16 Apr Rotation, Resilience, and Fundamentals Amid Geopolitical Shock

03 Mar A Market Perspective on Recent Middle East Events

Over the weekend, the U.S. and Israel launched coordinated military strikes against Iran, targeting senior leadership, military infrastructure, and components of its nuclear program. Iran’s Supreme Leader has reportedly been killed, and Iran has responded with missile and drone attacks across the region. President Trump has labeled the campaign “Operation Epic Fury,” with the stated objective of regime change in Tehran. Strikes are expected to continue, and there are already reports of U.S. casualties.

First and foremost, the human element matters. The safety of civilians and our troops is paramount. These are serious developments with real-world consequences.

At the same time, as investors, we have to assess what this means for markets, not emotionally, but analytically.

When geopolitical shocks occur, markets typically react through three primary channels: risk sentiment shifts, energy prices move, and volatility rises. The key question is not whether markets react — they always do. The key question is whether this evolves into a sustained macroeconomic shock, or remains a contained geopolitical escalation with temporary market implications.

This Was Building

While the scope of the strikes is significant, particularly the targeting of Iran’s senior leadership, tensions did not appear overnight.

Iran’s adversarial posture toward the U.S. and Israel has spanned decades. In 2019, Iran attacked Saudi oil infrastructure, temporarily disrupting global supply. Hamas’ October 2023 attack on Israel reignited broader regional conflict and heightened direct tensions with Iran. Last summer, Israel conducted a 12-day campaign targeting Iranian nuclear and missile assets. Nuclear negotiations failed in recent months, and a visible U.S. military buildup suggested escalation risk was rising.

In other words, this was a progression, not a bolt from the blue. Markets tend to struggle with true surprises. They often digest well-telegraphed risks more effectively than feared. We saw this in the market’s resilience in the Monday following the attacks.

The Energy Transmission Mechanism

For markets, the most direct variable is oil. Iran produces roughly 3 million barrels per day and sits along the Strait of Hormuz — one of the most critical energy chokepoints in the world. Roughly one-third of global seaborne oil exports pass through that narrow corridor. Even the threat of dis­ruption can push prices higher.

Following the strikes, WTI moved into the low $70s and Brent approached $80. That’s a clear reaction, but context matters.

Oil peaked near $128 in 2022 following Russia’s invasion of Ukraine. We are materially below those levels today. More importantly, the structural backdrop has shifted. The U.S. is now the world’s largest producer of oil and natural gas. While we remain part of a global energy market, domestic production meaningfully reduces vulnerability relative to prior decades.

Energy shocks become economically problematic when they are severe, sustained, and layered on top of fragile growth. At present, none of those conditions are clearly in place. Could they develop? Yes. Is that the base case? No.

We saw a similar dynamic in 2022 where consensus expected structurally higher oil prices for years. Instead, supply adjusted and prices normalized faster than projected.

What History Tells Us

A common behavioral mistake during geopolitical crises is extrapolation. Assuming that severe headlines translate into permanent market damage.

History does not support that view.

Markets have navigated world wars, the Gulf War, 9/11, the wars in Iraq and Afghanistan, Russia’s invasion of Ukraine, and the Israel–Hamas conflict. Each episode brought volatility. None permanently derailed long-term market compounding.

Markets ultimately price earnings, liquidity, policy, and productivity. Geopolitical events matter to the extent that they alter those drivers.

In many historical cases, markets bottomed while headlines remained negative. Waiting for clarity has often meant missing the recovery.

Portfolio Impact

It’s also important to separate emotional intensity from portfolio exposure.

Iran has been under heavy sanctions for years, and its economy is relatively isolated from global capital markets. Direct exposure within diversified portfolios is minimal.

The real risks are second-order: sustained energy inflation, shipping disruptions, broader regional escalation, or policy responses that tighten financial conditions. Those are macro variables we will be monitoring.

Our portfolios are built across asset classes, sectors, and geographies precisely because we cannot predict which shock will arrive next. Diversification is not theoretical — it is structural risk management.

Discipline Matters – Final Thoughts

Events like this test discipline more than analysis.

Military conflict carries emotional weight. But investment decisions made in emotionally charged environments tend to be the most costly.

Short-term volatility is uncomfortable. Permanent capital impairment is expensive.

The data is clear: missing even a handful of the market’s strongest days materially reduces long-term returns. Those days often occur during peak uncertainty.

This does not mean ignoring risk. It means distinguishing between headline risk and structural economic deterioration. Right now, we are firmly in the headline phase.

The strikes on Iran represent a meaningful geopolitical escalation. The situation is fluid, and we are monitoring developments closely.

However, our framework does not change based on headlines. Diversified portfolios aligned with long-term financial plans are designed to endure periods of uncertainty.

