By Thierry Hasse, Chief Investment Officer
Elevage Partners | April 6, 2026
The first quarter of 2026 was a stress test. Not the kind that arrives through gradual deterioration. The kind that arrives over a weekend, with airstrikes, and demands a response from every portfolio within days. For clients who hold both equity and fixed income portfolios with us, it was also a test of whether the two sleeves would work together the way we designed them to. They did.
Here is what happened, how the portfolio responded, and what it tells us about where we stand now.
The year opened with genuine momentum. The U.S. economy had closed out a third consecutive year of double-digit equity returns, the Federal Reserve had pivoted back to rate cuts, and S&P 500 earnings were projected to grow nearly 15% in 2026, with that growth expected to broaden beyond the handful of mega-cap technology companies that had led the market in recent years. (FactSet consensus estimates, January 2026.) The S&P 500 reached an all-time high of 7,020 in late January, trading at roughly 22 times forward earnings (Bloomberg). By almost any measure, the backdrop was constructive.
War Changes the Calculus
The outbreak of hostilities between the United States and Iran in late February and early March was swift and severe. Brent crude surged past $100 per barrel as the Strait of Hormuz, through which roughly one-fifth of the world’s traded oil flows daily, became effectively impassable (Bloomberg; U.S. Energy Information Administration).
The Federal Reserve held rates at 3.5% to 3.75%, raised its 2026 inflation forecast to 2.7%, and signaled fewer cuts ahead (Federal Reserve FOMC Statement, March 2026).
The S&P 500 retreated from its January high and crossed into correction territory by late March, briefly touching the 6,310 to 6,350 range, a decline of roughly 10%. Technology stocks bore the sharpest losses: approximately 70% of the index’s first-quarter decline of 4.2% came from that sector alone, with several leading software platforms posting their worst quarterly performance in years (Bloomberg). High-multiple growth stocks, priced for a future of falling rates and stable geopolitics, were repriced in an environment that offered neither.
How the Portfolio Responded
This is the part that matters most to clients, so I want to be direct about it.
Our government-centric industries theme, which includes defense contractors and healthcare companies whose revenues are shaped by government frameworks rather than economic cycles, provided meaningful insulation during the drawdown. Defense spending does not pause during geopolitical conflict; it accelerates. Defense holdings within this theme moved sharply higher as the conflict developed. These positions were sized into the portfolio because we assessed them as structurally durable across a range of environments, including this one. The quarter did not change the thesis. It validated it.
Our artificial intelligence and technology reset theme told a two-part story. The platform companies, software businesses with strong earnings and competitive moats, came under significant pressure as higher-multiple growth stocks bore the brunt of the risk-off rotation. That pressure was real and we are not dismissing it.
The energy and utility infrastructure positions we hold alongside those software platforms held up considerably better. These companies are positioned around the enormous and growing power demands of AI data centers, and when oil moved above $100, the original thesis for those positions was reinforced from an additional direction. The two parts of this theme did not move together, and the portfolio construction reflected that distinction.
Our wealth concentration theme, which emphasizes companies whose scale and pricing power benefit from the ongoing concentration of assets at the top of the economy, provided a steadying effect. The financial institutions and large consumer franchises in this group are less exposed to geopolitical risk than growth stocks, and they held up better through the volatility.
On the fixed income side, the short-duration emphasis we have maintained throughout proved its purpose. The fixed income portfolio continued to generate income across the quarter precisely when clients needed that income most: as a stabilizer that reduced the pressure to react to equity market moves. Clients who receive consistent income from their fixed income sleeve are better positioned to stay invested through equity volatility, and that is exactly what happened here.
What Alternative Assets Revealed
One of the most instructive developments of the quarter was the failure of so-called alternative assets to provide the protection many investors expected.
Gold posted a gain of roughly 19% through the early weeks of the quarter on central bank buying and geopolitical uncertainty (Bloomberg). But when the Federal Reserve held rates and signaled a hawkish posture, a strengthening dollar created a meaningful headwind for the metal. In mid-March, gold and equities fell in tandem, an unusual correlation that left investors who had sought protection in precious metals feeling exposed. Gold’s safe-haven properties are most reliable over long durations and most effective when a crisis prompts rate cuts and dollar weakness, not when it produces the opposite.
Bitcoin declined approximately 23% over the quarter. Ethereum fell roughly 32% (Bloomberg). The digital gold thesis, the idea that cryptocurrencies serve as inflation hedges or geopolitical refuges, was tested directly and did not hold. Cryptocurrencies remain high-beta, risk-sensitive assets that tend to fall hardest precisely when investors most want safety.
The bond market’s failure to cushion equity losses is worth restating plainly. In most historical episodes of major geopolitical conflict, a flight to the safety of U.S. Treasuries pushes bond prices higher and yields lower. That relationship broke down this quarter as inflation concerns pushed yields higher rather than lower. A traditional 60/40 portfolio offered investors little of the protection they had counted on. This is not a new phenomenon; the 1970s produced the same dynamic. It reinforces why our fixed income portfolios are deliberately built around shorter-duration income generation rather than long-duration capital preservation.
The Lesson the Quarter Keeps Teaching
On March 31 and April 1, as reports emerged that Iran was open to ceasefire negotiations, U.S. equity markets staged one of their most powerful two-day rallies in years. The S&P 500 surged 2.9% on March 31 alone, followed by another 0.7% advance on April 1. In two trading sessions, the market recovered approximately half the losses that had accumulated over five weeks of war-driven selling (Bloomberg).
For investors who had moved to cash during the correction, those two days demonstrated the arithmetic of market timing in real time. Missing the best days in the market can permanently impair long-term returns. The principle, widely attributed to the investor Peter Lynch, holds that more money has been lost by investors anticipating corrections than has ever been lost in the corrections themselves. The first quarter put that idea on display.
Historical analysis of U.S. equity markets dating back to World War II shows that markets have consistently moved higher in the years following major military conflicts, with the long-term compounding of quality businesses ultimately prevailing over short-term geopolitical disruption (Ned Davis Research, via Hartford Funds).
What We Are Watching
The central variable remains the duration of the Strait of Hormuz disruption. A swift resolution could trigger a meaningful reversal in energy prices and a broad relief rally. Each additional week of closure increases the risk of structural damage to global supply chains that takes longer to unwind.
Earnings season begins in earnest over the next three weeks. Even in the wake of the Iran conflict, analyst consensus has revised S&P 500 earnings estimates modestly higher (FactSet). We will be watching carefully for any change in capital allocation away from AI infrastructure, any material shift in the earnings trajectories of our core holdings, and the Federal Reserve’s posture as inflation and labor market data evolve.
A Note on Conviction
The underlying fundamentals of the U.S. economy remain sound. Corporate earnings are growing. The secular tailwinds of technological innovation, demographic demand, and entrepreneurial dynamism have not changed. What has changed, temporarily, is the level of uncertainty.
Uncomfortable uncertainty has historically been among the most reliable conditions for long-term opportunity. Our job is not to eliminate that discomfort. It is to build portfolios designed to carry our clients through it without forcing decisions that undermine long-term goals.
We are grateful for the trust you place in us to do exactly that. If you would like to discuss how a portfolio built around these principles is positioned for the environment ahead, we welcome the conversation at info@elevagepartners.com.