sector is projected to deliver earnings growth of roughly 37% over the next 12 months compared to 17% for the S&P 500. The Magnificent 7 continue to account for a disproportionate share of both earnings and index weight. 

At the same time, the earnings justification for these valuations has not yet broken down. AI infrastructure spending remains extraordinary. According to company earnings reports from the four largest AI “hyperscalers” (Amazon, Alphabet, Microsoft & Meta), over $400 billion was spent in 2025, roughly doubling the 2024 outlay. That spending does not stop when headlines turn negative.

We selectively reduced technology at the end of 2025 but continue to maintain exposure where appropriate while also holding positions in companies positioned to benefit from AI adoption. The FedEx analogy from last quarter still applies: the picks-and-shovels companies, the energy providers, and the businesses integrating AI into their operations are beginning to show up in earnings.

A Note on Private Credit: Something We Are Watching

Private credit has received significant media coverage this quarter, and we want to address it directly. The asset class grew from roughly $1 trillion in global assets under management in 2020 to nearly $2 trillion by 2024. Much of that growth was justified. But cracks emerged in early 2026 when retail investors in semi-liquid private credit funds began requesting their money back in large numbers. The underlying assets are structurally illiquid, and when redemption requests exceeded available cash, most funds triggered caps that limited withdrawals. No major fire sale has occurred. The caps are working as designed. 

According to Yardeni Research, three issues drove the investor concerns: fraud enabled by opaque fund structures and manager-set valuations; poor underwriting concentrated in software company loans, where AI disruption has caused enterprise value multiples to roughly halve since 2022; and valuation opacity, since private loans rarely trade and quarterly marks can lag reality significantly. The most prominent example is Blue Owl, which permanently halted redemptions on one retail-focused fund in February after more than 70% of its direct lending portfolio was concentrated in software.

Importantly, Yardeni Research notes that private credit represents only about 9% of total corporate borrowing. That is not sufficient exposure to constitute systemic risk on the order of 2008. This is a slow-moving problem largely contained to the semi-liquid retail channel, not a signal of broader financial instability.

What We Are Doing in Portfolios

Given the environment, our positioning reflects several convictions:

Fixed income: We are broadly diversifying across maturities and credit quality. With the Fed on hold and one cut still possible later in the year, we are not extending duration aggressively. High-quality shorter-term bonds and selective high-yield exposure continue to provide income without taking on undue interest rate risk.

International equities: We have selectively added exposure to developed international markets. Valuations are more attractive than U.S. large-cap equities and earnings expectations for international stocks are improving.  A weakening dollar would provide a currency tailwind. This is not a wholesale rotation away from U.S. stocks; it is a diversification we believe is now warranted.

U.S. equities: We continue to favor technology exposure where appropriate while maintaining broad positions in companies not directly tied to AI. The valuation reset in Q1 has made parts of the market more compelling than they were entering the year. We are positioned to participate as the broadening into value and non-tech sectors continues to materialize.

Cash alternatives: With rates still elevated, money market and short-duration positions continue to earn reasonable risk-adjusted returns with less volatility than the broad bond market. 

Closing Thoughts

The first quarter of 2026 was not the start anyone predicted. A Supreme Court ruling that upended trade policy. A new conflict that sent oil above $110 per barrel. A Federal Reserve caught between sticky inflation and a softening labor market. Stress in a corner of the credit market that most retail investors had never heard of before. And a stock market that reflected all of it, finishing the quarter down 4.6%, its worst start since 2022.

None of these developments have changed the fundamental argument for staying invested with a diversified, long-term portfolio. Markets absorb shocks. Valuations reset. Earnings grow over time. The investors who do best are typically the ones who remain disciplined when the headlines are loudest.

We remain committed to keeping you informed, keeping your portfolios positioned thoughtfully, and keeping you focused on what matters: your financial plan, your goals, and your family’s future.

As always, please reach out to your advisor with any questions. We are grateful for the trust you place in us.

Sincerely,

Chris Proctor, CIMA

Chief Investment Officer

Legacy Financial Strategies