iCapital Market Pulse: Navigating a noisy macro: Growth remains intact, but risks evolving

Key Takeaways:

• Volatility has exceeded expectations, driven by geopolitical tensions and energy‑price shocks, though we still expect the economy to avoid stagflation and grow near trend.
• Consumer resilience remains a critical buffer, with tax refunds, positive high‑frequency spending data, and the administration looking towards other fiscal relief to respond to higher oil prices.
• Fed policy remains on hold, with officials balancing upside inflation risks against a labor market that has become more vulnerable to shocks—raising the distinction between potential “good” vs. “bad” cuts.
• Positioning considerations: We continue to favor quality, a barbell approach, and income, which should help dampen overall portfolio volatility in this uncertain environment.

The macro landscape has reached a meaningful inflection point heading into the second quarter of 2026. Our expectation for above‑trend growth is facing new hurdles, as heightened geopolitical tensions are complicating the broader outlook for both the U.S./global economies and weighing on investor risk appetite. With that said, we still believe there are factors that can influence growth and act as a buffer from the large energy shock experienced in the first quarter.

As seen over the last few years, consumption has remained resilient on an aggregate level. Tailwinds from fiscal policy such as the wave of tax refunds from the One Big Beautiful Bill (OBBB) and further potential relief from the administration in response to high oil prices could help offset drags to growth. These are some of the reasons why we believe it is too premature that a stagflationary environment is a forgone conclusion.

Similar to what was experienced in 2025, there is a scenario where consumption could remain steady while employment growth remains muted. The energy price shock has caused a significant reset in Federal Reserve (Fed) pricing, with markets now expecting no policy changes this year. Officials have warned that while high energy prices could affect inflation, the labor market is also in a fragile position and vulnerable to further shocks. This distinction is important, as it will shape whether any eventual rate cuts are “good” cuts tied to easing inflation or “bad” cuts prompted by further labor‑market deterioration.

With this evolving backdrop, we think it is important for investors to focus on three key themes—across both private and public markets—which are having a quality bias, taking a barbell approach, and focusing on income. With volatility likely to remain elevated, the average S&P 500 drawdown during midterm election years is 17.5%¹, these factors should help provide some ballast in the portfolio.

Growth can remain resilient, but has diminishing tailwinds

Growth in 2026 begins from a muted baseline. Coming into this year, GDP was growing in line with its trend rate, though the fourth quarter was softer than expected given the government shutdown. GDP growth in Q4 2025 only expanded by 0.7% QoQ SAAR —a large miss compared to the Atlanta GDPNow model.² While the headline was weak, the internals were more encouraging, as the government shutdown subtracted one percentage point (pp), while consumption expanded by 2.0% QoQ SAAR.³

This resilience in consumption is one of the hallmarks of this cycle, where consumer spending has averaged 2.5% QoQ SAAR since the beginning of 2022.⁴ While consumption was supported by positive wealth effects, this has flipped in Q1 with public equity markets posting negative returns. Large declines of 10+% (the S&P 500 was down 4.3% in Q1⁵) typically result in a less than 0.2 pp decline in consumption.⁶ Therefore, any wealth effect impact should be limited, with an added tailwind coming from tax refunds—which we will discuss later.

We believe that growth in Q1 should hold up for the following reasons:

1. The reversal of the government shutdown should contribute about 1-1.3 pp to growth.⁷
2. A broad set of indicators suggest that the economy is still in a good spot. Looking at economic surprises ex labor, they remain firmly positive.⁸ This has also been confirmed by company commentary, where mentions of economic recovery by S&P 500 executives are at the highest level since Q2 2021 (see Exhibit 1).⁹

Therefore, we think Atlanta GDPNow maybe understating growth for Q1 2026, unlike Q4 2025 where it was overstated.

One divergence we were particularly focused on in 2026 was between GDP growth and labor markets. Coming into the year, it did appear that there were some signs that labor markets were starting to stabilize. However, this view was called into question with the February labor report, which showed that jobs declined by 92k for the month.¹⁰ While the print was impacted by one-offs such as labor strikes, weather and an underestimation from the birth-death model, there are concerns about the outlook given the uncertainty from tensions in the Middle East. While we did see hiring intentions in the NFIB Small Business survey tick down in the latest reading, we have not seen any meaningful change in employment expectations in both the University of Michigan and Conference Board surveys.¹¹

Looking at a broad set of labor indicators, it appears that employment growth is stabilizing, albeit at low levels. While employment growth has been slow, layoffs also remain low – indicating that we are still operating in a “low-hire, low-fire” labor market. Initial jobless claims are the best example of this, as they are still in line with 2023, 2024 and 2025 levels.¹²

Given participants’ concerns around a weak labor market and rising energy costs, there have been renewed fears of stagflation.

