While investors faced a barrage of headlines in the first quarter, the primary driver of the selloff was geopolitical uncertainty and a sharp rise in oil prices. The ongoing Iranian conflict and disruptions to shipping through the Strait of Hormuz (a risk we highlighted in our March investor update) constrained supply and increased market volatility.

As a result of this geopolitical shock, the Federal Reserve faces a difficult balancing act. Rising energy prices have complicated the inflation outlook, limiting the Fed’s ability to lower interest rates despite signs of labor market uncertainty. In recent comments, Chair Jerome Powell emphasized that the Fed has limited tools to directly address supply driven shocks such as rising oil prices. As a result of inflation concerns, interest rates moved higher during the quarter to reflect the lower odds of further rate cuts. The widely cited 10-year US Treasury yield rose from 4.17% to 4.30%, after briefly spiking to 4.43% in March. Higher rates, combined with persistent inflation concerns, have tightened financial conditions and added pressure to equity valuations.

Against this backdrop, equity markets entered the year at historically elevated valuations. During the first quarter, companies largely lived up to their lofty earnings expectations and reported record profits, highlighting the underlying strength of corporate America. However, investors began to reassess future growth expectations as the quarter progressed, leading to a broad repricing of risk assets. This shift was reflected in notable dispersion across different sectors of the stock market: energy stocks rose +38.2% during the quarter, while technology and communication services sectors declined -9.1% and -6.9% respectively. The infamous magnificent 7 stocks were down a collective -5.0% while the remaining 493 companies in the S&P 500 index were -1.0%.

JFG Outlook

Market pullbacks are never comfortable, and the combination of geopolitical tension, rising oil prices, and uncertainty surrounding artificial intelligence has created a challenging backdrop for investors. While the current drawdown of the S&P 500 has not yet reached correction levels, the steady flow of negative headlines has amplified uncertainty and investor anxiety. That said, volatility is a natural part of long-term investing, and as valuations compress, markets begin to offer more attractive entry points.

One area that has experienced a notable reset is the software sector. Fears around AI disruption have led to broad-based selling, creating a “sell first, ask questions later” environment, where even high-quality companies have seen meaningful declines. We view this as an area where opportunities may emerge. A recent example in our view is with leading cybersecurity company Palo Alto Networks. In March their CEO purchased approximately $10 million in his company’s stock after a significant pullback.

Within fixed income, we continue to emphasize credit quality as our primary focus. Coming into the year, we believed that credit risk, not interest rate risk, posed the greatest threat to bond investors. Today, the additional yield offered by lower-quality, high-yield bonds relative to investment-grade bonds is near historically low levels, and in our view, investors are not being adequately compensated for taking on additional credit risk. From a contrarian perspective, this lack of excess return reinforces our decision to maintain a higher-quality bond allocation, prioritizing stability and downside protection over incremental yield.

Today’s market environment presents compelling long-term investment opportunities, alongside ongoing risks tied to valuations and geopolitical uncertainty. We believe it’s important for investors to stay focused on their goals and be selective in how and where they invest their money.

Thank you for your continued trust in Juno Financial Group.