Energy Price Uncertainties and Higher Interest Rates Weighed on Financial Markets: Israeli/Iranian missile attacks on LNG facilities in Iran and Qatar on Wednesday triggered sharp selloffs in global financial markets. This was due to worries that energy prices will remain elevated for a longer period than previously anticipated. The outlook for inflation worsened, pushing interest rates higher. Yields on 2-year and 10-year U.S. Treasury notes surged to their highest level this year, closing on Friday at 3.90% and 4.38%, respectively, up 0.18% and 0.10 % for the week. The Bloomberg Aggregate Bond Index and the Bloomberg U.S. Municipal Bond Index each declined by 0.5% last week reducing their year-to-date (YTD) returns to -0.7% and 0.2%, respectively. Higher interest rates and earnings uncertainties associated with energy supply disruptions took their toll on the equity markets. The S&P 500 dropped 1.9%, extending its YTD loss to 4.7%. Internationally the MSCI developed and emerging markets indexes fell 2.1% and 0.3%, respectively, reducing their YTD returns to -1.5% and 4.5%.

FOMC Leaves Rates Unchanged but Raises Inflation and Growth Outlooks: On Wednesday, as widely expected, the Federal Open Market Committee (FOMC) held the the federal funds rate unchanged at 3.50%–3.75%. Committee members described economic activity as expanding at a solid pace, while acknowledging that inflation remains elevated and uncertainty around the outlook has increased, particularly due to geopolitical tensions in the Middle East. In its updated quarterly Summary of Economic Projections (SEP) the FOMC slightly increased its estimates for this year’s rate of inflation (2.7% versus 2.4%) and economic growth (2.4% versus 2.3%) but continued to forecast a 0.25% cut in the fed funds rate by the end of the year.

Wholesale Inflation Climbs: Also on Wednesday, the Bureau of Labor Statistics (BLS) reported February’s Producer Price Indexes (PPI). The “headline” PPI, which includes food and energy, rose 3.4% year-over-year compared with 2.9% in January. Core PPI, which excludes food and energy, climbed to 3.9%. Both readings were ahead of Bloomberg consensus estimates.

Unemployment Claims Remain Low: Initial claims for jobless benefits for the week ended March 14th were 205,000, down 8,000 from the prior week and below the Bloomberg consensus forecast of 215,000. Continuing claims for the week ending March 7th were 1.857 million, up from 1.847 million the prior week and slightly above the Bloomberg consensus forecast of 1.853 million.

As of this writing on March 21, 2026, the Trump Administration warned Iran that the U.S. would strike Iranian power plants within 48 hours if Iran did not reopen the Strait of Hormuz to commercial shipping. Earlier, President Trump said the U.S. military had reduced Iran’s ability to target vessels transiting the Strait of Hormuz and hinted at winding down U.S. military involvement in the Persian Gulf. Given President Trump’s sensitivity to financial markets—particularly interest rates—it is possible U.S. aggressions are nearing a peak, though only time will tell.

Despite the uncertainty the conflict has created, the FOMC (as noted previously) raised its 2026 economic growth outlook. Analysts have also been lifting earnings estimates. As of Friday, I/B/E/S-tracked estimates put S&P 500 2026 EPS growth at 17.9%, up from 15.6% on January 1st. Meanwhile, Bloomberg-tracked Wall Street strategists, on average, expect the S&P 500 Index to end the year at 7,561. This outlook has held steady since January and is 16.2% above Friday’s close. Taken together, these forecasts appear optimistic absent a rapid de-escalation in Middle East hostilities. That said, markets and economies have shown remarkable resilience to shocks over the past five years.

Roger Khlopin, CFA
Chief Investment Officer

Aaron Nghiem, CFA, CIMA
Senior Portfolio Manager