I am writing this commentary on the afternoon of April 14th, the second day after the US blockade of the Strait of Hormuz and deliberately dating it as the geopolitical situation and market reactions are so fluid that today’s observations may be irrelevant by tomorrow morning. In my opinion, from a market’s perspective, the most interesting thing that has happened since the start of hostilities with Iran is the near complete look-through of the event by financial markets. If we look at February 28th as the start date of hostilities, who would have guessed that 46 days later the S&P 500 would be higher, the VIX (Volatility Index) would be lower, and the DXY (Dollar Index) would be lower? Even the Taiwanese, Japanese, and Korean equity markets have recovered initial losses and are at or close to new highs, which is remarkable given expectations for oil-sensitive Asia. The one asset that has behaved exactly as expected—and hasn’t reverted to pre‑hostilities levels—is oil. Let’s look at what the markets have done both before and after the start of hostilities.
The first two months of Q1 2026 were characterized by expectations of strong global growth and high but trending lower inflation. In terms of equities markets, we were seeing international outperforming US, value outperforming growth, and within the US, significant sector rotation out of Information Technology, Consumer Discretionary and Financials (Exhibit 1). All of this was interrupted with the start of hostilities between the US and Iran.
Exhibit 1. S&P 500 Sector Weights and Rotation in 2026 Q1
*Based on changes in SPY.
Source: Bloomberg, AAFMAA Wealth Management & Trust LLC
Many asset markets performed in line with expectations at the beginning of Operation Epic Fury. The S&P 500 fell 7.78% from February 27th to March 30th, the date at which the index troughed. Although a weaker US equity market may have been expected, many were surprised at the modest drawdown. International markets (MSCI EAFE) fell 11.10% over the same time horizon. The larger drawdown made sense given the higher oil sensitivity of European and Asian economies and the lack of flexibility of single-mandate Central Banks to look beyond the near-term impact to headline inflation. Finally, within equity markets, Emerging Markets (MSCI Emerging Markets) had the largest drawdown over the period, -12.32%. Again, the ranking of drawdown made sense given oil-importing emerging market sensitivity to higher oil prices and potential decline in global growth.
On the fixed-income side, UK 10-Year Gilts sold off very significantly from February 27th to March 30th with yields rising from 4.23% to 4.99%. German 10-Year Bunds had a similar move from 2.64% to 3.03%. Again, these very extreme moves were consistent with expectations, given European oil sensitivity and associated inflation expectations. Perhaps less expected was a similar sell-off in US Bonds. US 10-Year yields rose from 3.94% to 4.35% over the same period.
The move in US Bonds was “less expected” because US Bonds have historically acted as a safe-haven during periods of market uncertainty, but balanced portfolios did not benefit from the allocation to bonds in this case as yields pushed higher at both the short and long end of the curve (see Exhibit 2). US Bonds were not the only safe-haven asset that failed to perform during this period. Gold fell 14.54% during the period. We exited our gold position last month as the options market indicated that there was more downside than upside in gold over the next two months. Analyzing it more fundamentally, we think the gold trade got crowded, and it began trading more like a risk asset than a hedge. Finally, in terms of currencies, the DXY (US Dollar Index) rose 3% during the period, which was consistent with expectations given the rise in oil prices, but, as of April 14th, the DXY is lower than its level of February 27th. While we see the US Dollar in a potentially longer-term downtrend, we expect significant volatility in the currency as long as the Iran crisis continues.
Exhibit 2. Change in US Treasury Yield Curve Since Beginning of Iran War
Source: Bloomberg, AAFMAA Wealth Management & Trust LLC
In contrast to the volatility in asset markets, the economic outlook, especially in the US, has been more stable. If we look at economic forecasts in the US, general expectations are now for weaker growth, higher unemployment, and limited progress on inflation, but none of these expectations have been of a magnitude significant enough to derail risky assets. Perhaps the most surprising observation is the market expectations for PCE Inflation (Exhibit 3). The TIPS market shows a near-term surge in headline inflation and a very quick reversion to a downward trend toward target inflation. Ten-year breakeven inflation levels are anchored around 2.3%, so there remains an expectation that inflation will revert to target. Even if the Strait of Hormuz begins operating close to capacity today, it is unlikely that the price of oil is going to revert to pre-conflict levels any time in the near future. This suggests that the outlook on headline inflation may be optimistic, and the bigger question globally is how much of the increase in headline inflation will pass through to core inflation. The longer this crisis lasts, the higher the probability that we will start getting a significant pass through into core inflation. Will that prompt a negative market response?
