April 2026 edition

Key takeaways

• Heightened volatility in midterm election years is the norm, not the exception.
• Our forecast for U.S. economic growth was revised slightly lower; duration of the war is an important swing factor.
• The equity risk/reward profile has modestly improved following the pullback, as prices, valuations, and sentiment have reset.
• We upgraded bond duration in late March, and we are upgrading high yield from less attractive to neutral following an improved entry point.

Navigating the curveballs

Entering the year, markets reflected optimism around economic improvement, a broader market advance, and eventual Federal Reserve (Fed) rate cuts. While reasonable, history also suggested a bumpy path. Midterm election years tend to bring higher volatility as policy uncertainty rises.

Our 2026 outlook – The Seventh Inning Stretch – highlighted that after a three-year advance, the bull market deserved the benefit of the doubt, while reminding investors to expect curveballs. The first quarter brought a wave of headlines, including AI disruption concerns, geopolitical tensions, private credit stress, tariff developments, and a sharp rise in oil prices tied to escalating U.S.–Iran tensions.

After a strong start, global markets pulled back as higher energy prices challenged many of the assumptions behind early optimism.

Positioning through the pullback

In early March, our work suggested markets had entered a corrective phase, with additional downside risk.

By the end of the month, however, the equity risk/reward began to improve as valuations, sentiment, and technical conditions reset. This supports a measured approach to cash deployment for underweight investors. A more aggressive stance would likely require a more compelling risk/reward setup.

Zooming out, it is also important to recognize how resilient U.S. corporations have been. Over the past decade, profits ultimately recovered following COVID, the fastest Fed tightening cycle since the 1980s, the highest inflation since the 1970s, supply shocks tied to the Russia–Ukraine war, and last year’s tariff shock. Corporate resilience remains a meaningful longer-term support.

Leaning into the weight of the evidence

In a headline-driven environment, particularly with markets focused on oil prices and the Middle East, we continue to rely on our weight-of-the-evidence framework, which combines historical perspective, economic analysis, fundamentals, and market signals.

Historical perspective

• Midterm election years often see sharper drawdowns despite modest full-year gains.
• Since stocks bottomed during the Global Financial Crisis in 2009 to the recent peak, the S&P 500 has delivered a total return of more than 1300%, despite experiencing more than 30 pullbacks, with an average decline near 10%. Indeed, pullbacks are the admission price for participating in the potential of long-term growth. 
• The recent pullback of 9% is roughly in line with that history, though less than the average maximum decline seen during midterm election years of roughly 17%.
• Notably, following a 10% decline, which is slightly deeper than the recent setback, the S&P 500 was higher one year later 88% of the time. Periods that failed to rebound typically coincided with recessions, which is not our base case, though a key risk we continue to monitor.

Economic perspective – Slightly lower growth but no recession

Our team’s U.S. growth outlook has been trimmed to reflect supply chain disruptions and higher energy prices. Prolonged elevated oil prices would increase downside risks. That said, several factors continue to support growth:

• The U.S. economy is less energy sensitive than in past cycles
• Consumers spend a smaller share of income on energy
• Tax cuts provide a partial buffer
• Wage growth continues to outpace inflation
• AI and tech-related capex continue to rise
• Early signs point to modest productivity improvement

Fundamental backdrop

• Valuations have reset meaningfully. The S&P 500 declined from roughly 23x earnings to near 19x at the recent low and compared to 18x at the tariff shock low in 2025.
• Technology valuations also compressed sharply, from 32x at its peak last October to 20x, more recently, reaching their lowest levels since early 2023.
• Earnings estimates continue to trend higher across market caps.

Market signals

• While the S&P 500 has moved below its 200-day moving average, conditions became modestly oversold in late March, with bearish sentiment rising.
• While we have not seen full capitulation, these conditions lower the bar for positive surprises from a contrarian perspective.

Portfolio Positioning

We continue to emphasize globally diversified portfolios.

• We maintain a modest equity tilt. Underweight investors should consider averaging into equities, with flexibility to become more aggressive if markets weaken further.
• We retain a modest U.S. bias while maintaining our positioning in international markets, which have already absorbed larger setbacks and could rebound more quickly if conditions stabilize.
• Sector positioning remains balanced, with exposure to technology, where valuations have reset and earnings leadership remains intact, as well as cyclical and resource-oriented areas such as industrials and materials.

In fixed income, we upgraded duration in late March as yields moved close to one-year highs. With this publication, we are also upgrading high yield from less attractive to neutral, supported by improved valuations and attractive absolute yields.

We downgraded gold in late January near record highs, as it had become the most extended by our measures since the 1980s. As a result, it failed to provide its typical hedge during the recent rise in geopolitical risks, given stretched starting conditions and higher real (inflation‑adjusted) rates. Following a sharp correction, the risk/reward has improved, and we continue to see longer-term portfolio diversification benefits.

Bottom Line

The range of outcomes remains wide, and near-term market moves are being driven by headlines where investors have limited edge.

Still, expectations, valuations, and technical conditions have reset leading to an improved risk/reward backdrop.

This supports a measured approach to putting capital to work today. A more aggressive stance would require a more compelling risk/reward tradeoff within our weight-of-the-evidence framework.

As always, we will continue to follow the weight of the evidence, keep an open mind, and update you as our views evolve.