“
”Markets in Focus
Timely analysis of market moves and sectors of opportunity
BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA1, 2
Only tangible progress on a ceasefire or reopening the Strait of Hormuz will meaningfully reverse the risk-off tone now.
There is nothing wrong with diversification, only the way many investors have approached it.
We continue to suggest building a list of opportunistic buying or rotation opportunities rather than chasing waves of volatility.
The deal or no deal whipsaw over ending the Middle East war has continued to dent investor sentiment and pressure global markets as:
Equities and bonds have struggled globally with government yields spiking.
Outside of the energy sector, there are fewer places to hide across the equity complex.
More than half of S&P 500 Index constituents are down more than 20% from highs and thus are now in a bear market.
Pain is spread across a number of sectors, though financials and information technology have been the most challenged.
The Nasdaq-100 Index posted losses for the fifth consecutive week, its longest streak in four years.
Despite the pain across many parts of the market, there are still signs that investors remain too sanguine about the prospects for an immediate resolution to the conflict with Iran and that risks remain skewed to the downside. Without some stabilization across the financials and technology sectors, it is difficult for the broader indices to regain footing. The dollar also looks to continue pushing higher, which has challenged assets like gold and could lead to further deleveraging from the market. In the coming weeks, earnings season will kick into full gear starting with the banks. This provides an opportunity to refocus on fundamentals and growth trends that have not been derailed by the current crisis. With so many stocks being in a bear market, we believe plenty of high-quality assets have been thrown out with the bathwater. We remain risk-off and skeptical of bounces right now, but investors should consider building a shopping list for when there is more clarity and remaining invested across the energy complex as a hedge, despite the significant price appreciation.
Sector valuations have changed meaningfully this year
12-month forward price-to-earnings ranges for S&P 500 sectors excluding real estate
Source: Bloomberg, as of March 27, 2026
Higher energy prices have contributed to rising inflation expectations, along with already negative consumer sentiment and rising input costs. Eventually, the market is likely to start to move from pricing higher inflation to pricing downside risks to growth as higher energy prices erode consumer purchasing power. Markets are still pricing higher inflation and tighter monetary policy. However, this is an optimistic scenario if the conflict resolves quickly before aggregate demand softens and input costs rise.
The sharp rise in bond yields is presenting a more attractive point at which investors can start to get more positive. That’s because a further meaningful backup in yields would only be sustainable if we saw interest rate hikes and significant additional fiscal stimulus. And that’s unlikely in the US and Europe. In the US, the Federal Reserve (Fed) with Fed Chair Jerome Powell and recent Fed speakers remain focused on a more balanced message, not one that would indicate hikes.
In equities, recent price action has reflected whipsawing geopolitical sentiment, and that is unlikely to change. We believe investors should look for upside buying opportunities given underlying fundamentals, but it’s too early to make any meaningful changes from a risk-off stance. Equity positioning has continued to fade as more investors, especially systematic funds, look for places to hide given the lower price trends. Commodity trading advisor (CTA) exposure remains washed out while volatility target funds have turned defensive as close-to-close volatility has picked up.
That said, we believe that stocks are getting close to the point where these systematic flows could soon start to skew toward buying. A relief rally that drives a correlated move higher and volatility lower could trigger these systematic players to start re-leveraging. It’s impossible to time when this will happen, so it’s important for investors to retain exposure to the market. We have been vocal on diversification because there are sectors, industries, and geographies that are holding up much better than others. This allows investors to maintain exposure to parts of the market where the price action has been painful despite fundamentals remaining solid. That has created opportunities when looking at valuations across different sectors in the S&P 500 Index, assuming we don’t see significant downward revisions. The forward price-to-earnings (f P/E) multiples for both financials and information technology are trading below their Liberation Day lows from April 2025 with healthcare getting pretty close.
Incremental headlines will not meaningfully reverse the risk-off tone now. That will require tangible progress on a ceasefire or reopening the Strait of Hormuz. The US Federal Reserve looks constrained with respect to the rate-cutting cycle. Rising inflation expectations and a stable low hire-low fire labor backdrop leave little room to ease rates in the near term. Perhaps this is why we saw such negative price action last Friday, which helped extend the losing streak of the S&P 500 to five consecutive weeks, its biggest weekly loss since Oct. 10. The S&P 500 Index is now down 8.7% from its January closing high and finished at the lowest level since early August.