Exhibit 3. Change in US Treasury Yield Curve Since Beginning of Iran War
Source: Bloomberg, AAFMAA Wealth Management & Trust
In terms of US economic growth, consensus forecasts for 2026 year-over-year real GDP have dropped towards a still relatively strong 2.2%. This weaker activity level will have some negative impact on the labor market with our expectations showing the unemployment rate rising to 4.6% later this year. Our modeling suggests that negative oil supply shocks due to the conflict of 5% to 10% over the next quarter could reduce US GDP by anywhere from 0.14% to 0.51%.
The growth hit is likely to be more significant outside the US, especially for the more oil-sensitive economies in Europe and southern Asia. India, Thailand, and the Philippines are already looking at a significant downward revision to GDP even if oil flows in the near-term. Japan, Korea, and China will likely be hurt less unless the oil interruption is prolonged. China has deliberately insulated itself from higher oil prices by diversifying energy sources into coal and renewables but remains vulnerable to severe weakness in emerging economies given that they are its biggest export target.
The oil price spike and uncertainty about its duration have created a very difficult environment for central banks. Prior to the Iran conflict, the US was experiencing a softening labor market and high but trending lower inflation. At that time, it seemed the Fed would look through the higher level of inflation, and markets were expecting one to two interest rate cuts. After the conflict, a small probability of a hike was priced in for the near term and much of the expected rate cuts for later in the year were reversed. Our expectation is a period of stasis for the Fed in the near term with a 25-basis point cut later in the year. For single-mandate central banks, like the ECB, we expect several rate hikes over the summer. The expected interest rate trajectory and oil price sensitivity suggests that the US would be a better destination for capital in the near term.
As discussed, the continued high level of oil prices is somewhat at odds with the market response. The rebound of multiple markets to new highs since March 30th suggests that markets have not lost faith in the growth outlook. This belief is well-reflected in the stability of strong earnings estimates during the crisis. As the S&P 500 fell, earnings estimates did not follow suit. The S&P 500 started the year at 22 times forward earnings estimates and dropped to 19 times on March 30th. This suggests that the market found value at these levels and also maintained the belief that the AI (Artificial Intelligence) investment cycle will continue to drive earnings growth. While we think this AI theme primarily benefits the US, we do believe this theme is one of the factors supporting the strong rebound in Northern Asia equity markets in spite of their greater sensitivity to oil.
Equity markets are often able to look through geopolitical shocks as their impact is historically short-lived. Are equity markets correct to look through this crisis? While it’s too early to be certain, we are maintaining current portfolio risk levels. We will be hoping for a near-term resolution to the conflict, but in the meantime, we will be carefully watching for changes in long-term inflation expectations and evidence of pass-through to core inflation. We will be watching the upcoming earnings season closely to confirm that confidence in economic growth and AI themes remain in place. Finally, while we acknowledge the strong performance of international and emerging markets since March 30th, we see these markets as most vulnerable to a prolonged crisis and higher oil prices. Therefore, we see the US as the best destination for capital in the short term.
Yours in trust,
At AAFMAA Wealth Management & Trust LLC, we are committed to serving the unique financial needs of the military community. Whether you require a complimentary portfolio review, a comprehensive financial plan, assistance with your investment strategy, or trust services, our military wealth management professionals are ready to serve you. Contact us today to set up an appointment with a Relationship Manager who can assess your financial health and customize your personalized action plan.
Founded in 2012, AAFMAA Wealth Management & Trust LLC (AWM&T) was created to meet the distinct financial needs of military families. We proudly deliver experienced, trustworthy financial planning, investment management, and trust administration services – all designed to promote lasting security and independence.
We are proud to share the mission, vision, and values of Armed Forces Mutual, our parent company. We consistently build on the Association’s rich history and tradition to provide our Members with a source of compassion, trust, and protection. At AWM&T, we are committed to serving as your trusted fiduciary, always putting your best interests first. Through Armed Forces Mutual's legacy and our financial guidance, we provide personalized wealth management solutions to military families across generations.
© 2026 AAFMAA Wealth Management & Trust LLC. Information provided by AAFMAA Wealth Management & Trust LLC is not intended to be tax or legal advice. Nothing contained in this communication should be interpreted as such. We encourage you to seek guidance from your tax or legal advisor. Past performance does not guarantee future results. Investments are not FDIC or SIPC insured, are not deposits, nor are they insured by, issued by, or guaranteed by obligations of any government agency or any bank, and they involve risk including possible loss of principal. No information provided herein is intended as personal investment advice or financial recommendation and should not be interpreted as such. The information provided reflects the general views of AAFMAA Wealth Management and Trust LLC but may not reflect client recommendations, investment strategies, or performance. Current and future financial environments may not reflect those illustrated here. Views of AAFMAA Wealth Management & Trust LLC may change based on new information or considerations.