Investment Management - First Quarter 2026

The Signal and the Noise

The first quarter of 2026 was a stark reminder that geopolitical events can change rapidly. In fact, by the time this piece is published, the narrative may have changed again, multiple times. The escalation of conflict in Iran and subsequent volatility in global markets have dominated the headlines, creating widespread uncertainty. It is natural to feel a sense of unease when the “noise” of the 24-hour news cycle is so loud. However, our charge is to look past the immediate turbulence to find the “signal,” or underlying data that ultimately dictates long-term value. Near-term risks may be elevated, but the fundamentals leading into 2026 remain constructive, and history suggests a fast-changing global environment can create opportunities for investors.

Key Takeaways from the First Quarter

• Increased volatility and growth concerns due to the war in Iran, but fundamentals remain largely intact

• Continued rotation away from large cap technology after years of dominating market leadership and S&P 500 performance

• Transition at the Federal Reserve (the "Fed") and an unknown path of interest rates

Market Pulse – Distinguishing Price Volatility from Fundamental Value

After reaching a new all-time high in late January, the S&P 500 index faced downward pressure for the rest of the quarter, declining 4.3% from the start of the year. Medium and small domestic indices fared better, in part due to the rotation away from mega-cap technology names, with the S&P 400 Mid Cap index rising 2.5% and the S&P 600 Small Cap index advancing 3.5%. International equities, as tracked by the MSCI EAFE index, were down 1.2% for the quarter. Fixed income markets, buffeted by changing expectations of central bank actions, economic growth, and inflation, were volatile but largely flat year-to-date on a total return basis.

Performanceⁱ for various indices for the three-month (not annualized), one-year, three-year, and five-year periods appears below:

Bond Indices

Equity Indices

Geopolitical Turmoil and Legal Developments

On February 28^th, the United States and Israel launched a coordinated military operation against Iran, the most significant direct U.S. military confrontation in the Middle East in decades. Tensions had been building since late 2025, when protests erupted across Iran amid economic collapse and the devaluation of the rial. Citing Iran’s ongoing nuclear ambitions and the failure of multiple rounds of diplomacy, the Trump administration decided to act militarily following the breakdown of a third round of negotiations on February 26^th.

Iran’s response was swift and sweeping, launching retaliatory strikes on U.S. embassies, military installations, and neighboring energy facilities across the region. Iranian forces imposed a blockade on the Strait of Hormuz, the narrow waterway through which approximately 20% of the world’s oil and liquefied natural gas supplies pass. More recently, there have been contradictory reports on the status of negotiations, with both sides refuting statements made by the other and rejecting proposals to cease hostilities and reopen the Strait.

As expected, the most immediate effects have been felt in energy markets, with the price of Brent crude surging 55% from $71 per barrel at the end of February to $110 per barrel at quarter end.ⁱⁱ While the spike in energy prices could prove transitory if the war is short-lived, this development complicates the inflation picture for the Fed and other central banks. A longer war adds to existing supply chain issues and threatens to reduce global economic growth.

Adding further complexity during the quarter was a mid-February Supreme Court ruling that invalidated the administration’s sweeping tariff program imposed under the International Emergency Economic Powers Act (IEEPA). The Court held that the executive branch exceeded its authority by invoking IEEPA, a use of the law found to be inconsistent with the original scope Congress had intended when the statute was passed in 1977. The administration quickly moved to alternative legal avenues, imposing a universal 15% tariff under Section 122 of the Trade Act of 1974, which authorizes the President to impose temporary import surcharges to address significant deficits. The Supreme Court’s ruling and the administration’s response, which is already being challenged by numerous states, serve as reminders that trade policy remains one of the more difficult variables to predict.

Consumer Resilience Amidst Global Volatility

The U.S. economy displayed a bend-but-don’t-break resiliency during the quarter. While the labor market showed signs of continued softening, the broader growth narrative remained largely intact. The economy continues to add jobs, particularly in the health care industry, but the pace of growth is slowing. Despite layoff announcements in the news, initial jobless claims have remained steady.ⁱⁱⁱ

Gross Domestic Product (GDP) forecasts were revised upward by the Fed in March, to 2.4% for the year, mostly bolstered by productivity gains and still-strong consumer spending. Inflation continues to be stubborn but seems to be largely contained, assuming the war in Iran does not drag on for too long and energy prices abate. The latest report on consumer prices came in as expected, rising 2.4% in February from a year earlier, but that was largely viewed as outdated as the effects of the war have yet to show up in government data.^iv

Decoupling Rate Cycles from Conflict Impacts

The Fed delivered three consecutive interest rate cuts at the end of 2025, bringing the federal funds rate to a target range of 3.50% to 3.75%. The expectation heading into 2026 was for continued, if cautious, easing throughout the year. With the war in Iran and uncertainty around tariffs, that calculus grew considerably more complicated throughout the quarter.