April is shaping up to be a catalyst-rich month. The good news is that April is seasonally one of the strongest months of the year. The bad news is there still doesn’t look to be an off-ramp for the war. US equity markets will be closed on Friday, with event premium for the March nonfarm payroll (NFP) shifting to Monday, April 6, coinciding with the proposed US-Iran deadline. First-quarter earnings kick off at mid-month with banks starting on April 14. The end of the month will be packed with the Fed decision on April 29 and nearly every Magnificent Seven company reporting over the last two weeks of April. Given the catalysts and uncertainty around the next phase of the war with Iran, we believe focusing more on key secular growth themes can help weather the storm. Many of these themes have been part of our playbook this year, but they’re worth emphasizing given price action over the last month and their relative performance to the broader equity complex.
Reminder on diversification. Many articles about the poor performance of the 60/40 portfolio year to date are making hyperbolic claims that diversification is broken. It’s not. Rather, at the start of the year, we warned that rising correlations between stocks and bonds required a more nuanced approach to diversification. Portfolios built upon the assumption of stable correlations can become misaligned as those relationships evolve, which is what we’re seeing now. There is nothing wrong with diversification, only the way many investors have approached it. We need to more tactically allocate capital across asset classes (including commodities and real assets) and within equities. It’s important to balance exposure better across sectors, industries, market capitalizations, and geographies. In commodities, traditional energy names have provided a good place to hide. Share prices are stretched, but this isn’t a move to fade until we get clarity on when and how the Strait of Hormuz will open. Natural gas looks to have structural supply challenges given damage, coal is becoming an alternative, and even clean energy has held up well relative to its traditional beta to the market. We recently wrote a Thematic Insights commentary on gold and industrial metals with some additional diversification ideas. There will be a time to rotate from these trades, but we’re not there yet.
Focus on artificial intelligence (AI) capital expenditure beneficiaries. Hyperscalers continue to break down and seven semiconductor companies are starting to show signs of weakness, but it’s important to focus on the full range of AI 2.0 companies we have highlighted for the past year. This includes not just the semiconductor beneficiaries, but the industrial side of the AI buildout and the power/grid supply chain. There is also an increased focus on robotics and the physical side of AI plus the supply chains that will be necessary to support future growth. Aerospace, electrical equipment, construction and engineering, utilities, and battery storage have all held up quite well since their fundamental growth is not meaningfully disrupted by the uncertainty in the Middle East.
Sometimes it’s best to wait and see. Markets are stuck in a vacuum of certainty. This leads to erratic price action overnight and large intraday swings that aren’t captured in traditional volatility metrics that are already elevated. It becomes very difficult to see bottoms in trades that might be washed out (e.g., the underperformance of software) or to assess whether leadership is rolling over for fundamental reasons or just because of geopolitical uncertainty (e.g., semiconductors). Focusing on the fundamentals is critical. As we move into earnings season later in April, guidance will be vital to assessing the degree to which earnings expectations for 2026 may have been impacted by the current disruptions. In an environment where sharp moves can reverse even within a single day, we continue to suggest building a list of opportunistic buying or rotation opportunities rather than chasing waves of volatility.
Developments in the Middle East will continue to dominate but data releases start to pick up with the Consumer Price Index (CPI) data. Inflation data will finally begin to reflect the war in Iran and subsequent spike in energy prices. We’ll get March CPI readings from the euro-area, Switzerland, South Korea, and Tokyo (a leading indicator for Japan). The US jobs report and retail sales, Chinese Purchasing Managers Index (PMI), and Japan’s Tankan survey also come this week. Additionally, several central banks release meeting summaries, including the Bank of Japan, Reserve Bank of Australia, and Bank of Canada. Plus, there are long lists of European Central Bank speakers and a few from the US Federal Reserve. Specifically this week, Fed Chair Powell is scheduled to participate in a moderated discussion at Harvard University’s principles of economics class while New York Fed President John C. Williams speaks at the Staten Island Economic Development Corporation.
1 Matt Orton, CFA, is Chief Market Strategist at Raymond James Investment Management. Joey Del Guercio, CFA, is Research Associate for Market Strategy at Raymond James Investment Management.
