It didn’t take long for markets to shift from optimism to uncertainty. What began as a year focused on the staying power of Artificial Intelligence (AI) and a broadening market rally quickly gave way to rising geopolitical tensions in the Middle East, with the conflict involving Iran becoming the primary focus for investors.
The resulting surge in energy prices sparked a broad selloff across both stocks and bonds, making this the most challenging quarter for markets in several years. Major indexes, including the technology-heavy NASDAQ and small-cap stocks, briefly entered correction territory (a 10% decline). At the same time, interest rates rose as expectations for Federal Reserve rate cuts were pushed further out, with yields rising by roughly half a percentage point and putting pressure on bond performance.
Despite the negative headline returns, there were some encouraging developments beneath the surface. Prior to the escalation in the Middle East, markets were beginning to broaden, with performance extending beyond the “Magnificent Seven” into a wider range of sectors and companies. This broader participation helped provide some stability during the period of increased volatility.
Investment Strategy
With increased market uncertainty this quarter, your portfolios have held up well. Your stock allocations have outperformed their benchmarks, largely due to how we were positioned coming into the year. We maintained a tilt toward value oriented investments and kept a lower exposure to the “Magnificent Seven,” where valuations appeared elevated and concentration risk was growing. As market leadership broadened beyond a narrow group of stocks, this positioning worked in our favor.
A key contributor this quarter has been our US small cap allocation. Our position in Avantis US Small Cap Value (AVUV) performed well, benefiting from its focus on companies that are both attractively priced and highly profitable. This area of the market has shown resilience and reinforces the benefit of maintaining exposure beyond US large cap stocks. More broadly, your portfolio remains well diversified across sectors, styles, and geographies, with exposure to areas such as energy and utilities (value tilt), which have performed well in the current environment.
We are not making changes in response to short term market volatility. We are monitoring inflation, particularly with higher energy prices. If it remains elevated, we may shift our focus toward companies with stronger earnings and the ability to manage rising costs. At the same time, we are evaluating opportunities within growth stocks. Many of these companies have seen their stock pull back this quarter, even as their earnings outlook remains solid, creating more attractive opportunities.
Outlook
The key factor in our outlook centers on energy prices and the duration of the conflict with Iran. Based on current market expectations, energy prices are unlikely to remain elevated for more than the next few months. However, the longer they stay high, the more pressure it could place on the global economy.
That said, the US economy is well positioned to absorb higher energy prices. As a net exporter of oil and natural gas, the US is more insulated than in past cycles. Coming into the year, the economy was on solid, though not exceptional footing, and that remains the case today. The job market is slowing, but several factors should help support growth, including continued investment in AI, money coming back to consumers and businesses through tax cuts and refunds, and increased government spending, particularly related to defense.
Against this backdrop, corporate earnings have remained resilient. This quarter, earnings estimates have continued to move higher. While energy companies are expected to benefit from higher prices, strength has extended beyond that sector, with many companies maintaining or reaffirming their outlooks. For the S&P 500, earnings are currently expected to grow between 14% and 16% this year (long term average earnings are around 7%), an increase from earlier estimates at the start of the year. At the same time, the recent pullback in stocks has improved valuations, with prices moving lower while earnings expectations have moved higher.
While headlines have shifted quickly this year, the underlying fundamentals remain steady. Periods of volatility and intra year declines are a normal part of investing, even in positive years. The chart above highlights that stock market pullbacks are common, but they have historically occurred alongside positive annual returns.
When it comes to bonds, yields remain well above the levels seen over the past decade, providing a strong starting point for future returns. The recent pullback in bond prices has largely been driven by shifting expectations around Federal Reserve policy rather than stress in credit markets. With fundamentals remaining stable, we believe bonds continue to offer attractive return potential over the next three to five years.
Overall, the underlying fundamentals in both stocks and bonds continue to point toward a constructive environment for investors. While we are closely monitoring energy prices and geopolitical developments, we view the recent volatility as a normal part of the investing cycle rather than a shift in the broader trend.
About Andrew
Andrew Comstock, CFA®, is Principal & Wealth Advisor at Beyond Wealth, a fiduciary financial advisory firm in Overland Park, Kansas, dedicated to empowering clients to make impactful financial decisions. Serving the Kansas City metro area, Beyond Wealth specializes in helping wealth-building professionals and business owners navigate life transitions. With a mission to provide comprehensive wealth management services, Andrew’s proficiency lies in leveraging his background in institutional investment management to create tailored investment strategies. He provides research-driven portfolio management, focusing on helping clients build wealth for key milestones, whether it’s buying their forever home, purchasing a business, or funding their children’s education. Alongside Brandy, Andrew combines comprehensive planning with a long-term investment approach, helping clients grow their wealth while enjoying life.
Andrew began his career in institutional investment management, managing portfolios for insurance companies, pension funds, and mutual funds. Inspired by a desire to make a more personal impact, he transitioned to advising individuals directly, bringing his passion for financial empowerment to Beyond Wealth. Known for his commitment to high standards and always seeking to grow and discover, Andrew is dedicated to delivering thoughtful, tailored strategies for his clients’ unique financial needs.
Andrew graduated from the University of Tulsa with a BSBA in Finance and obtained the Chartered Financial Analyst® designation. Active within his professional community, he’s a member of the CFA Institute, Kansas City CFA Society, and the Overland Park Rotary Club. Andrew is a past president of his Rotary club, served on the University of Tulsa’s Board of Trustees, and was the National Board President of the Alumni Association at TU. He is the Investment Chair for the Catholic Foundation of Northeast Kansas. Outside of work, Andrew is a devoted Chiefs, Royals, Sporting KC, and Everton fan who loves exploring KC’s vibrant restaurant scene, especially the BBQ hotspots. With dual citizenship in the U.S. and Ireland and experience living in Switzerland, he’s an avid traveler who’s visited 37 countries and counting. Andrew is also a proud cancer survivor, a perspective that reinforces his commitment to helping families feel confident about their financial futures while embracing the present. To learn more about Andrew, connect with him on LinkedIn.
