Q2 2026 Conversations on Markets

SECOND QUARTER, 2026

CONVERSATIONS ON MARKETS

While this report reflects market conditions and developments during the first quarter, we would note that sentiment has evolved rapidly in recent weeks. In mid-April, improving expectations around geopolitical stabilization—alongside easing oil price expectations, continued economic resilience, and steady earnings outlooks—supported a rebound in global equity markets, with major indices approaching fresh all-time highs. We will revisit these developments and their implications in our next quarterly update.

Navigating the Disconnect: Energy Shock vs. Market Resilience
In a quarter marked by two U.S. military operations involving major oil producers, Venezuela and Iran, which led to a spike in oil prices, the S&P 500 declined a relatively modest 4.3%. At the same time, the 10-year Treasury yield, which fell to 3.94% in late February shortly before the escalation with Iran, rose to as high as 4.43% by late March¹. Equity leadership tilted toward commodity-linked sectors, as Energy and Utilities significantly outperformed more economically sensitive areas such as Technology, Consumer Discretionary, and Financials, signaling that investors may have been positioning for a slower growth environment.

More broadly, the response across financial markets remained relatively measured. Even traditional safe-haven signals were muted: gold did not behave in a way consistent with sustained geopolitical stress, and the U.S. dollar strengthened only modestly. This disconnect between rising geopolitical tensions and relatively stable financial markets raised an important question: were markets adequately pricing in the downside risks at that time?

Elevated Oil Prices May Lead to Inflation and Slower Growth
Since the onset of the Middle East conflict, pricing in physical energy markets has conveyed a clear and material shift in perceived supply risk. Traffic through the Strait of Hormuz has declined sharply, with daily ship transits down by more than 100 vessels, underscoring the disruption to one of the world’s most critical energy corridors. At the same time, energy prices have moved decisively higher. Brent crude rose approximately 50%, European natural gas increased more than 58%, and U.S. gasoline prices climbed over 35%.

The Strait of Hormuz remains a vital artery for approximately 20% of global energy flow³, and any prolonged disruption would have far-reaching consequences. Liquified natural gas (LNG) shortages could affect electricity generation across Asia and Europe, while disrupted fertilizer markets may eventually impact agricultural output and food prices. Higher energy costs could increasingly pass through transportation, manufacturing, and consumer goods, intensifying inflationary pressures.

In such a scenario, the global economy could face a challenging combination of slower growth and persistent inflation. Historically, this has been a difficult environment for both equity and fixed income markets, suggesting that pricing at the time may have appeared optimistic relative to the scale of the potential disruption.

Energy market participants were not pricing in a prolonged escalation
Not all segments of global asset markets are interpreting recent developments in the same way. Take, for example, the observations from the commodity markets, which tend to reflect the views of participants directly involved in the physical system—producers, refiners, utilities, and large-scale buyers. These are not observers; rather, they are managing real supply, demand, and logistical constraints, and their pricing reflects those realities.

These markets are currently signaling a more measured interpretation of the situation. While energy prices rose sharply to reflect near-term stress, longer-term pricing suggested that market participants expected the disruption to be manageable over time, rather than a permanent shift to structurally higher energy costs.

This stood in contrast to some of the more cautionary headline narratives that emphasized worst-case outcomes. While those risks were real, the pricing of oil, gas, and related commodities suggested that the more likely path was one of short-term disruption followed by gradual adjustment, rather than sustained escalation. For investors, this distinction was important. The more probable risk was not an abrupt market break, but a gradual tightening of economic conditions as higher energy costs filtered through the economy and increased pressure on business margins.

Global earnings growth rates are still at a healthy level
Periods of market dislocation often give rise to compelling investment opportunities across sectors and regions. Energy-exporting nations, such as the United States, stand to gain from higher commodity prices and increased global demand for stable supply versus regions that remain heavily dependent on imports. Similarly, companies with strong pricing power or more limited direct exposure to commodity imports will remain well-positioned to absorb rising costs and protect margins in the short term.

Taken together, the current environment is best characterized by elevated risk amid ongoing market adjustments. Markets may ultimately need to reprice if disruptions persist longer than currently expected. However, current pricing in the financial markets suggests that a prolonged worst-case scenario is not the base case, with projected mid-teens global earnings growth from 2025 levels.

For investors, strong underlying economic fundamentals argue against a sudden shift in long-term asset allocation. Instead, we recommend remaining invested in line with long-term objectives. At the same time, we will continue to closely monitor for any indications of sustained rising inflation, slowing growth, and margin compression.

Bel Air Investment Advisors is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC (member FINRA and SIPC). Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities, nor should anything contained herein be construed as a recommendation or advice of any kind. Consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. No investment process is free of risk, and there is no guarantee that any investment process or investment opportunities will be profitable or suitable for all investors. Past performance is neither indicative nor a guarantee of future results. You cannot invest directly in an index.

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1. Source: Bloomberg. Bel Air Investment Advisors.
2. Source: S&P Global Market Intelligence Network. Data as of March 12, 2026.
3. Source: U.S. Energy Information Administration. “Amid regional conflict, the Strait of Hormuz remains critical oil chokepoint.” https://www.eia.gov/todayinenergy/detail.php?id=65504
4. Source: Intercontinental Exchange.
5. Source: Clearnomics, MSCI, Standard & Poors, LSEG. April 6, 2026.