In our last commentary, we described a scenario going into 2026 where U.S. stock market valuations were historically high, the Fed was in cutting mode, and the Trump administration was asserting itself in our hemisphere. This was in the backdrop of a generational affordability challenge for the average American.
Consumers entered the new year anticipating the tailwinds of tax relief from the One Big Beautiful Bill, greater stability around tariff policy, and the prospect of lower borrowing costs. However, as we begin the second quarter, circumstances have shifted quite dramatically. After a rather calm January, two major events happened in February that helped shape this change in trajectory. On February 20th, the Supreme Court ruled 6-3 against the Trump administration’s use of the International Emergency Powers Act (IEEPA) to impose tariffs. In response, the Trump administration quickly imposed new tariffs with threats of additional actions, creating renewed uncertainty for businesses and consumers.
After what appeared to be a successful incursion in Venezuela, the Trump administration turned its attention to Iran. Tensions quickly escalated, with the U.S. and Israel claiming that Iran will not give up its aspirations of becoming a nuclear power thus posing an unacceptable global security threat. On February 28th, after perceiving that diplomatic efforts were futile, the U.S. and Israel initiated Epic Fury, a military operation targeting nuclear facilities, military infrastructures, and several leaders of the Iranian regime. Iran responded by effectively closing the Straits of Hormuz causing oil prices to spike and roiling global markets for fear of a cascading regional conflict. This also puts the Federal Reserve in a position where they will more likely pause rate cuts in contemplation of the potential for oil-price-related inflation.
For the quarter, large cap U.S. stocks (S&P 500 Index) fell -4.33%. The Mag-7 contributed to this decline with Microsoft down the farthest (-23%) and the average decline of the group over 11%. Small cap U.S. stocks (Russell 2000 Index) suffered more modest declines of -.89%, buffered by its larger exposure to the oil and banking sectors. Developed international equities (MSCI EAFE Index) sagged -1.24% while emerging markets (MSCI Emerging Markets) were off -.16% due to a strengthening U.S. dollar and the greater impact of the oil shock yet continuing their recent outperformance over domestic equities. Real estate (Dow Jones Real Estate Index) was the lone positive asset class for the quarter, up 1.24% on relatively strong earnings and accelerating fundamentals.
Fixed income (Bloomberg US Aggregate Index) began the quarter in positive territory, but inflation expectations from the oil spike caused returns to fade ending the quarter virtually even -.05%. According to the CME FedWatch Tool, as of 03/31/26, futures markets were pricing in zero interest rate cuts, a sizable change from the beginning of the year. Further, the debate around the health of the private credit market continues to be a drag on the fixed income market.
As we move forward this year, all eyes remain on the conflict with Iran. While the outcome is not to be known, we will provide our current point of view about this extremely volatile set of circumstances.
Operation Epic Fury
Nearly everyone would agree that Iran has been a dangerous global troublemaker for decades, one whose leaders have caused great suffering and economic strife for their people. Past U.S. administrations, including the first Trump presidency, have tried and failed to compel Iranian leadership to cease their relentless pursuit of nuclear weapons and other first strike capabilities. When this Trump administration made the decision to escalate matters to a major kinetic conflict, it sparked vigorous debate about whether our decision makers were as prepared economically, politically, and strategically as their military prowess would suggest. Only time will tell.
The path to our current situation began with a massive bombing campaign and the elimination of the Iranian leadership hierarchy, as well as disabling key communications and defense systems. Iran’s retaliation strategy was to attack its neighbors to weaken U.S. resolve, and to “close” the Strait of Hormuz, the passageway for roughly 20% of the world’s oil shipments. Since these initial moves, the two sides have been engaged in brinkmanship in an attempt to force each other’s hands or gain leverage in peace negotiations. As of this writing, we are in a tenuous cease fire, with Irael and Lebanon doing the same. The Trump administration counteracted the strait closure by ordering a military blockade. Shortly after, Iran declared the strait “open to commercial shipping,” only to reverse course over the weekend. The U.S. claims a major deal is very close, but official Iranian channels have provided no confirmation of any such agreement.
Economic Impact
So far, the economic and market impact of this conflict seems mostly contained. The S&P 500 declined by over 9% early on as markets tried to weigh potential impacts on corporate earnings and consumer spending. Yet, with the announcement of the cease
fire, it has returned to recent highs. Oil prices have been on a roller coaster as well with West Texas Intermediate (WTI) crude oil climbing to $120 per barrel in late February, yet falling to $80 per barrel as of April 17th. Even with this recent drop, WTI crude remains roughly $20 per barrel higher than before the conflict began.
The U.S. may have the upper hand economically by enacting the blockade because it is denying Iran substantial oil revenue by turning away vessels. If this persists, Iran may have to abruptly shut down oil production due to a lack of storage. A shutdown of this
nature could cause irreversible damage, reducing long-term capacity and costing millions to bring back online. That said, the blockade risks the disruption of oil and other commodities through the strait thus potentially damaging the global economy.
