1Q Investment Commentary: Geopolitics Take Center Stage
BY PAUL BODNAR
CM Wealth CEO, Chief Investment OfficerKey Takeaways
• Broadening Equity Performance: Despite a volatile first quarter where the S&P 500 fell 4.3% and the NASDAQ declined 7.0% , market leadership began to shift toward domestically-oriented smaller companies; this trend has accelerated sharply since quarter-end, with the Russell 2000 rallying to an 11.9% year-to-date gain and outperforming the S&P 500 by 680 basis points as of mid-April.
• Private Credit: We want to reassure clients that we have no exposure to the retail "evergreen" vehicles currently facing redemption gates; our credit strategy remains focused on selective, niche drawdown structures alongside institutional peers. We’ll share more thoughts on this topic below.
• Outlook: While the Iran conflict poses a significant recessionary risk, our current opinion assumes a resolution that will act as a catalyst for a strong year in cyclical and value-oriented assets that have lagged in recent years.
Strong Economic Fundamentals Challenged by Attack on Iran
The first quarter of 2026 marked a clear inflection point for markets, as geopolitics and energy dynamics displaced valuation and monetary policy as the dominant drivers of risk sentiment. What began as a contained repricing of technology stocks, driven by questions about AI’s long-term impact on enterprise software business models, escalated sharply on February 28th. Coordinated U.S. and Israeli strikes on Iran triggered retaliatory attacks and the effective closure of the Strait of Hormuz, a critical passageway for roughly 20% of global oil supply.
The resulting energy shock reintroduced inflation volatility just as disinflationary pressures had begun to take hold, highlighting the limits of diversification during supply-driven inflation episodes. Against a backdrop of still-elevated equity valuations and renewed supply-side risks to global growth, the quarter reinforced an emerging theme: equity market leadership is broadening, with dispersion increasing across sectors, styles, and market capitalizations.
Equity markets declined modestly in aggregate, though headline results obscured significant divergence beneath the surface. The S&P 500 fell 4.3% and the NASDAQ declined nearly 7%, as software and AI-adjacent names bore the brunt of a structural reassessment. Meanwhile, smaller-capitalization equities proved more resilient, with the Russell 2000 up 0.9% and the Russell Microcap index rising 1.5%, reflecting a rotation toward more domestically oriented businesses with greater sensitivity to real economic activity.
In fixed income, expectations for rapid policy easing were deferred, though not abandoned. Central banks adopted a more cautious, data dependent posture as elevated energy prices complicate the near-term inflation outlook, even as medium-term projections continue to point toward gradual convergence toward target levels.
Strong Start to 2Q, Pre-Iran War Themes Resume
We remain positive on economic fundamentals and expect equity market performance to continue broadening in 2026 beyond the "Magnificent 7". This trend was firmly in place before the February 28th strikes. We continue to see massive data center capital expenditures, a rebound in domestic manufacturing, and a steady job market as the primary engines driving markets higher. Since negotiations began, the market has rapidly rebounded on expectations of a resolution that would reopen the Strait of Hormuz.
This resurgence is particularly evident in the industrial sector. One of our key themes is that the AI revolution is not just about code; it is about physical infrastructure. This shift is finally boosting domestic industrials through massive demand for electrical grid upgrades, air purification, and specialized machinery required for the data center boom. Consequently, the ISM Manufacturing Index turned positive in 2026, ending a period of contraction that began in late 2022. Furthermore, aerospace supply chains have finally eased, allowing production to accelerate to meet substantial backlogs.
ISM Manufacturing Index: Return to growth after years of contraction
Importantly, this recovery in the "real economy" tends to favor small-cap performance, an area where we remain overweight in most client portfolios. As of April 17th, the Russell 2000 small cap benchmark is up 11.9% year-to-date, beating the S&P 500 by 680 basis points. This outperformance is supported by robust fundamentals, with 1Q 2026 earnings growth for the Russell 2000 expected to hit 33.4%.
Positive Outlook Unless Geopolitics Get in the Way
Geopolitical risk, particularly the lack of a resolution in Iran, remains the primary variable for the remainder of 2026. A failure to open the Strait of Hormuz could derail an otherwise healthy economy and potentially tilt us into a global recession.
However, our base case remains that a resolution will be reached, leading to a strong year for markets. We believe we are in the early stages of a significant recovery in parts of the economy that have lagged for years and can lead the next leg of this economic expansion.
Private Credit: Navigating Structural Tension and Selective Opportunities
Private credit has recently drawn significant scrutiny as several prominent, retail-oriented "evergreen" vehicles have gated or limited redemptions. While headlines have raised concerns about a broader systemic failure, our view is that the risk is largely contained to these specific structures. Importantly, we want to reassure our clients that CM Wealth does not have exposure to these vehicles.
This situation offers an inside look into how we invest. First, when large amounts of capital flow into a single area, risk is often mispriced. In this segment of the market, we believed terms had shifted too far in favor of borrowers—primarily private equity backed companies. Loans were being "priced for perfection," meaning an acceptable return was only possible if there were no challenges. However, the real world is rarely perfect. For years, recurring revenue software businesses were viewed as ideal borrowers due to their consistent cash flows. AI disrupted that assumption by challenging the long-term viability and valuation of many software business models.
Second, we believe it is not only what you own but who you own it with, especially in less liquid vehicles. Retail investors notoriously flee at the first sign of trouble, which is exactly what is occurring today. One retail-heavy $33 billion fund recently saw 14% of its investors file for redemption, and it filled half of those requests. This causes two issues. First, it impacts liquidity for remaining investors. Second, it could lead to a "liquidity trap" in which the fund must sell its highest-quality assets to satisfy exiting investors, leaving those who remain with a lower-quality, more troubled portfolio. Also, at such a massive size, it is impossible for these managers to build a quality portfolio selectively; they simply become the "market," losing the very selectivity that makes private credit attractive.
We are not seeing it yet, but market dislocations often create opportunities for specialist managers. We remain focused on the types of vehicles we utilize, preferring to invest alongside our institutional peers. For example, in our CM Private Opportunities strategies, we have partnered with the credit teams at Monomoy and Charlesbank. These teams can target distressed opportunities and market dislocations when they arise.