After a relentless multi-year push higher, stocks pulled back in the first quarter, with the tech-heavy Nasdaq index even reaching correction territory (down more than 10% from its peak). Though we are still in the early innings of the development and rollout of artificial intelligence, soaring capital expenditure forecasts for the mega cap tech players have called into question the timing and magnitude of the returns that leading tech companies will ultimately realize on their investments. For context, the so-called Magnificent Seven are now expected to invest roughly $675 billion in 2026, slightly more than the GDP of Argentina. These forecasts have weighed on the “Mag 7” in recent months, and all seven stocks have underperformed the S&P 500 year-to-date. And in the final weeks of the quarter, the war in Iran (and the resulting surge in oil prices) added further pressure on the broader equity market.
U.S. stocks, as measured by the S&P 500 Index, declined 4.3% in the first quarter, including dividends. International stocks, as measured by the MSCI All Country World Index ex-US, fell 0.6% in the quarter, including dividends. A slight uptick in the strength of the U.S. dollar further pressured international returns for U.S. investors. Gold has largely served its purpose as a store of value through recent volatility, up 8%, though even gold retreated from its highs in response to the turmoil in the Middle East.
The S&P 500 Index currently trades at 20x forward earnings estimates, still above its long-term average, though down from its loftiest levels. International stocks, by contrast, trade at just 15x forward earnings.
A less certain world
There’s a Wall Street maxim that “the market hates uncertainty,” and it certainly feels as though we’re living in a far less certain world than even a few weeks ago: war in the Middle East, concerns over artificial intelligence-driven layoffs, soaring gas prices and corresponding inflation fears, higher mortgage rates, and four-hour security lines at the airport. None of these items bode well for the consumer, and the University of Michigan Index of Consumer Sentiment slumped 6% sequentially in March.
Investor sentiment isn’t much better, with U.S. stocks, major international markets, government bonds, and Bitcoin all down year-to-date. As mentioned earlier, even gold has retreated from its highs in recent weeks. No wonder investors are flocking to prediction markets in search of returns.
Earnings remain a bright spot
Although sentiment headwinds are likely to persist, we remain focused on underlying fundamentals, which remain strong. The job market is a perfect example: high profile tech layoffs dominate the headlines, but jobless claims have been remarkably stable in recent weeks. There’s a widespread belief that AI-driven efficiencies will drive jobless claims higher over the medium-term, though that remains to be seen.
Corporate earnings tell a similar story: more than 75% of the S&P 500 delivered upside in the fourth quarter. Technology and communication services companies led the way, beating expectations by roughly 7% on average (though it’s worth noting that those earnings beats were not always rewarded against a backdrop of high expectations and increasingly conservative guidance). Collectively, S&P 500 earnings jumped almost 14% in the quarter, driven primarily by healthy revenue growth of 9%. In fact, consensus expectations for 2026 have never been higher (up 3% over the past three months and up 4% over the past year), now implying 17% earnings growth year-over-year. The recent market selloff is understandable given war in the Middle East, but the underlying fundamentals that have driven the market higher over the past three years remain largely intact.
Another bright spot from recent turbulence has been an improvement in market breadth. After years of dominance by technology and communication services, other sectors have taken over market leadership: notably energy (+41% year-to-date), but also utilities (+8%), materials (+8%), and consumer staples (+7%).
Taken together, the mix of rising earnings and a market pullback have taken some of the pressure off valuation. The S&P 500 now trades at 17 times 2027 consensus earnings forecasts, still expensive relative to history but no longer in clear bubble territory.
Outlook
Against a backdrop of AI uncertainty and geopolitical turmoil, one emerging school of thought for investors has been the so-called HALO trade, identifying stocks of companies with “Heavy Assets,” “Low risk of Obsolescence,” or both. Our equity models have benefited from owning these stocks year-to-date, primarily in the energy, utilities, and industrial sectors. In many ways, HALO stocks are representative of the type of stock we look for at Howland Capital: well managed, high-quality companies with strong moats that protect their businesses. We believe these stocks can outperform over the course of any economic cycle. Additionally, these stocks provide important diversification away from the technology stocks that have taken an outsized role in determining market performance in recent years.
Although we strive to invest for the long term, we understand that clients’ personal circumstances often change in the short term. It’s why we manage separate accounts for each of our clients. Given recent market volatility and ongoing geopolitical uncertainty, maintaining an open dialog with us regarding your risk tolerance and any upcoming cash needs is more important than ever. Regular communication helps guide our asset allocation decisions, and we encourage you to reach out if you have specific concerns or cash needs in the months ahead.