We cannot predict every shock, but we can prepare for them through disciplined portfolio construction.

Discipline — not reaction — is what compounds wealth over time.

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09 Feb From Disinflationary Growth to a Broader Expansion

EXECUTIVE SUMMARY

The U.S. economy is transitioning from a narrow, services-led disinflationary expansion to a broader growth regime marked by a manufacturing rebound, persistent inflation friction, and an expansion of corporate earnings participation. After a prolonged contraction, manufacturing activity has re-entered expansion, driven by a decisive recovery in demand.

Financial markets reflect this shift: the yield curve has re-steepened on improving growth expectations, and the “earnings gap” between mega-cap tech and the broader market is closing. This regime favors cyclical participation and disciplined factor rotation over duration-driven valuation expansion.

MANUFACTURING: A DEMAND-LED INFLECTION

The January manufacturing PMI rose to 52.6, marking a clear exit from contraction. This rebound is supported by New Orders at 57.1 and Backlogs at 51.6, confirming that demand acceleration is genuine rather than inventory-driven.

Historically, the simultaneous rise of New Orders and Backlogs above 50 has preceded acceleration in industrial production. While manufacturing employment remains cautious (48.1), the surge in orders suggests a transition from a services-only expansion toward a more balanced growth mix.

SERVICES: RESILIENT, BUT INFLATION-CONSTRAINED

Services activity remains firmly expansionary (PMI 53.8). However, prices paid surged to 66.6, indicating re-accelerating cost pressures. Unlike traditional demand-pull inflation, current services inflation is increasingly structural, driven by labor shortages in specialized sectors and rising energy intensity from AI-related infrastructure. These indices suggest that inflation is stabilizing above target, creating an asymmetric environment that constrains Federal Reserve easing.

The Corporate Earnings Outlook: Breadth Returns

The macro shift into manufacturing and resilient services is manifesting in a significant broadening of corporate fundamentals. For the full year 2026, S&P 500 earnings growth is projected at 14.1%–15.0%, marking what would be the third consecutive year of double-digit gains.

Closing the “Earnings Gap”

The defining characteristic of 2026 is the participation of the broader market. While the “Magnificent 7” continue to lead with 22.7% projected growth, the S&P 493 (the rest of the index) is expected to accelerate to 12.5%. This would confirm that the earnings recession for mid-to-large-cap cyclicals has effectively ended.

Margin Resilience & Productivity

Despite rising input costs, net profit margins are forecasted to reach a record 13.9%. This is driven by two primary factors:

1. 1. 1. AI Implementation: Transitioning from pilot stages to production-level automation in manufacturing and back-office functions.
      2. Pricing Power: Specifically in the Industrials and Materials sectors, where companies are successfully passing through costs as demand outstrips supply.

Monetary Policy and the Yield Curve

The yield curve’s re-steepening to approximately +55 bps (10y–3m) reflects growth-driven dynamics rather than policy accommodation. With growth broadening and input-cost pressures elevated, aggressive easing risks reigniting inflation. The most likely policy path is “higher-for-longer” rates with gradual, data-dependent cuts.

With Chairman Powell’s term at the Federal Reserve ending in May, President Trump’s pick to replace him, Kevin Warsh, is likely to take over. Warsh is viewed as a more financial market friendly pick, but will undoubtably have to toe the line between further accommodation and rising inflation risks.

Market Volatility and Risk Regime

Market signals confirm an orderly transition. Equity volatility has risen modestly but remains below systemic risk levels. Bond market volatility is near historical troughs, indicating rate uncertainty is well-anchored. Credit spreads remain comfortably below stress thresholds, signaling rotation within risk assets rather than a broad exit from the market.

Translating the Regime into Equity Portfolio Construction

This macro regime – broadening growth with inflation friction – calls for a rotation toward “Earnings Realization” over “Valuation Expansion.”

• Reduce Concentration in Long-Duration Growth: High valuations and discount-rate sensitivity limit upside in mega-caps.
• Increase Selective Exposure to Cyclicals & Value: Specifically, Industrials and Materials, which benefit from manufacturing momentum and have seen positive earnings revisions of 28.6%.
• Broaden Market Cap Participation: Mid- and small-cap equities offer greater sensitivity to domestic growth and less reliance on multiple expansion.
• Maintain Quality as an Anchor: Emphasize profitability and balance-sheet strength to navigate a “higher-for-longer” interest rate environment.

Conclusion

The U.S. economy is entering a new phase defined by manufacturing re-engagement and an earnings recovery that is finally reaching the broader index. For investors, the challenge is not an imminent recession but adapting to a world where returns depend less on the Federal Reserve and more on earnings delivery, factor rotation, and industrial productivity.