As we have discussed over the past 5 years on “2 Question Tuesday” (tune in!) or at our Firm’s Economic and Market Update X, March has increasingly become “the new October” in terms of volatility and market performance. The stock market typically experiences weak returns during this period. This year, the S&P 500 witnessed a peak-to-trough sell-off of approximately -9.8%, while the Nasdaq declined by -12.7% and the Dow by -10.8% as of 4/6/26. Historically, over the last 75 years, the average intra-year sell-off has been around -14%, while the market still finishes positive roughly 80% of the time.

Geopolitical Concerns:

The war in Iran has captured headlines and is the market’s primary focus. The market’s response has been unprecedented, reminiscent of the meticulous tracking during the Battle of Waterloo, where traders had an intricate flag system to gauge the tide of battle. This level of responsiveness to daily war and geopolitical events is remarkable. The tensions affecting energy supplies are particularly significant for developed and emerging nations, especially Europe, which relies heavily on oil from the region. Given that energy prices are pivotal to inflation, these developments warrant our close attention—albeit not necessarily to this granular level that affects stock prices.

It is important to remember that the sell-off commenced prior to the outbreak of the conflict. Valuation concerns surrounding software companies, private credit, and AI hyper-scaling initiatives were already at play, and the subsequent war only exacerbated the situation, driving up energy prices and inflationary fears.

Let’s examine the root causes of the sell-off:

Software Companies:

The traditional model of subscription-based software companies is now called into question due to the rapid onset of artificial intelligence for cheaper, quicker solutions. While many firms that once commanded significant market capitalizations may not survive the AI revolution, well-run blue-chip companies that facilitate AI integration will demonstrate resilience. The market has scrutinized these valuations, leading to dramatic sell-offs, with many high-growth software names declining 30% to 50% from recent highs. Like anything, there will be winners and losers. Some of these companies still have wide moat enterprises that have gone on sale and look attractive.

Private Credit:

We have consistently voiced caution regarding private credit over the last 5 to 7 years. While some firms have demonstrated success, concerns about liquidity, transparency, and proper diversification remain paramount. In early March, as anxiety spread regarding the viability of software firms, private credit investments showed over 30% exposure to this sector. In addition, the broader private credit market has grown to roughly $1.5 trillion globally, raising further concerns around transparency and liquidity in a stressed environment. As seen in the past with collateralized mortgage obligations, lack of diversification can lead to severe market corrections. The interest rates faced by these companies—often over 10%— raise serious questions about their viability in the current economic landscape.

Currently, valuations for many companies in this category have declined by 30% to 40%. However, we see potential for value, particularly as we strategically enhance our income portfolios, focusing on high-quality management.

What is ironic about these investments, and while I have never been a fan, is that when we look at stress on markets, liquidity always becomes paramount at the most unexpected times. When assets veer too far from what they are worth and dislocations exist, that is when money can be made. The unfortunate structure of private credit and private equity investments due to the illiquid nature makes it very tough to take advantage of these dislocations at the right times. This is why our preference has always been towards liquid, low-cost marked-to-market assets.

AI Investments of the Hyperscalers:

The founders of significant tech giants, including Meta, Alphabet, Amazon, Nvidia, and Tesla, have pledged nearly $1 trillion towards AI development. While this investment is impressive, concerns about excessive spending and reliance on circular financing are emerging. For instance, *Amazon’s free cash flow forecast for 2026 averaged $105 billion; today, the 2026 consensus estimate is -$11 billion of cash burn! These are huge investments going into AI. One would think, given Amazon’s record of prior investments including retail and the cloud, that they have made good bets before. Likewise, the price-to-earnings ratio for the “Magnificent Seven” has contracted to around 27, a historically low figure, down from peak levels of ~35. We view these investments as strong buying opportunities; indeed, some individual stocks have seen P/E ratios fall to 16 to 17.

Inflation and Energy Prices:

We anticipate rising inflation and potential spikes in oil prices above $100 a barrel, causing short-term concern. However, I believe this surge will be temporary, with energy prices stabilizing in the $50-$70 range in the long term. It’s vital to recognize the ongoing conflict’s significant shadow over international energy markets. Should a resolution be achieved, it could positively influence both inflation and economic growth.

Midterm Elections and Market Returns:

Historically, midterm election years experience muted market returns, usually in the 1% to 5% range. This year appears to follow that trend; however, given the market’s preceding performance, even modest gains may convey broader resilience.

Interest Rates and Economic Outlook:

In times of war and geopolitical uncertainty, substantial amounts of foreign capital typically flow into U.S. assets, particularly Treasuries. Recent events remind us of past moments when foreign countries sold Treasuries during geopolitical crises, yet we have observed fluctuations in the market dynamics this time. While our dollar has rallied around 3%, Treasury yields have risen rather than stabilized. Watching the 10-year Treasury pierce the 4.42% level was disconcerting, particularly given that the 10-year began the year closer to 4.15% and reached a low point of 3.96% in late February before turning sharply upward in a short period of time.

Despite being in a midterm election year, I believe we will not see a swift market recovery. However, there are opportunities in sectors where current prices of high-quality companies have deviated from historical norms. A long-term approach, combined with careful and tactical decision-making, is essential. The valuation on the S&P 500 index is attractive, having fallen from 23 times earnings on Oct. 27, 2025, to its current level around 19 times, while earnings have risen 12.7%.

Amid this backdrop, one geopolitical development deserving more attention than it has received is the scheduled Trump-Xi summit in mid-May. Overshadowed in recent weeks by escalating tensions with Iran, this meeting carries significant strategic weight. A constructive outcome — one in which both nations find common ground on trade and regional security — would benefit both economies and could serve as a meaningful catalyst for the kind of stability that supports the valuations and long-term opportunities we are identifying today.

If no future geopolitical or inflationary shocks arise from Iran or the associated conflict, we believe we may have found a bottom for the year. As always, returns during midterm election years tend to be muted; however, if positive solutions emerge from the Iranian conflict, the global economy and energy markets may grow increasingly stable, providing a significant dividend in our future.

Recently, I ran my 10th NYC half marathon. This time, it was for Project Purple, which raises money for pancreatic cancer research. This and the last five full New York City marathons I have run reminded me of the many similarities between distance running and investing in times like these. At the beginning, everyone is optimistic and hopeful; everyone’s having fun; you have some great turns and straightaways; sometimes you get a pebble in your shoe you have to run with for a while; mile 18 to 19 is always awful; and then as you finish, you begin reflecting. Just as a marathon requires disciplined training, mental endurance, and fortitude, investing requires the same, especially in times of unknown outcomes and outside events affecting stock and bond prices.

We anticipate continued volatility through November, barring unforeseen geopolitical events or unanticipated fallout from the war. Nevertheless, many technology stocks are attractively priced, presenting compelling long-term investment opportunities.