2 Unless otherwise indicated, all data cited is sourced from Bloomberg as of March 20, 2026.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Any forecasts, figures, opinions, or investment techniques and strategies set out are for informational purposes only. There is no assurance any estimate, forecast or projection will be realized.
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce
return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.
International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.
Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.
Indices
Nasdaq 100® — a stock market index made up of 103 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock market. It is a modified capitalization-weighted index.
S&P 500 Index — Measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
M-909609 Exp. 7/30/2026
BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA1, 2
Diversification still matters, but there’s a strong case for it to be broader and more tactical as traditional stock-bond relationships weaken.
Markets are increasingly pricing in structural longer-term risk, not just a temporary geopolitical shock.
While risks remain elevated, light positioning and upcoming catalysts may create opportunities to redeploy capital.
As the war in the Middle East continues to induce sharp price swings, it’s hard for investors to see a light at the end of the tunnel after an already volatile month. Cracks are manifesting across the market with government bond yields spiking and equities moving lower. The rotation trade, including the outperformance of international equities, abruptly reversed at the start of the war, with no signs of relenting. While it seems that the energy complex or cash may be a place for investors to hide, each comes with its own set of risks, most notably market timing.
So how should investors think about diversification in this environment? With the S&P 500 Index and both investment grade and high yield bonds in the red year to date, it’s no surprise that the traditional 60/40 portfolio has been underperforming. At the start of the year, we highlighted the risks of rising stock-bond correlations and the need for broader equity diversification across geographies, sectors, industries, and market capitalizations, along with a more tactical approach to asset allocation. Although several portfolio diversifiers have declined, certain areas have offered insulation due to idiosyncratic risk. Even as fears around worst-case conflict outcomes intensify, we believe time remains to reposition portfolios to weather volatility and capitalize on the eventual market recovery. In the short term, we remain risk-off but continue to look for opportunities to redeploy capital.
Look out below
S&P 500 Index over the last year
Source: Bloomberg, as of March 20, 2026
In the short term, we remain risk-off but continue to look for opportunities to redeploy capital.
What often changes markets most is not the immediate disruption, but the moment participants begin pricing in permanence rather than temporary shock. That seems to be what took place last week when the attack on Qatar’s liquefied natural gas (LNG) facilities inflicted damage that may take years to repair, implying a structural supply risk to energy on top of the current disruptions. US 10-year Treasury yields have surged nearly 50 basis points since the start of the war, jumping 13 basis points last Friday alone. Interest rate cut expectations are rapidly being priced out and rate hikes are now starting to be priced in. On the equity side, the move in rates has infected small caps and rate-sensitive sectors like real estate, consumer staples, and utilities — all of which underperformed the broader market despite traditionally defensive characteristics. Further, ballasts like gold that historically have provided a haven during periods of uncertainty also have broken down. Considering these challenges, it is easy to understand the desire to dash for cash.
The script has flipped: market implying partial hikes this year now
Futures-implied cuts priced in by respective FOMC meeting
Source: Bloomberg, as of March 20, 2026
Bonds have provided insulation from weakness across equities broadly, just not as much as we might historically be accustomed to. The S&P 500 is down nearly 7% from its all-time high while the Bloomberg Aggregate Bond Index is down less than 1% over the same period. While these losses can be frustrating for investors, we believe there is still power in diversification.
That said, it’s myopic just to think about stocks and bonds — there’s a lot that happens under the surface in equity and fixed income:
Sectors like information technology and communication services are outperforming the broader market given their diversified revenue streams and strong balance sheets that are less impacted by the Middle East conflict.
Within industrials, durable secular growth trends and an increased focus on defense have provided some relative insulation.
Globally, while equity markets in Europe and many Asian nations have been challenged given their heavy energy imports, countries like China have provided a measure of relative resistance.
Energy’s outperformance has led markets like Canada and Saudi Arabia to outperform as well.
We believe the key to success lies in pursuing diversification and tactical rotation, viewing cash allocations as a component of a broader toolkit for responding dynamically to evolving market conditions.
It is unknown where things are headed in the next week, let alone the next month. US Federal Reserve Chairman Jerome Powell said as much at last week’s Federal Open Market Committee (FOMC) press conference when asked how higher energy prices from the conflict would impact the economy.
“The thing I really want to emphasize is that nobody knows,” Powell said. “The economic effects could be bigger. They could be smaller. They could be much smaller or much bigger. We just don’t know.”
