LIZ ANN SONDERS: Hi, everyone. I'm Liz Ann Sonders, and this is the March Market Snapshot. In this installment, I'll share our latest thoughts on the military conflict in Iran. Few geopolitical events in recent memory have redrawn the market landscape as swiftly as the U.S.-Israeli strikes on Iran that began at the end of February this year, and the subsequent effective closure of the Strait of Hurmuz.
[High/low chart for "Equities at mercy of oil" for Brent crude oil is displayed]
So let's start with oil prices. They began the year in the low-$60s territory alongside abundant global supplies, but obviously they've undergone an historic repricing, with a, so far, brief move into double-digit territory. Now, the last time oil had traded above $100 was in the wake of Russia's attack on Ukraine, when it broke that threshold in March of 2022, and actually held there until mid-July of that year. Now, the current shock is not just yet at that extreme, but it's categorically different in its supply mechanics, given, again, the effective closure of the Strait of Hormuz.
[Intraday correlation between Brent crude oil and S&P 500 is displayed]
Now, the relationship between oil and equities has snapped into sharp inverse focus. So through early 2026, pre-war, oil and the S&P 500 shared relatively loose or at times even mildly positive rolling correlations, as both responded to broad macro conditions. That has changed decisively over the past couple of weeks. The S&P 500 is now exhibiting a strong inverse intraday correlation with oil. Now, whether this persists hinges entirely on how quickly tanker traffic can get through the strait.
[High/low chart for "U.S. is a net oil exporter" for Imports of U.S. crude oil and petroleum products oil is displayed]
Now, the strategic context here matters for assessing longer term vulnerability. The good news is the United States' import demand has been trending down for the past two decades.
[Exports of U.S. crude oil and petroleum products oil is displayed]
Conversely, exports have been growing at a rapid clip over those same two decades, such that the United States is now a net exporter of oil. And as you can see, that crossover dates back to just before the pandemic erupted in late 2019. Now, that net export position does structurally insulate the U.S. economy more than it once did, but the effective closure of the Strait of Hormuz does tighten global balances in a way that reverberate even for a country that is a net petroleum exporter, at least on paper.
[High/low chart for "Inflation risk in focus" for Breakeven 5-year inflation rate is displayed]
Now on the inflation expectations front, the 5-year breakeven rate, one of the cleaner real-time reads on how markets are pricing prospective inflation, currently stands at more than 2.6%, and that's according to Federal Reserve data. And that is meaningfully above the Fed's 2% target.
[High/low chart for "What a difference oil price spike has made" for Probability of Fed rate change by end of 2026 as of 2/27/26 is displayed]
And of course, the oil shock were it to continue threatens to push that higher, and it complicates the Federal Reserve's already delicate position. So the Fed left the fed funds rate unchanged at its January 2026 meeting after three consecutive cuts in the latter part of last year that had pushed borrowing costs to their lowest level since 2022. This chart shows the probabilities of the range between hikes and multiple cuts, and where those probabilities were at the end of February, which means prior to the onset of the war in Iran.
[Probability of Fed change by end of 2026 as of 3/5/26 is displayed]
Since then, it's a very different story. Several FOMC, which is the Federal Open Market Committee, participants have been indicating that further reductions would likely be appropriate if inflation declines in line with expectations. On the other hand, other participants have argued that it may be prudent to hold rates steady for some time, and some recently have even raised the possibility that rate hikes could become necessary if inflation remains persistently above target. Now, currently, the market is pricing at about one-and-a-half cuts for all of 2026, but those expectations will undoubtedly be a moving target.
[Table for "Churn under surface of indexes persists" for Major indexes and maximum drawdowns for S&P 500, NASDAQ and Russell 2000 is displayed]
Now, turning to equity market performance, the first two months of 2026 were already telling a differentiated story before the Iran shock fully registered. We find that many investors have expressed surprise at the resiliency of the market, given only a mild decline year-to-date for the S&P 500 and NASDAQ, and actually slight positive performance for the Russell 2000, and that's the index of small-cap stocks on a year-to-date basis. Now, the index level maximum drawdowns so far this year have been mild, -3%, -6%, and -7%, respectively, for the S&P, NASDAQ, and Russell. But the final column here highlights that a fuller story is being told under the surface of the capitalization-weighted indexes. In the case of the S&P 500, the average member has had a -14% drawdown at some point this year, and it's even more stark for the NASDAQ and Russell 2000, with those average member maximum drawdowns coming in at -27% and -21% respectively.
[High/low chart for "What a difference a war has made" for Index price performance YTD thru 2/27/26 is displayed]
This highlights that this has been a highly rotational market with a tremendous amount of churn under the surface, and that's a backdrop we think will persist for at least a good chunk of this year. Now, for the two-month period prior to the onset of the war in Iran, international stocks were handily outperforming domestic indexes, and at the style level, value was enjoying leadership over growth.
[Index price performance since 2/27/26 is displayed]
But since the war, it's like a switch was flipped, with domestic indexes handily outperforming international stocks, and large-cap U.S. growth stocks faring relatively better.
[High/low chart for "War caused a sharp switch in sector performance" for S&P 500 performance YTD thru 2/27/26 is displayed]
Within the S&P 500, sector dispersion has been extreme as well. Even before the onset of the war, Energy was having its day in the performance sun, but that was followed by other classic cyclical sectors performing well too, including Materials and Industrials, but also a classic defensive in the case of Consumer Staples, which was also faring well.
[S&P500 sector performance since 2/27/26 is displayed]
But just like with the broader indexes, at the sector level, it was like a switch was flipped once the war began. Now, Energy has been one of the better relative performers, no surprise there, but even it has displayed some weakness. More extreme, of course, has been the weakness in prior winners like Materials. Frankly, there's just a lot of what I've been calling short attention span money flowing through the market, and we believe that shifts in leadership, like we've seen in the last couple of weeks, could continue to happen very swiftly at times.
[List of "Takeaways" is displayed]
Now, the gap between index level and average member drawdowns, which I touched on, that has been pronounced, and that is a feature of this ongoing dispersion environment in which there's low implied correlation at the index level, and it's masking much more significant volatility at the stock level. That dynamic has been one of the dominant structural themes of 2026. Breadth has broadened, correlations have declined, and the stock picker's market thesis has gained real traction. The Iran shock, though, now tests whether that dispersion persists or collapses back into the kind of correlated selloff that can erase a lot of the alpha that gets generated beneath the surface. This type of subsurface volatility may provide an opportunistic backdrop for short-term traders, but for long-term investors, we think adhering to the traditional disciplines, especially of diversification across and within asset classes and periodic rebalancing, those will be the key to a successful ride through this turmoil.
That's it for now. Thanks as always for tuning in, and I will be back with another installment next month.
[Disclosures and Definitions are displayed]