At its meeting in January, the Fed voted unanimously to hold rates steady, a decision broadly anticipated by markets. The emergence of conflict in Iran in late February dramatically altered the backdrop for the March meeting. While the target rate was unchanged, in their updated Summary of Economic Projections, officials raised their current year inflation forecast from 2.4% to 2.7% and continued to signal just one rate cut in 2026, likely later in the year. Futures markets, however, are increasing the probability of rate increases by the end of the year, due to surging energy prices and rising import costs.^v

Chairman Jerome Powell acknowledged the difficulty of the moment during his post-meeting press conference, noting the Fed faces an energy shock of an unknown “size and duration, complicating its ability to act aggressively on either the inflation or employment front.^vi He also downplayed concerns around stagflation, a period of rising inflation and slowing growth, commenting, “I always have to point out that that was a 1970s term at a time when unemployment was in double figures and inflation was really high. That’s not the case right now.”^vii

The outlook for global interest rates has shifted due to the war in the Middle East. The European Central Bank as well as the Bank of England have signaled that they are ready to fight inflation. Market expectations have changed, pricing in multiple hikes from both banks. Despite the “vast majority”^viii of Fed participants not seeing rate hikes as a base case, fed funds futures now indicate a small possibility of rate hikes this year. As no one really knows how the war will develop, central banks are in a wait and see mode.

Amid the uncertainty around monetary policy, Powell’s term as Chairman ends in May 2026. President Trump nominated Kevin Warsh, former Fed governor from 2006-2011, to succeed him. While Warsh has historically been viewed as hawkish (i.e., restrictive), more recent comments suggest a more accommodative posture aligned with the administration’s preference for lower rates. Assuming he is confirmed, Warsh will likely advocate for rate reductions in the second half of the year, particularly if the energy shock proves transitory and core inflation moderates. We are watching this transition closely, as changes in communication and forward guidance under a new chair can move markets significantly, independent of actual rate decisions.

The True North: Record Earnings as the Market Anchor

Following a 14% increase in earnings growth for S&P 500 companies in the fourth quarter of 2025,^ix analysts expect another double-digit increase for the index in the first quarter, at 12.5%. If this holds true, it will mark the sixth straight quarter of double-digit growth.^x The information technology, financials, and materials sectors are expected to lead the way, but eight of the eleven sectors are projected to report year-over-year earnings growth, continuing the broadening out we observed in the second half of 2025.

An area to be watched closely during earnings season is the software industry, which is navigating a period of “creative destruction” as generative artificial intelligence (AI) reshapes the competitive landscape. Concerns that AI might render established Software-as-a-Service (SaaS) models obsolete have led to increased volatility and share price declines, as investors question the long-term viability of SaaS companies whose core value propositions (e.g., data entry, basic coding, routine customer support, etc.) are easily replicated by large language models. The barrier to entry for developing niche software tools has lowered significantly, and incumbents who fail to integrate AI face a genuine threat of displacement.

However, it is premature to declare winners and losers in this transition. While some companies face disruption, many established software players are leveraging massive proprietary datasets and sticky enterprise relationships to build AI-enhanced features that provide immediate and defensible value. In any technological shift, the primary beneficiaries are generally those who own the distribution channels and can embed new capabilities into existing user relationships. The distinction between “disrupted” and “accelerated” will likely depend less on AI itself and more on a company’s ability to adapt its business model to capture the productivity gains AI promises.

Filtering the Headlines and Maintaining a Long-Term Focus

As we communicated to our clients in early March at the onset of conflict in Iran, in a world of unknowns, what we do know are our clients’ financial plans and cash flow needs. We have been monitoring asset allocations closely and adjusting where necessary, to ensure sufficient liquidity is available for your needs and for future buying opportunities. As always, please feel free to reach out to us if you would like to discuss your risk tolerance and positioning in more detail.

Distinguishing Structural Trends from Cyclical Shocks

Typically, geopolitical events result in high levels of volatility but with low long-term impact on market performance, certainly less than investors often expect. The longer the disruption to trade in the Gulf region lingers, the greater the probability for longer term economic repercussions. That said, expectations for U.S. economic growth will likely continue to be driven by AI investment, increased productivity, lower than feared tariffs, tax cuts, and relatively low inflation and interest rates. These are powerful forces at work in the U.S. economy, countering the geopolitical confusion and violent actions occurring around the world.

Firm News & Compliance Reminders

Congratulations to Glen Buco, CFP®, and Victoria Henry, CFP®, for being named as Top Fee-Only Financial Advisors by Washingtonian magazine.^xi

We are happy to introduce a new addition to our IT team. Hamza Mohamed joined West Financial in January 2026 as an information systems administrator. Previously, he worked with Atlantic Union Bank where he provided frontline IT support.

