First Quarter 2026: Trump Card Played

It’s an understatement to say the first quarter of 2026 ushered in a colossal wave of change and disruption. 

In our 2026 investment outlook in January, we had a generally positive view on the forward prospects of the economy and markets. We recognized geopolitics and the potential for policy swings as clear risk, but not likely to change the broader economic or market trajectory. We summed up these risks as the “Trump Card,” because events like the U.S. capture of Venezuela’s president in the first week of January proved that anything could happen on the geopolitical front. At the moment, we’re experiencing geopolitical and economic upheaval centered on the conflict in the Middle East, but no one can yet confidently forecast that upheaval’s depth or duration. Consequently, the cost of capital is currently in question as well, and interest-rate outlooks globally have turned from dovish to hawkish in the space of a month.

What had been prevailing investment themes continue to prevail, though with some important differences. AI continued to be a source of profound change and disruption and earnings growth generally remained robust for businesses across a variety of sectors.

In the first quarter overall, we experienced a great deal of fundamental and performance dispersion across equities, fixed income, and alternatives such as hedge funds, which in aggregate generated flat returns. Real assets were the outlier to the upside with strong returns for the quarter.

Key areas of focus for the remainder of 2026 include:

• Middle East: The duration and ultimate path to resolution of the conflict will continue to matter to markets. But the uncertainties involved are significant. As an investor, it will be critical to remain flexible without being overly reactive.
  
  
• Cost of Capital: Fed rate cuts are no longer a forgone conclusion this year. The risk of not only a pause but also hikes is back on the table. Interest rates impact asset prices, so we’re keeping a close watch on Fed policy. The outlook for rates will hinge in part on the duration of the Middle East conflict, as that affects the supply and price of oil, which in turn affects inflation and growth. 
  
  
• AI: The massive capex spending, SaaS business integration of AI features, and venture capital financing of AI-native startup businesses marches on. It seems that AI is here to stay. Differentiation between winners and losers will be important. There will be both. 
  

Over much, but not all, of the past 15 years, many investors have deemphasized diversification. The more equity risk one took the better, especially if you focused on large-cap U.S. growth. Loading up on the Mag 7 was all the rage. But periods of pronounced dislocations happen. That’s not an argument for avoiding risk, which is central to generating satisfactory returns over the long term. But the case for robust risk management and better diversification has never been stronger.

Read the full Q1 2026 Portfolio Insights.