Are risks to stagflation increasing?

Since the start of the Iran War (February 28), oil prices have risen by 54%, which has resulted in nearly a one dollar increase in the national average gas price.¹³ This is already starting to filter through into sentiment data as the 1yr. inflation expectations climbed from 3.4% to 3.8%—the largest increase since last April (Liberation Day).¹⁴ These increases in energy prices have led to renewed concerns about stagflation, where Bloomberg News mentions of stagflation have risen to the highest level since 2022.¹⁵

This shock will feed through to inflation, though the impact on core prices is smaller—about five basis points (bps) cumulatively over two months for every 10% move in oil prices (see Exhibit 3).¹⁶ Given the 50% rise in oil prices since the start of the conflict, this could potentially now add about 25 bps to core CPI over the coming months.¹⁷ However, the risk is that there is still no evidence of improvement in the Middle East. The Strait of Hormuz remains effectively shut, and energy assets continue to be targeted across the region—despite a ceasefire President Trump announced through April 6.
But there has also been upward pressure on other commodity prices, namely aluminum. Since the start of the conflict, prices are up 8.31%, which ranks in the 91st percentile in monthly changes going back to 1990^.18 Historically, similar price increases have pushed input costs higher, with the ISM Manufacturing Prices Paid component typically rising about 4 pp over the following month, which are already at elevated levels.¹⁹

However, it is not just oil and aluminum prices that could contribute to inflation; we are also seeing a shock in memory chips given the demand for technology equipment from the buildout of AI. This is seen through imported computer equipment prices which rose 4.8% month-over-month—the largest increase on record.²⁰

While these factors raise the risk of stagflation, we still believe it is premature to conclude that the economy is shifting into that environment. Higher costs may weigh on discretionary spending, but this should be partially offset by the boost from tax refunds.

Currently, tax refunds are up 20% compared to last March, as tax refunds have totaled $208 billion year-to-date (YTD).²¹ This greatly outweighs the ~$20 billion shock from elevated energy costs, specifically if gas prices remain at $4.00 through the end of April.²² In addition, the administration is also looking into cutting the Federal gas tax, which could save $23 billion per year.²³ While this should help support aggregate spending, the effects will likely be uneven, as lower‑income households spend the largest share of their disposable income on gas—reinforcing the K‑shaped dynamic that has become more pronounced in recent years.

These refunds are one of the reasons why high‑frequency measures of retail activity have held up. Johnson Redbook same‑store sales are still rising 6.9% year over year, broadly in line with levels since the start of the conflict.²⁴ Credit‑card spending has also remained positive throughout March, though much of that strength reflects higher gasoline prices. However, even excluding gasoline, spending has remained slightly positive.

All else equal, while the risks to higher inflation have increased, we think the economy and the consumer should be able to withstand this current shock. But, the duration of the shock,which is in its 5th week,will ultimately influence the outlook.

Cuts are still expected, but the reasons could be changing

Given our expectation for stagflation risks to be avoided, growth remaining above trend (in the near-term) and inflation running above target, the Fed has and will likely remain on hold—something we previously discussed (here). However, the tricky part for the Fed is their mandate is now moving in opposite directions—downside risks to labor and upside risks to inflation.

The FOMC raised both its headline and core inflation forecasts at its most recent meeting. While the Committee left its unemployment forecast unchanged, it emphasized that the risks have shifted to the downside. Recent Fed commentary has echoed this view, with officials noting that the oil price shock poses additional risks to the outlook and that the labor market is now in a position that is more susceptible to further shocks.

Since the start of the year, the risks to the labor markets have increased. While the February nonfarm payroll report was weak, driven by a few one-off factors, a broader set of labor indicators would suggest that the labor market is stabilizing. However, historically, oil shocks have lifted the unemployment rate by about 0.3–0.5 pp over the next 12 months.²⁵

It is also worth noting that the Fed’s reaction function to this shock will likely be different than 2022. First, we were much earlier in the cycle than we are today. This was coupled with a number of supply chain constraints as the domestic and global economies re-opened after COVID. Second, labor markets are in a very different place today, as average monthly job gains were 491k in 2021–2022, compared with roughly 60k over the past 24 months.²⁶

While we expect rate cuts this year, the reason for cuts could be changing. For now, we still believe in “good cuts” as we think we could see further progress on inflation toward the Fed’s target, as there is historically little feed through from energy to core and we think higher energy prices could weigh on core services ex housing—which has been sticky since the start of the year. But if these shocks do weigh on labor markets, then this could transition to “bad cuts.”