This uncertainty has investors on edge, probably more than the price action would suggest, emphasizing the importance of not overreacting to incoming information.
We continue to believe in defensive positioning as expectations rise for a prolonged conflict in the Middle East. Growth optimism has room to decrease, but the increasing calls for stagflation and global recession risks seem hyperbolic and may fade at some point. Relatively speaking, US equities have remained resilient, particularly large-cap technology that was out of favor at the start of the year. US equity positioning is now at extremely low levels. Last week’s move lower triggered $20 billion of systematic outflows, with commodity trading advisors’ (CTAs) exposure now looking washed out. This all points to potential short-term stabilization that investors may use to help position their portfolios to weather market volatility. Along the way, key questions and areas to watch in the near term include:
What are triggers for US equity upside? There are a few scenarios that could trigger some support for US equities.
We believe that de-escalation in the Middle East could offer the best catalyst for a strong bounce across US equities, global stocks, and bonds. This is also the most immediate hope for a sustainable bounce.
Quarter-end rebalancing and corporate buybacks could provide a bid to the market. Recent estimates highlight about $40 billion to $50 billion in expected buying flows for US equities in the last trading week of the month. Quarter-end buying flows have not historically shown strong evidence of triggering periods of meaningful positive equity returns, but they can add support to the market and the story of relatively resilient US equities. Another potential source of market support until month-end could be the S&P 500 buybacks, which is currently running around $4 billion per day.
A less hawkish message at the April FOMC meeting could provide upside to stocks and bonds and help reverse the recent swings in rate cut/hike pricing.
Earnings season starts soon, and it will be particularly important to see strong results across the mega-cap technology complex. The last week of April is shaping up to be very significant for catalysts given the Fed decision is on April 29 and six of the Magnificent Seven report in the last two weeks of the month.
The consumer staples sector remains at risk. Despite a more defensive nature, consumer staples was one of last week’s worst performing sectors in the S&P 500, down 4.5%. However, it remains one of the best performers year to date, lagging only energy, which is largely driven by multiple expansion and not earnings growth. Consumer staples also is the most negatively correlated sector to oil and tends to suffer when bond yields rise, making it an area that may be less than ideal for diversification.
Could technology help to ballast the market? The correlation between the S&P 500® Equal Weight Index and the Magnificent Seven has turned negative, which began with the capital expenditure-induced selloff a few months ago. Over the past few weeks, however, technology has provided some stability. While the last time correlations were this negative, we saw a period of dramatic outperformance for the mega-cap stocks, we believe that is unlikely to repeat. However, technology and the mega-caps in particular could be primed to reestablish market leadership — positioning has decreased meaningfully and valuations have returned to more attractive levels. Their revenue streams are also well diversified and more insulated from the risks of the conflict in the Middle East.
The war in the Middle East will continue to dominate investor attention this week, and there aren’t a lot of data catalysts to follow, meaning that price will be a key driver of markets. That said, there will be several central bank speakers to pay attention to. On the economic front, we will see the S&P Global Flash US Purchasing Managers Index (PMI) data for March, US Bureau of Labor Statistics Import Price Index and current account balance, and the US Department of Labor’s weekly initial jobless claims update. The PMI data is important as it should give an indication of consumer sentiment since the survey window will have captured the conflict escalation.
From the Federal Reserve, we’ll hear updates on the US economy from Vice Chair Philip Jefferson, San Francisco Fed President Mary Daly, and Philadelphia Fed President Anna Paulson.
1 Matt Orton, CFA, is Chief Market Strategist at Raymond James Investment Management. Joey Del Guercio, CFA, is Research Associate for Market Strategy at Raymond James Investment Management.
2 Unless otherwise indicated, all data cited is sourced from Bloomberg as of March 20, 2026.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Any forecasts, figures, opinions, or investment techniques and strategies set out are for informational purposes only. There is no assurance any estimate, forecast or projection will be realized.
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce
return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.
International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.
Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.
Indices
Bloomberg Aggregate Bond Index — a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds as a benchmark to measure their relative performance
S&P 500 Index — Measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
S&P 500® Equal Weight Index — the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.
M-906358 Exp. 7/23/2026
BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA1, 2
Without tangible movement toward an off ramp, oil prices are likely to continue driving the direction of equities, interest rates, and the dollar.
