GSAM's Investment Committee Releases Its 1st Quarter 2026 Market Update

April 16, 2026

The first quarter of 2026 has been marked by elevated geopolitical tensions, a continuation of stable inflation, interest rates and a steady labor market, but uncertainty abounds when considering how each of these may progress throughout the remainder of the year. These economic variables combined with a U.S. mid-term election cycle later this year and increased market volatility have raised investor unease similar to what was felt in April 2025 when tariffs were announced. While the environment remains complex, it is important to recognize the economy has been relatively stable and fostered modest growth in recent years. Therefore, an uptick in market volatility, while uncomfortable, may present opportunities for investors to reposition portfolios to better manage risk and upside potential.

On the U.S. economy, inflation continues to be one of the most closely watched indicators to understand just how strong and stable the environment really is. Although first-quarter inflation remains near multi-year lows, progress has been uneven across sectors as surging energy prices, especially gasoline, are driving a short-term spike in headline inflation. The conflict in Iran has driven a sharp surge in energy costs, with oil prices jumping about 55% since the conflict began just over a month ago. This pushed U.S. gas prices from under $3 per gallon to over $4, the fastest monthly increase in two decades. Energy shocks tend to be challenging for the economy because they can be both recessionary and inflationary. Higher energy costs take a larger share of household disposable income, leaving less available to spend on things other than staples (i.e. rent, groceries, etc.). This spike in energy prices is expected to drive inflation upwards, at least over the short-term. A prolonged period of elevated inflation could slow economic growth if sustained, as higher fuel costs ripple through transportation, production, and consumer prices. As a result, interest rate policy by the Federal Reserve (“the Fed”) has remained restrictive, as they held rates steady at their most recent March meeting and signaled a cautious stance that will continue to be data-dependent moving forward. Markets have adjusted expectations accordingly, with fewer anticipated rate cuts in the near term than initially projected heading into 2026.

The other half of the Fed’s dual mandate of promoting a stable economic environment is to maintain a healthy level of employment, which has been a strength of the overall economy over the past half decade. The unemployment rate has fluctuated between 4.0% and 4.5% for the last two years, which is relatively low by historical standards (the 30-year average hovers around 5.5%) and widely considered a very sustainable rate. Although the labor market has shown continued strength, there are emerging signs of gradual cooling. Job openings and job creation have declined from recent peaks. Job growth has stalled, with the average monthly gains at 13,000 over the past year, compared to gains at 89,000 a month over the comparable period a year earlier.  Though job creation remains positive, the majority of job gains have been somewhat concentrated in the medical and hospitality sectors over the past twelve months. Continued job gains may be largely dependent on interest rate decisions by the Fed, as well as the degree of utilization for artificial intelligence.

Consumer spending continues to be the primary driver of U.S. GDP growth and remains solid, yet increasingly concentrated among higher-income households, making overall economic growth more fragile and heavily dependent on wealthier consumers. Stock market and home prices are up sharply in recent years, which has likely driven higher-earning consumers to feel more comfortable with continued spending. However, if a pullback in equity markets is sustained over a few quarters, lower portfolio values on paper may have a negative impact on the consumer spending growth on the upper end of the income spectrum. Additionally, there are indications that households more broadly are becoming selective with spending, particularly as higher borrowing costs and reduced savings levels weigh on discretionary spending. At the same time, rising delinquencies on credit cards, auto loans, and student debt signal growing financial stress among lower- and middle-income households, suggesting potential downside risks to future spending. This marks a shift from the robust consumption trends observed in previous quarters.

Against this macroeconomic backdrop, equity markets have experienced increased volatility and a slight pullback in prices, depending on where you look. Although markets have been choppier to start the year than we saw the last couple years, fundamentals still support continued growth and more favorable valuations may prove to be a potentially advantageous long-term entry point. Refer to the data table below for a comparison of performance across various indices: 

For equity markets, the first quarter of 2026 marked the weakest quarter since 2022, a notable shift in momentum following strong performance throughout 2025. U.S. large-cap equities, as measured by the S&P 500, declined approximately 4.3% during the quarter and at one point were down as much as 7% from recent highs. This pullback was driven by a combination of geopolitical instability, rising energy prices, and shifting expectations around Federal Reserve policy. Equity market performance revealed increasing dispersion and a rotation away from mega-cap growth. While large-cap indices declined, mid- and small-cap stocks showed relative resilience, suggesting a broadening of market leadership. Mid- and small-cap companies have lagged large-cap stocks over the last few years as interest rates have been elevated but they stand to benefit more from a reduction in interest rates when additional cuts eventually occur. As a reminder, smaller companies tend to benefit disproportionately from lower borrowing costs and improving domestic economic conditions as they are more domestically focused and less exposed to global trade headwinds than larger companies.  Additionally, the mid- and small-cap indices are more diversified with an increased weighting to industrials and financials while being less reliant on the technology sector. This diversification is important as not all mid- and small-cap companies are equal, so it matters what you own. For example, as much as 40% of companies included in the Russell 2000 index are unprofitable, yet many of those names have enjoyed strong returns recently. Conversely, fundamentals across large-cap stocks remained solid, with S&P 500 companies projected to deliver approximately 13% year-over-year earnings growth for Q1, marking the sixth consecutive quarter of double-digit growth. This divergence between strong corporate earnings and weakening price performance suggests that valuation compression, rather than deteriorating fundamentals, has been the primary driver of recent equity weakness.

In the fixed income arena, investors experienced volatile 10-year U.S. treasury yields which fell below 4% in February before rebounding toward the mid-4% range to end the quarter amid renewed inflation concerns and rising oil prices. This compares to late 2025 trends, when yields had been stable or declining, providing a tailwind for bond returns. Notably, the traditional role of bonds as a hedge against equity volatility weakened during the quarter, with both asset classes coming under pressure. As a result of the increase in rates for longer-dated maturities, short-term bonds, as measured by 3-month T-bills, fared better through the quarter. However, over the past year, much of the bond performance has been relatively similar across different types and maturities as shown in the table above. Investors are still being compensated for taking additional risk in high-yield bonds, but not to the extent we’ve historically seen as spreads have compressed. Looking ahead, the trajectory of inflation and central bank policy will remain critical determinants of bond market performance, particularly as investors reassess the timing and magnitude of potential rate cuts relative to earlier expectations.

The Grant Street Investment Committee remains active on the defensive side of client portfolios. As a result of increased stock-bond correlation, we have continued seeking strategies that provide a similar risk profile to that of traditional core bonds while maintaining the opportunity for greater upside potential. The most intriguing strategy we recently implemented is designed to generate positive returns in both rising and falling markets, as we experienced this past quarter. The low correlation provided by this strategy makes it an ideal complement to a balanced portfolio. Our disciplined approach emphasizes diversification, risk management, and a focus on fundamentals. Within equities, we continue to reap the benefits of our diversified approach, owning high-quality equities while maintaining allocations across the capitalization spectrum and across the globe. In a market environment such as the one experienced in the first quarter, it is crucial to maintain a balanced exposure to a variation of equities to mitigate the impact of volatility and future uncertainty.

As we move into the second quarter, several key themes will remain in focus: the trajectory of inflation, the timing and magnitude of potential monetary policy adjustments, and the durability of economic growth. While uncertainty may persist, the overall picture of the economy is one of gradual normalization. We recognize that periods like these can raise questions and concerns. Our investment committee remains vigilant in analyzing macroeconomic data, monitoring market developments, and adjusting portfolios as needed to align with long-term objectives. We are grateful for your continued trust and partnership.

Sincerely,

The Grant Street Asset Management Investment Committee