Changing tech leadership: Are we in a hard asset world?

As discussed in our Outlook, we anticipated a potential shift in technology leadership—and that trend appears to be playing out this year. The information technology sector is the third worst performing sector this year, down 9.25%.²⁷ However, there has been much dispersion within the sector as highlighted by the Google AI ecosystem being up 14% this year vs. the Open AI ecosystem which is down ~20%.²⁸ This dispersion can also be seen in Software, where there are concerns that AI could disrupt the industry group. Fears of this disruption have contributed to the investment theme HALO, which was coined by Josh Brown and stands for Heavy Assets and Low Obsolescence, which is up 9% this year and has outperformed software by roughly 34 pp YTD (see Exhibit 4). ²⁹

This dispersion is likely to persist throughout the year, especially with investment‑grade technology issuance projected to reach $360 billion—a 5% increase from 2025—and CapEx expected to rise to roughly 92% of free cash flow.³⁰ This is why we think it is important to have a selective approach in the technology sector and would be favoring:

1. Companies with low leverage. We would want to focus on companies that do not have much debt on the balance sheet and can use various channels to finance their large CapEx spend.
2. Strong Moats. As discussed here and here, we want to be focusing on companies that not only have access to large pools of proprietary data and have deeply embedded workflows as they manage enterprise data that other layers depend on.

The investment playbook: How to be positioned for an evolving and uncertain environment

Given this backdrop there are three tenants we would focus our investment strategy on across private and public markets at this juncture: 1) having a quality bias 2) taking a barbell approach and 3) focusing on income.

Coming into the year, we felt that 2026 was going to be a modest year for equity market returns—valuations were elevated relative to history and midterm election years are historically volatile. With the expectations for mid-to-high single digit returns this year, we think these factors should help dampen overall portfolio volatility.

Quality: We think it is important to focus on companies that have strong free cash flow, can demonstrate pricing power, have low/manageable leverage ratios and trade at reasonable valuations relative to their growth prospects. Indeed, companies with these characteristics are flat on the year and have outperformed the broader market (S&P 500) by five pp.³¹

In private markets, we think it is important to focus on top quartile managers. Given the current environment, slower exit activity and concerns about marks, specifically as it pertains to software companies, we think dispersion will rise across all private market strategies this year (see Exhibit 5). Manager selection in 2026 will be key, and we think it will be important to focus on managers that have delivered consistent returns and have a long-proven track record, demonstrating investment capabilities across different market cycles.

Barbell: We think it’s important to focus on a strategy that is somewhat agnostic to the growth environment—balancing sector exposures that can perform well whether growth is accelerating or decelerating. In public markets we would be favoring exposure to sectors such as industrials and utilities. In fact, an equally weighted allocation to both these sectors would have returned 4.7% so far YTD.³² However, this isn’t just a near-term phenomenon. This strategy performed in line with the S&P 500 from the COVID low through the end of 2022—showing how this approach performs in various growth environments.³³

Income: Given our modest return expectations for public equities in 2026, we would want to focus on income generating assets, which should provide attractive risk-adjusted returns. Given the uptick that we have seen in volatility, the terms on structured investments, specifically notes designed to provide income with downside protection should improve. Income notes can be customized as to the level of protection, tenors, underliers and monthly or quarterly coupons offering high single digit to low double-digit yields.

Although we’ve covered private credit in depth this quarter, the asset class still presents opportunities—especially for new deployments—given that many loans have widened 50–100 bps since the end of 2025.³⁴ With base rates near 370 bps and middle market spreads of 500–550 bps, all in yields could rival our expectation for equity returns this year.³⁵ The main risk is that many evergreen funds will be overweight 2024–2025 deals, which were originated in more competitive markets and generally at less attractive terms.

Bottom line: The macro environment is facing considerable uncertainty, but growth has been able to prove resilient. Given the dislocations and dispersion that has formed since the start of the year, investors are likely to find opportunities to deploy capital, especially if and when the geopolitical landscape stabilizes.