As cyber threats continue to rise across the financial industry, we remain diligent in protecting your information and encourage you to do the same. Simple habits such as closing your browser after accessing Schwab Alliance, Fidelity.com, or other secure websites, keeping your devices updated with reputable antivirus protection, and avoiding unknown links or attachments can greatly reduce risk. To avoid spoofed websites, type the full URL directly into your browser and save it as a favorite. We also recommend using strong passwords, enabling multi-factor authentication, and removing unfamiliar applications. Remember: report any suspicious activity or unauthorized transactions to us and/or your custodian and immediately change your password. Schwab Alliance can be reached at 800-515-2157 and Fidelity at 800-544-6666.

Our annual disclosure document, Form ADV Part 2A, has recently been filed with the Securities and Exchange Commission (SEC). In accordance with SEC regulations, in the event of any material change, we must provide to all clients our Form ADV Part 2A or the Summary of Material Changes with an offer to provide the entire Form ADV Part 2A. The Summary of Material Changes can be found below. Form ADV Part 2A and other disclosure documents are available on our website (www.westfinancial.com/disclosures), the SEC’s website (www.adviserinfo.sec.gov), or can be provided to you in hardcopy form upon request.

Form ADV Part 2A – Summary of Material Changes

Since the filing of the last annual amendment of this brochure on April 10, 2025, WFS has made the following material changes:

• Item 14: Effective March 13, 2026, WFS terminated its referral agreement with Strategic Advisers LLC (“Strategic Advisers”), a company within Fidelity.

Follow us on LinkedIn or go to www.westfinancial.com to view our recent blog posts. Thank you for your continued confidence in West Financial, and please do not hesitate to refer your friends, family, or co-workers who may benefit from our services.

Brian L. Mackin, CFP®

President

_{i Each of the S&P 500 Index, the S&P 400 Index, the S&P 600 Index, the MSCI EAFE Index, the ICE BofA 1-5 Year Index, the ICE BofA 1-10 Year Index, the ICE BofA 1-12 Year Municipal Bond Index, the Dow Jones Industrial Average, and the NASDAQ Composite (each, an “Index”) is an unmanaged index of securities that is used as a general measure of market performance. The performance of an Index is not reflective of the performance of any specific investment. Each Index comparison is provided for informational purposes only and should not be used as the basis for making an investment decision. Further, the performance of your account and each Index may not be comparable. There may be significant differences between the characteristics of your account and each Index, including, but not limited to, risk profile, liquidity, volatility and asset comparison. The performance shown for each Index reflects no adjustment for client additions or withdrawals, and no deduction for fees or expenses. Accordingly, comparisons against an Index may be of limited use. Investments cannot be made directly into an Index.}

_{ⁱⁱhttps://www.eia.gov/dnav/pet/hist/RBRTED.htm}

_{ⁱⁱⁱhttps://www.reuters.com/world/us/us-weekly-jobless-claims-increase-slightly-2026-03-26/}

_{^ivhttps://www.cnbc.com/2026/03/11/cpi-inflation-february-2026-breakdown.html}

_{^vhttps://www.cnbc.com/2026/03/27/markets-see-the-feds-next-move-as-a-potential-hike-as-oil-prices-inflation-fears-rise.html}

_{^vihttps://www.federalreserve.gov/mediacenter/files/FOMCpresconf20260318.pdf}

_{^viihttps://www.federalreserve.gov/mediacenter/files/FOMCpresconf20260318.pdf}

_{^viiihttps://www.reuters.com/markets/us/kevin-warshs-first-move-fed-chair-could-be-rate-hike-2026-03-19/}

_{^ixhttps://insight.factset.com/earnings-insight-infographic-q4-2025-by-the-numbers}

_{^xhttps://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_031926.pdf}

_{^xiTo arrive at the names of the area’s top financial advisers—the fee-only financial planners, fee-based advisers, estate attorneys, tax accountants, and insurance advisers marked with a “Top Financial Advisor” tag—the Washingtonian distributed surveys to hundreds of people who work in the local financial industry, asking them whom they would trust with their own money. The Washingtonian also did their own research, consulting industry experts and publications. The “Top Financial Advisor” names on this list are the people who received the strongest recommendations. Firms do not pay a fee for employees to be considered or placed on the final list of “Top Fee-Only Financial Planners” or “best adviser.”}

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_{The information contained herein does not constitute investment advice or a recommendation for you to purchase or sell any specific security. You are solely responsible for reviewing the content and for any actions you take or choose not to take based on your review of such content.}

_{This information is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.}

_{Certain information contained herein was derived from third party sources as indicated. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. WFS has not and will not independently verify this information. Where such sources include opinions and projections, such opinions and projections should be ascribed only to the applicable third-party source and not to WFS.}

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