Private credit has been a concern for months, and an onslaught of negative headlines in recent weeks has increased the strain.
Oil shocks and private credit concerns encourage a more cautious near-term playbook as investors wait to redeploy risk capital.
The Middle East conflict has commanded the attention of global markets for the past two weeks, and oil prices have largely driven the direction of equities, interest rates, and the dollar. This dynamic is unlikely to change without tangible movement toward an off ramp, but most developed market central banks are set to meet this week, including the US Federal Open Market Committee (FOMC), which could cloud the picture further.
The FOMC seems likely to adopt a hawkish shift in tone, stopping short of endorsing recent shifts in market pricing for rate cuts and instead emphasizing its commitment to price stability. Investors have already priced out all expectations for rate cuts for this year, which has made bonds look increasingly attractive at current levels.
In equities, price action is becoming increasingly risk-off, rather than focused on rotation, and retail investors have been less willing to buy the dip. Considering all the uncertainty injected into the future path of inflation and corporate margins, equities have actually been quite well behaved – but the longer that oil prices remain elevated, the more challenging assumptions will have to become.
Opportunities have been created over the past few weeks as high-quality assets are thrown out with the bathwater, but we believe it is too early to wade into the uncertainty. Macro pain from higher energy prices and prolonged disruption will trickle into consensus trades, and it will likely take time for this to be fully reflected in equities. Now is the time to manage risk and protect gains while drafting plans for when we finally start to see an end to hostilities in the Middle East.
There have been significant shifts across Treasuries and the credit market over the past few weeks, including a swift re-pricing of this year’s rate cut expectations. The market has gone from pricing three rate cuts this year to none, setting up for a potentially consequential FOMC meeting this week. However, it’s worth noting that rate markets and central banks can look through short rises in energy prices.
Energy commodity prices look set to remain elevated for a while longer, increasing the risk that higher oil prices could spill over into other asset classes – and worse, into inflation expectations. That makes central banks less likely to push back against recent expectations for more hawkish policy settings, even if they remain in “wait-and-see” mode. Financial conditions have also been tightening on their own as the dollar and the long end of the Treasury curve continue moving higher while investment-grade and high-yield credit spreads widen.
Any discussion of the US Federal Reserve (Fed) raising interest rates seems alarmist at this point, providing an opportunity to fade the noise.
Given the backdrop across fixed income and commodities, it is no surprise to see more cracks in equities. Professional investors moved to reduce their risk during the first week of the Iran conflict – particularly the investors running market-neutral hedge funds – which rapidly unwound popular long and short trades from January and February.
Longer dated yields are meaningfully higher since the conflict began
U.S. Treasuries Yield Curve
Source: Bloomberg, as of March 13, 2026
In contrast, last week seemed more like a “sell everything” drawdown. The broadening trend has reversed, and the performance of sectors like materials and industrials has begun to lag while information technology has started leading (alongside energy, which has been leading all year). Small caps and international markets have seen selling pressure driven by concerns around dollar strength, the impact of higher oil prices, and heightened fragility to changes in the economic growth outlook.
There is good and bad news about the potential path forward. Volatility remains extremely elevated across indices, exchange-traded funds (ETFs), and individual stocks. The difference between expected and actual volatility, as measured by S&P 500 Index 1-month at-the-money implied volatility trades, is at some of its highest levels of the last five years. Fear is well reflected in the market, even if the S&P 500 Index is down “only” about 5% from its all-time high.
Equity positioning also sits at its lowest level since last summer. Systematic selling driven by algorithmic strategies and commodity trading advisors (CTAs) looks to be mostly behind us; meaningful escalation of the conflict would be necessary to re-ignite automated selling pressure.
On the flip side, passive flows have yet to flee the market, and consensus fundamental trades show limited positioning pain despite headlines.
There will be more work to do if the macro outlook deteriorates further. As the S&P 500 Index flirts with important technical levels, it seems likely that any remaining complacency will be slowly eroded.
Several changes are forcing a re-think of the rotation theses that commanded our attention over the past few months. The Iranian crisis could become a systemic growth shock, particularly for some European and Asian economies that rely on energy imports. The market may be looking for a silver bullet in the form of a Truth Social post from US President Donald Trump, but the fact is that he has no way of unilaterally ending the war.