A Path Forward
The Trump administration has not been particularly clear or consistent in articulating its end goals; however, one can surmise that Operation Epic Fury was designed to serve two purposes. The first was to decapitate Iran’s leadership hierarchy while destroying their military capabilities. Once achieved, the U.S. would force the abandonment of all nuclear aspirations and turn over existing enriched uranium. As this unfolds, their second objective is to embolden the people of Iran to rise up and re-establish a new neutral secular regime.
From our point of view, there are three realistic paths forward to resolving the Iran conflict.
1-There is a controlled de-escalation where the strait remains open with no constraints while negotiations in earnest take place. The U.S. would ease sanctions on Iran in exchange for strict limits on its nuclear ambitions and military activity.
2- We witness a prolonged stalemate where there are periods of kinetic action or strategic maneuvers with peaceful pauses and ongoing negotiations. In this scenario, we could expect additional naval standoffs, cyberattacks, proxy skirmishes, and periodic market shocks.
3- Neither side accepts peace terms and the conflict reignites and escalates either between the U.S. and Iran, Iran and Israel or both. In this scenario, oil flow through the Straits of Hormuz would be further disrupted, kinetic action would resume, and odds of involvement by larger global powers would increase. Markets and the economy would most likely suffer, as supply chains would be disrupted, shortages would widen, and the likelihood of a global recession would rise.
As far as regime change, in all three scenarios, the probability of an uprising and installation of a secular neutral government seems extremely low. In order for this to happen, there would have to be a meaningful defection of their military forces in concert with a broad-based movement involving millions of citizens and unified leadership with a credible alternative political structure.
What We Can Expect
It is reasonable to prepare for the Iran conflict to persist in some fashion for quite some time. The longer it goes on, the more likely we will see both direct and indirect consequences to the global economy. According to the International Energy Agency (IEA), this may be the worst oil supply disruption in history, losing over 11 million barrels per day. Higher oil prices can spread through the economy from manufacturing to airline travel, food, and agriculture raising costs and reducing purchasing power. If inflation becomes embedded, it can slow consumer spending, delay business investment, and slow supply chain production. In concert, this could lead to stagflation, a stubborn combination of sticky inflation and a weak economy.
Under our current environment, monetary policy could continue to shift with the Fed postponing rate cuts or even raising rates if circumstances dictate. Fiscally, the cost of the conflict has ranged from $28-51 billion and rising by ~$1 billion per day. This will certainly add to the debt and deficit problems we already face, which could in turn further affect interest rates and the economy.
The Trump administration is well aware of these potential outcomes, and with the midterms approaching, there is no doubt they will be keenly focused on seeking a timely and advantageous ending to the conflict. We remain cautious that the stress on consumers and our economy will be temporary. So far, equities are rebounding, corporate earnings remain solid, and consumers continue to spend with a boost from the tax relief of the One Big Beautiful Bill.
Prudence in Volatile Times
As investors, when facing the unknown, the knee jerk reaction is to seek to get out of harm’s way. Yet, as with many things in life, we rarely see a worst-case scenario present itself, so to act on these emotions usually results in doing more damage than good. This is not to minimize the gravity of the circumstances at hand. In this case, the conflict with Iran presents clear and present danger for the stability of global markets and the balance of power throughout the world.
Yet, as we have reiterated in other uncertain times, our portfolio allocation decisions are made together with our clients early on and with the knowledge that volatility will present itself many times abruptly, along the way. As such, we focus on prudent diversification including equities for long-term opportunities and fixed income as a buffer through difficult times. If we are patient, we often find incremental opportunities to reallocate seeking to improve long-term outcomes.
Here are a few things to keep in mind through times of volatility:
- Minimize your exposure to daily headlines and sensational news- You rarely learn anything actionable and it can add to unnecessary concern.
- Do not leverage to binary outcomes- This can add a gambling component that will increase risk to your portfolio, especially in the long run.
- Always have some liquid assets available- This will reduce short-term thinking and provide opportunities when they present themselves.
- Your time horizon matters- Markets tend to absorb and move past conflicts and resume historical economic growth.
- Favor resilience over maximum growth- Diversification will allow you to mitigate short-term risk while staying positioned for reasonable long-term returns. • Create a prudent strategy and stick with it.
We closed our last commentary with this statement, “The markets and economy will no doubt present new surprises both exciting and challenging, and we urge you to remain vigilant and adaptable with focus on reaching your long-term goals.
The conflict with Iran surprised us with a new challenge, and we intend to act accordingly.
Stay the course!
Thank you for your continued confidence in our services.
– The Wealth Dimensions Team
Indices themselves are not investible products.
The S&P 500® Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 large publicly traded companies in the U.S.
The Russell 2000® Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the US and Canada.
The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries.
The Dow Jones U.S. Real Estate Index is designed to track the performance of real estate investment trusts (REIT) and other companies that invest directly or indirectly in real estate through development, management, or ownership, including property agencies.
The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index which broadly tracks the performance of the U.S. investment-grade government and corporate bonds. For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.