Markets in Focus - March 2026

Market Review: The AI sorting hat

Global equity market performance diverged in February, extending this year’s cyclical rotation out of U.S. large-capitalization (cap) technology stocks, and into international and value equities. Artificial intelligence (AI) disruption concerns clouded the market, and the repricing of vulnerable industries led the Financials and technology-related sectors to underperform (Figure 1). As a result, the S&P 500® posted its first negative monthly return since April 2025.

There were several significant policy-related developments last month, including the nomination of Kevin Warsh as the next Federal Reserve (Fed) chair, the U.S. Supreme Court ruling which overturned emergency powers tariffs and a military conflict in Iran. Amid the uncertainty, U.S. Treasuries posted their best monthly return in a year, while gold and oil prices marched higher in a lead up to the geopolitical developments at month end.

Figure 1. S&P 500 Sector Performance - February 2026
Financials and technology-related sectors trailed amid AI disruption concerns

As of 2/28/2026. Source: FactSet®. FactSet® is a registered trademark of FactSet Research Systems Inc. and its affiliates.

View accessible version of this chart.

Short takes

Sophisticated AI tools are disrupting the software industry
- Typically, an industry undergoing disruption has followed the pattern of broad price declines, a partial bounce-back and then a slow grind over time as winners and losers are separated.
Focus on durable trends
- Increasing fiscal stimulus is a global trend that we expect to persist and benefit international markets.
- Indicators of U.S. growth, such as the Purchasing Managers’ Index (PMI) surveys have continued to improve.
Low-hire, high-angst labor market
- Widespread concern about AI-driven mass layoffs is likely premature in the near term.
- The medium-term impacts to the labor market could be more significant, in our view.

The big picture: Geopolitical uncertainty remains high

Conflict in the Middle East has sharply heightened uncertainty in the near term. Global financial markets are sensitive to energy price shocks, and the largest impact has been felt in international markets for liquefied natural gas (LNG), due to impacted production from Qatar, the world’s second largest LNG exporter.

Given Iran’s geographic proximity to the Strait of Hormuz, a key maritime trade route through which 20% of the world’s oil and LNG trade passes through daily, the question of how long shipping will be disrupted, lingers. While oil prices thus far in early March have “only” risen back to 2024 levels (Figure 2), the tail risk of higher prices persists.

Figure 2. Brent Crude Oil Price Per Barrel
Prices have risen back to 2024 levels, but remain below the spikes reached after the onset of the Russia-Ukraine war

As of 3/6/2026. Source: Bloomberg L.P.

View accessible version of this chart.

In response to these developments, equity markets in Asia and Europe have experienced sharper drawdowns, both from greater energy cost vulnerability and a retracement of recent outperformance. We expect these regions to benefit disproportionately from a de-escalation of the conflict. Internationally, the underlying drivers of fiscal stimulus and defense spending are likely to be reinforced, which should help to reassert the pre-existing narratives and trends.

In the U.S., market resiliency has faced strains from a combination of AI-related disruption, tariff uncertainty, private credit vulnerability and stubborn inflation data. The conflict in the Middle East adds to the short-term vulnerability of U.S. financial markets, particularly if oil prices move sharply higher. It is important, however, to disaggregate the existing concerns and assess the potential impacts.

AI-related disruption, most recently focused on the software industry, is real, but from a macro standpoint, should be net positive. That said, while negative impacts of disruption could be felt in the nearer term, it may be a more gradual process for the positive impacts to come to fruition.

Similarly, we expect the renewed uncertainty associated with the recent U.S. Supreme Court ruling against tariffs based on the International Emergency Economic Powers Act to be short-term in nature. Ultimately, tariffs may settle at lower overall levels than prevailed prior to the ruling.

In the private credit space, there is significant dispersion among areas that might be experiencing credit quality deterioration and those that remain stable. Typically, more pervasive damage to credit environments has involved the Fed raising interest rates, which we firmly do not expect to happen this year, despite recent data showing elevated producer prices.

Outlook and portfolio positioning

Despite the short-term uncertainty and strained market resilience, we believe the environment for taking equity market risk is favorable this year. The drivers supporting international markets remain durable and the AI-related disruption rippling through U.S. equity markets should gradually calm and allow for broad-based gains as companies benefit from technology enhancements. Additionally, President Trump is scheduled to meet with President Xi of China at the end of March. We believe the series of planned in-person meetings between the two leaders has the potential to improve U.S.-China trade relations and serve as a positive catalyst for markets.

TEXT VERSION OF CHARTS

Figure 1. S&P 500 Sector Performance - February 2026 (view image)
Financials and technology-related sectors trailed amid AI disruption concerns

Sector	Performance
Utilities	9.87%
Energy	8.77%
Materials	8.27%
Cons Staples	7.87%
Industrials	6.97%
Real Estate	6.23%
Healthcare	3.42%
Financials	-3.83%
Info Tech	-3.98%
Comm Services	-5.14%
Cons Discr	-5.42%