Oil shocks tend to weigh on beta and cyclical stocks for months. Meanwhile private credit concerns had already been causing problems for the financial complex – price action has been abysmal for months, and an onslaught of negative headlines in recent weeks increased the strain. It encourages a more cautious near-term playbook as we wait to redeploy risk capital.
We believe that this is a time to preserve portfolio balances through a low-risk approach that remains ready to buy dips selectively. We are looking for areas where market movement has been driven less by fundamentals and more by investors squaring their positions – specifically, we want to rotate out of sectors and countries that are most impacted by rising energy prices and/or risks from tighter financial conditions or economic cooling – seeking to redeploy that capital into sectors and themes that can benefit from increased spending regardless of conflict.
Diversification isn’t dead. The underperformance of the traditional 60/40 portfolio has stood out since the onset of conflict in the Middle East. In higher and more volatile inflation regimes, stock-bond correlations tend to rise, which we flagged in our 2026 outlook. We’re seeing that correlation play out amid geopolitical stress, oil volatility, and cross-asset rotations. But proper diversification extends beyond the 60/40 allocation, and it is increasingly important to seek diversification from other areas. Investors should think about sufficiently diversifying their allocations across asset classes, which includes commodities and real assets, and within equities, across geographies, sectors, industries, and themes. Dispersion beneath the surface remains elevated. This is an environment where thoughtful portfolio construction and being tactical across asset sleeves – instead of relying on static allocation – will drive resilience.
Don’t forget about technology. Despite increased risk-off price action, last week saw strong inflows into mega-cap tech. Price action has been choppy to start the year as investors rotated into energy, industrials, materials, and staples. Nonetheless, semiconductors and hardware remain areas of strength, and the fundamentals of these businesses are largely insulated from current geopolitical challenges. An increasing cost of energy will certainly have an impact on margins, but positioning levels have massively lightened up and valuations are starting to reflect some degradation of free cash flow. Last week’s price action was constructive as investors realized how the revenues of these companies are insulated, and this part of the market is likely to bounce back once we have some clarity.
Biggest concerns: Financial and consumer sectors
Credit concerns have not been diminished by geopolitical events. Credit stress is being catalyzed by drying liquidity, rising yields, ramping inflation concerns, and the disruptive pressure that artificial intelligence (AI) is placing on software. Exposure to private credit and withdrawal caps have continued pressuring larger banks, alternative asset managers, and business development companies (BDCs). The poor behavior of financials is a problem across the market capitalization spectrum, and it is hard to see this sector meaningfully participating in any relief rally driven by progress with Iran. Many of the concerns are hyperbolic and grossly generalize the impact to the sector, but these companies remain vulnerable, making them tough to buy on dips for now.
On Friday, consumer sentiment data from the University of Michigan gave an early window into potential impacts from the US-Iran conflict. The headline reading was solid, but the report’s commentary was split between improvement before the conflict and its subsequent erasure after the start of the conflict. We believe that consumer sectors could be most vulnerable to higher-for-longer oil prices. Consumer staples, in particular, looks overvalued as a sector and appears to be the beneficiary of a rotation without the supporting fundamentals. However, its negative correlation with crude oil made it a place to hide out.
The Middle East will continue dominating investor focus this week, but there are plenty of other catalysts. The US Federal Reserve, Bank of Canada, European Central Bank, Bank of England, and Bank of Japan will meet this week, and although they are expected to keep interest rates unchanged, we will hear their respective risk assessments and how they have evolved since the start of the Iran conflict. The Reserve Bank of Australia will also meet, and it is expected to raise its benchmark rate.
This week’s US data releases include the industrial production index from the St. Louis Federal Reserve and the Producer Price Index from the U.S. Bureau of Labor Statistics. Europe will get UK job figures and Germany’s ZEW Financial Market Survey. Chinese retail sales and industrial production will also offer insights in Asia.
1 Matt Orton, CFA, is Chief Market Strategist at Raymond James Investment Management. Joey Del Guercio, CFA, is Research Associate for Market Strategy at Raymond James Investment Management.
2 Unless otherwise indicated, all data cited is sourced from Bloomberg as of March 13, 2026.
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Indices
S&P 500 Index — Measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
M-903348 Exp. 7/16/2026
