Making sense of markets: Will energy disruption shake a solid foundation?

Recent market performance has largely been driven by headlines about geopolitical conflict and energy markets, which have introduced a high degree of uncertainty and a bout of volatility. These developments haven’t meaningfully altered the trading range that has persisted since late 2025, both in U.S. equities and the benchmark 10-year U.S. Treasury yield.

Taking a step back from the headlines, we believe the rangebound market performance offers evidence of a fundamentally solid economic and corporate backdrop. In our view, what markets are experiencing today is more consistent with a period of digestion following a strong advance rather than a prolonged stall.

While markets have shown limited overall movement and marked time, it’s notable that economic data and corporate earnings growth have continued their positive trends.

On the surface: Economic and corporate conditions remain resilient

Economic growth has unfolded at a sustainable pace, and recent economic data has increasingly exceeded expectations, reinforcing the durability of the expansion. Manufacturing activity, after essentially more than three years of slowing, is stabilizing and moving back toward growth, while the services sector remains firmly in growth mode.

Exhibit 1: Manufacturing activity regains pace

Institute for Supply Management (ISM) Purchasing Managers’ Index from February 2022 to February 2026. Source: Bloomberg

Corporate fundamentals also remain encouraging. Earnings growth for the S&P 500 continues to expand at a healthy pace along with upward revisions to earnings forecasts. Year-over-year earnings growth for the S&P 500 in the fourth quarter of 2025 exceededs 14%, representing the fifth straight quarter of double-digit earnings growth.¹

Exhibit 2: Earnings growth catches up with price performance

February 28, 2025 to March 16, 2026. Shaded gray area begins on September 30, 2025. Source: Bloomberg

At the same time, the S&P 500 price-to-earnings ratio—which measures how much investors will pay for expected earnings—has edged below 21 as earnings growth has outpaced price performance since the end of September.

Exhibit 3: Equity valuations have become more reasonable

PE ratios calculated using next-twelve-months earnings expectations. Source: Bloomberg

We expect high levels of corporate investment to continue supporting economic momentum, particularly on AI spending. In the near term, a fiscal boost from higher tax refunds driven by OBBBA changes is also expected to provide additional support, helping offset some of the affordability pressures that higher energy prices could introduce.

Equity markets: Beneath the surface

On the surface, U.S. equities have largely been holding within a well-established trading range of about 3.5% dating back to the fall. However, beneath the surface there has been a great deal of activity.

Market leadership has broadened meaningfully, and international markets have continued to lead the U.S. in 2026, signaling more synchronized global participation in the economic expansion. Within the U.S., mid- and small-cap equities have outperformed as the economic cycle has strengthened, while value stocks have led growth stocks by a considerable margin, highlighting a shift toward more economically sensitive sectors.

Equal-weight indices have outperformed their capitalization-weighted counterparts in 2026—in stark contrast to the performance pattern of the last three years—and providing evidence of declining dependence on the narrow leadership of mega-cap tech companies.²

The dominant AI narrative has undergone an important shift. Investor sentiment has evolved from euphoria to concern about extraordinary levels of capital spending and a widening circle of industry disruption. At the same time, industrial-oriented sectors have come into favor with the solid economic backdrop and manufacturing renaissance coupled with their limited exposure to AI disruption.

Recent sector-level performance paints a vivid picture of the rotation, with the U.S. energy sector over 28% higher year-to-date, materials up more than 8%, and industrials almost 7% higher.³

Meanwhile, as a group, the Magnificent Seven is down about 7.5% year to date.⁴ Investors have reassessed the capital spending trajectories of these companies, which are expected to increase by about 60% in 2026 and approach $700 billion in total, raising questions about the timeline and viability of monetizing their investments.⁵

Within tech, the software industry has also been hit particularly hard, falling approximately 18% year to date amid concerns that agentic AI will erode their historically high profit margins and growth.⁶

Fixed income: Stability despite rate volatility

Despite the recent energy shock, fixed income markets have remained relatively stable despite shifts in inflation expectations and the outlook for Federal Reserve (Fed) rate policy. These adjustments have contributed to short-term rate volatility but have not altered the trading range for interest rates or the broader outlook.

The 10-year Treasury yield has remained largely rangebound between roughly 4% and 4.25%, though has recently climbed above the top end of that range as energy-driven inflation concerns have risen.

Credit markets tell a more nuanced story, with credit spreads widening in recent weeks by varying degrees across different market segments. Investment-grade spreads have widened, but remain relatively contained, while private credit and other less-liquid segments of the credit market have seen more pressure. In these less-liquid areas, the most notable pockets of weakness are related to software companies that are expected to face challenges from AI disruption. Overall, however, we believe corporate balance sheets and the availability of financing remain broadly healthy.

Rotation, not deterioration

Taken together, today’s market environment appears less like the beginning of a downturn and more like a recalibration following a strong period of performance. Economic growth remains resilient, corporate earnings continue to expand, and market leadership has broadened in ways that historically support more sustainable returns.

Geopolitical developments and policy uncertainty may keep volatility elevated in the near term, particularly as investors assess the duration of energy disruptions. We believe there are a number of buffers in place for the economy to absorb the initial energy shock, but every day that the Iran conflict drags on and the Strait of Hormuz remains closed increases the risks to the economy and, by extension, financial markets.

Pressure will also mount on the Fed if the conflict and energy market disruption continue to extend. The economy is already facing a relatively soft low-hire/low-fire labor market, and high energy prices could impede economic growth. The Fed may be willing to look through the initial energy shock, but we would expect a sustained disruption that pushes prices higher to bring about the end of the Fed’s rate-cutting cycle.

We’re also in a mid-term election year, and markets often encounter “surprises” and high-impact events that have a tendency to cause volatility and negative reactions. In that sense, the heavy influence of headlines in 2026 is not necessarily unique.

For now, underlying conditions suggest the foundation of the economic expansion remains intact. Rotations and episodes of volatility can arise during healthy market cycles, and if fundamentals remain healthy then a more meaningful pullback may present select opportunities as markets adjust.

 

 

 

1. The blended year-over-year earnings growth rate according to FactSet Earnings Insight on February 27, 2026
2. Based on the performance of the market-cap- and equal-weighted S&P 500 indices
3. Year-to-date performance as of March 16, 2026 according to Bloomberg. All indices are sector-level components of the S&P 500.
4. Source: Bloomberg
5. The Tech Download: Can hyperscalers justify their huge AI capex? (CNBC, February 13, 2026)
6. Year-to-date performance as of March 16, 2026 for the S&P 500 software industry index according to Bloomberg