Q1 2026 Market Update

To my clients and partners,

This first quarter of 2026 has been anything but normal.

I want to start by acknowledging something directly: if you have looked at your account recently, the numbers are probably not what you want to see. The S&P 500 is on track to finish Q1 down roughly 4.81%, which would make it our worst quarter since 2022. I know that is not easy to sit with, and I want you to know that I feel that weight too. Every account I manage is something I take personally. Your money is not a number on a screen to me. It is your retirement, your kids' future, your business you built, your life's work. So before I say anything else, I want to say this: we are paying attention, we are on it, and this letter exists because I think you deserve more than a formal email.

Now let me tell you what is actually happening and what we think it means.

The biggest driver of this quarter is something most investors have never seen in their lifetime: Conflict in the Middle East. (That's a joke.) Unfortunately, every generation for the last 900 years has seen some sort of conflict in the Middle East. Right now the Strait of Hormuz is functionally closed (possibly changing soon) where roughly 20% of the world's oil supply normally flows every single day. Oil crossed $100+ a barrel for the first time since 2022. Diesel and jet fuel have spiked even harder. Countries across Asia, which bear the heaviest dependence on Gulf energy, are hoarding fuel. Flights are being canceled. Stock markets around the world sold off hard.

The media is covering the military conflict extensively, and they should. But what I want you to understand is the direct mechanism connecting what is happening in the Middle East to what you are seeing in your account. Higher oil prices mean higher inflation. Higher inflation means the Federal Reserve has less room to cut interest rates. Less rate cut flexibility means tighter financial conditions for businesses and consumers. That chain of events is what the market is pricing right now. And the market is doing something very specific with it: it is treating every day of this conflict as a binary event. If there are signals of de-escalation, stocks rebound sharply. If there are signals of continued conflict or further closure of the Strait, stocks decline. We have been living inside that back and forth for most of March, and it is exhausting to watch if you are checking prices every day. (There are better versions of March Madness I promise, unless you're a Duke fan).

On top of the energy shock, we are dealing with a tariff environment that refuses to settle down. The Supreme Court challenged the administration's tariff authority in February. The administration responded by invoking a different legal statute to maintain a 15% universal surcharge. (Mom and Dad are fighting again). That kind of policy uncertainty is genuinely difficult for companies to navigate. When a company cannot predict what it will pay for imported goods/units 6 months from now, it makes fewer investments, hires fewer people, and guides earnings more conservatively. That is showing up in the data: GDP growth slowed, hiring is at its weakest pace since 2008/2009 (excluding COVID) and consumer sentiment hit its lowest annual average since records were first kept in 1960.

And yet corporate earnings are still growing.

This is not normal for a recession. Large companies, particularly the ones that make up the majority of the S&P 500, have spent the last few years building pricing power, cutting costs, and shifting more revenue to high-margin software and services. They can absorb tariff pressure better than small businesses. They have already reported strong Q4 2025 numbers. The reckoning may come in Q1 2026 earnings, which we are about to start receiving over the next two to three weeks. What we will be watching very closely is not the headline earnings numbers but the forward guidance. 'What are CEOs saying about the rest of 2026?' That forward guidance is the single most important signal for where the market goes from here. If large companies guide cautiously, markets will reprice down. If they express confidence despite the uncertainty, the setup for a rebound is strong.

Also, not to kick the market when it's down but: software and technology companies are getting crushed because of AI.

The recent updates from Anthropic and OpenAI have crossed a threshold that a lot of people in the market are only beginning to understand (and possibly react/overreact to). The AI models are now capable enough that a company with a handful of engineers can build internal software tools in a matter of weeks that would have cost millions of dollars per year in SaaS subscriptions two years ago. Think about what that means for companies like Salesforce, Workday, ServiceNow, and dozens of other enterprise software businesses. If your finance team can now have engineers build a custom internal CRM tool using AI for a fraction of the cost, why are you paying $6M a year for a subscription?

I want to be nuanced here, because the answer is not simply "all software companies are dead." The companies with deep data moats, amazing valuations with solid fundamentals and genuine switching costs are very different from the ones selling subscriptions for tasks that AI can now do for close to nothing. Separating those two categories is some of the most important research work we are doing right now. Some of the software names that have sold off sharply this quarter are genuinely impaired. Others have been thrown out unfairly and represent some of the most interesting opportunities I have seen in years. You have most likely seen lots of activity in your account since late November.

Which brings me to what we are actually doing.

Wayne Gretzky, the world famous investor, was once asked what made him the greatest investor (hockey player) of all time. His answer was simple: he skated to where the puck was going, not to where it already was. That is the entire philosophy behind how we manage money and how we are approaching this quarter specifically. This is not a time to panic. This is a time to do the work.

The $600B+ in AI infrastructure capex being committed by the five largest technology hyperscaler companies in 2026 is not stopping because of the Iran conflict or because of tariffs. The physical buildouts of data centers, power infrastructure, fiber optic networks, and semiconductor manufacturing are long-cycle investments that were planned years ago and are already underway. What is happening right now is that the market is punishing anything with "technology" in the description without distinguishing between the companies that are genuinely at risk from AI disruption and the companies that are actually building the physical infrastructure of the AI era. That indiscriminate selling is creating the opportunities I have been waiting for.

Some of the companies I am watching most closely right now are the ones receiving the largest share of that capex, specifically in photonics, power infrastructure, electrical construction, and semiconductor equipment. Some of these names have already had enormous runs over the last twelve months. Others have barely moved and are sitting at valuations that imply no credit whatsoever for the multiyear tailwinds they are directly in the path of. My job, and the job of my team, is to separate the ones with real durable earnings power from the ones riding a hype wave. That distinction matters enormously when valuations compress the way they have this quarter.

We also have cash reserved across client accounts specifically for moments like this one. That was intentional. The years of 2023, 2024, and 2025 delivered the S&P 500 returns of roughly 25%+, 23%+, and 16%+ respectively. We know at some points there would be a quarter that looked like this, and that the right move during the good years was to take some gains and hold reserves so we could be proactive rather than reactive when it arrived. That is where we are now. We are not panicking. We are preparing to move.

I know that watching your account go down is genuinely unpleasant. It does not matter how rational the explanation is or how temporary the cause may prove to be. Seeing a negative number on a statement where you expected growth is hard, and I do not want to minimize that by throwing statistics at you. What I want you to know is that I think about your specific situation constantly. I think about your timeline, your goals, your risk tolerance, and what this quarter means not in terms of headlines but in terms of your actual financial life. Nothing about your long-term financial plan has changed because of this quarter. The fundamentals of the companies we own are largely intact. The macro headwinds are real but are not permanent. And the opportunities being created by this volatility are genuine.

My job is to protect your downside, find the upside that others are missing, and communicate with you honestly through every quarter, not just the easy ones. This is one of the harder ones. I am grateful for the trust you place in me and I do not take it lightly.

If you want to talk through anything specific to your account or just want to think through what all of this means for your situation personally, please reach out. I always have time for that conversation. Please use the scheduling link for clients here to book a time:

More to come as Q1 earnings season unfolds. I expect the next few weeks to be clarifying.

Cheers,

Conner Young

(As always, these are my thoughts and observations. This is definitely not financial advice. Do your own research!)

This is informational and not investment advice. Investing involves risk and loss of principal. Past performance does not guarantee future results. We and our clients may hold positions in securities mentioned and may trade without notice. Indices are unmanaged and cannot be invested in directly. Data is believed reliable but not guaranteed. We do not provide tax or legal advice. See our Form ADV for details.