By the end of Q1, the S&P 500 finished down 4.3%, marking the second consecutive year it closed the first quarter in negative territory. If we look back at 2025, we know how that story ended: a strong rally through the final nine months. Let’s hope history repeats itself. 

As of now, we’re off to a good start. U.S. stocks posted a sharp reversal in April despite conflicting headlines about the Iran conflict and the Strait of Hormuz. Markets fluctuated with each new development, serving as a useful reminder that geopolitical risks don’t follow a straight line — they show up unexpectedly and take a meandering path to a resolution. 

Iran and the Bigger Picture 

In late February, U.S. and Israeli forces launched joint strikes on Iran, triggering the closure of the Strait of Hormuz and an immediate spike in oil prices. Global equity markets sold off sharply, and Iran dominated the market narrative through March. A fragile ceasefire was announced April 7, sparking a strong relief rally.  However, as Charles Schwab observed, much of that initial move was driven by the unwinding of hedges rather than a true resolution of the conflict. The situation remains fluid, and the whipsaw in markets over just six weeks is a good reminder how unpredictable geopolitical risks can be. 

We anticipate the Iran conflict and the delicate ceasefire will continue to shape day-to-day market movements. Despite this, strong corporate earnings have provided a stabilizing force, helping to overshadow the noise from the Iran news cycle. 

As the situation evolves and moments of clarity emerge, longer-term narratives will regain attention. Chief among them is the ongoing story of AI. 

AI: Still Moving at Lightning Speed 

AI continues to reshape business at a remarkable pace, and the large-scale infrastructure build-out behind it remains a meaningful driver of broad economic growth. The investment opportunity spans the entire AI value chain, as J.P. Morgan’s Michael Cembalest has outlined well, including: 

• Building data centers and chips 

• Power generation and transmission 

• The LLM platforms themselves (ChatGPT, Claude, etc.) 

• Implementation of AI-driven business models across industries 

We continue to believe diversified exposure across this chain is a better approach than concentrating in any one layer.  

Over time, the real test will be whether AI delivers widespread productivity gains for the broader economy. This becomes increasingly critical as the U.S. workforce continues to shrink, which leads us to the economic outlook and what it means for the Fed. 

 

A Shrinking Labor Force and a Tough Job for the Fed 

Here’s an interesting puzzle: the number of people working is falling, yet the unemployment rate is also dropping. How is that possible? 

Over the past 12 months, the working-age population (anyone over 16 who could work) grew by 1.8 million. However, the number of people actually working shrank by 650,000, and the count of people officially “unemployed” stayed roughly flat. So where did the difference of nearly 2.4 million people go? Answer: they moved into the “not in the labor force” category, which increased from 102.4 million to 104.8 million. This shift is largely made up of Baby Boomers continuing to exit the workforce, a demographic trend we don’t expect to go away anytime soon. 

For workers who remain, this is actually good news, as it means less competition for jobs. But for the broader economy, it means we’ll become increasingly reliant on productivity improvements like AI to fill the gap. It also raises a fair question: is the unemployment rate still a reliable barometer of economic strength? Or should labor force participation carry more weight? There’s no easy answer, which is exactly what makes the Fed’s job so difficult right now. 

 

The Fed: Likely on Hold 

The federal funds rate currently sits between 3.5%–3.75%, unchanged across the Fed’s last two meetings in January and March. The March dot plot still pencils in just one 25-basis-point cut for all of 2026, but 14 out of 19 FOMC members now favor holding steady or making only a modest adjustment, which is a notably more cautious stance than we saw in December. The next meeting is set for April 28–29, and a hold is nearly a foregone conclusion, with prediction markets pricing in about a 98% probability of no change. 

Adding to the complexity: the rise in oil prices has pushed headline inflation higher. While the Fed will likely characterize this as “transitory” — a short-term spike rather than a lasting trend — it complicates the case for cutting rates when headline CPI remains above 3%. Determining how much of this inflation is energy-driven versus more persistent is no easy task. 

We expect that both the Fed and longer-term interest rates remain range-bound for the foreseeable future, with little likelihood of rates becoming a major market-moving force in either direction. 

 

What Should We Take Away From All This? 

The news cycle is constantly shifting. AI, oil prices, deficits, tariffs, the dollar, and the Fed will each take their turn in the spotlight. That’s just the nature of investing today. 

Here’s what we do know: patience pays off. Whether it was tariff volatility last year or the Iran conflict this year, markets have given us a real taste of turbulence. And in both cases, they’ve also given us a recovery. If the volatility of the past 15 months has felt like too much for your portfolio, the recent rebound is actually a good opportunity to revisit your risk profile and asset allocation. It’s always better to make adjustments from a position of relative strength rather than at the lows when emotions are at their peak. 

Ultimately, it’s about you, not the markets. That’s why your financial plan matters so much, and why it can keep you grounded when the headlines feel anything but. 

 

 

Sources: 

• CNBC — “A fragile U.S.-Iran ceasefire sparks market relief” (April 8, 2026) — cnbc.com | cnbc 

• Charles Schwab — “Truce in Iran: Relief but Not Resolution” (April 9, 2026) — schwab.com | schwab 

• Ycharts — Asset class performance data (MTD and Q1 returns) 

• Trading Economics — “United States Fed Funds Interest Rate” — tradingeconomics.com | tradingeconomics 

• Investopedia — “The Fed’s 2026 Outlook Just Shifted” (March 18, 2026) — investopedia.com |investopedia 

• Kalshi — Fed April 2026 meeting prediction markets — kalshi.com | kalshi