Making Sense: March Market Update

Making Sense

Market Update | March 2026

Recorded on March 24, 2026

Amy: Hi. I'm Amy Thomas. I'm a strategist here at First Citizens Bank. Today is Tuesday, March 24, 2026, and I want to welcome you to our monthly Making Sense Market Update series. Each month, our Chief Investment Officer Brent Ciliano and Head of Market and Economic Research Phil Neuhart take a deep dive into what's happening in the markets and the economy. As always, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only. This should not be considered as tax, legal or investment advice.

Brent: Thank you, Amy, and good afternoon, everyone. Hope all of you are well. Phil, it's hard to believe that we are literally a quarter into 2026 already, and boy, what an event-filled quarter it has been.

Phil: Absolutely.

Brent: We've got a lot to cover today. And given the ongoing conflict with Iran and what's going on in the Middle East, we thought it appropriate to have a special update in this section to talk about where we are, the impact on financial markets.

We will additionally cover what we would normally do, which is our economic update. We'll talk specifically about growth, labor market policy and the broad housing outlook there. Specifically, we'll get into markets. We'll talk about equities. We'll talk about an update on artificial intelligence, a little bit about fixed income and we'll talk a bit about private credit. So why don't we jump right in?

Phil: So here we're showing geopolitical risk index. This is just a measure of how high is geopolitical risk globally, right, around the world. What you can see here is the Iran war, this year, major spike. That kind of goes without saying.

Brent: Yeah, you would expect that.

Phil: Yeah, you're back at levels near where it was when Russia invaded Ukraine. I think what's more interesting, though, is this 1-year average, this blue line. In the 2010s, look at where that average is and look at where it is in the 2020s. We are just in a higher geopolitical-risk environment. And something I think that investors and markets have to contend with that the 2020s were kind of back to normal, right, which is that there is geopolitical risk that had been very low in the 2010s.

So where are all eyes on? All eyes are on the Strait of Hormuz, right? And the reason is, and we'll talk a lot about this a lot more later, is that crude oil is the transmission mechanism to all sorts of markets, and the key with crude oil and the price of crude is our ships flowing through the Strait of Hormuz, which we are showing here.

As you all know, that fell all the way to zero. Now it is kind of at a trickle, but you could see where it's supposed to be in normal times. So this is the key. Every headline around the strait is moving markets globally, and we are seeing really sudden moves based on those headlines—some of which are substantiated, some of which are not. But this is the real focus and something we in the investing community are watching very closely.

Brent: Yeah. And you would expect that when, know, you have 20 million barrels a day flowing through that strait. There have been conversations to sort of ease that supply shock with strategic petroleum reserves being released. The US talked about releasing upwards of 400 million barrels, which sounds like, hey, maybe that might quell some of that supply shock, but you have to remember, it's not the number that's released. It's really the flow-through rate. You can only distribute out roughly about 2 million barrels a day, right? So if the conflict ended tomorrow, it would take upwards of 200 days to get that 400 million barrels out into the market. So again, we're going to hopefully want to see a de-escalation of tensions so that we can get that that oil flowing in.

Phil: Yeah, 20% of global oil supplies run through this strip. It is very easy to replace that quickly.

Brent: Exactly. So let's talk about the financial impact surrounding this conflict.

We've broken it down into four sections. The top half is on energy. The middle part is on equities, and then we have some fixed income and currencies and some other assets.

What we're looking at here, really three columns here, Phil, right? So what was the performance of these assets year to date preconflict, what's occurred during this conflict and then where are we actually today. And what you would expect as you just highlighted, whether I look at WTI crude or Brent crude, natural gas out of Europe, you saw, interestingly enough, before this conflict began, energy prices were already moving up.

So this conflict sort of exacerbated that. If I kind of take that all the way through the pipeline—no pun intended—is that when I think about unleaded regular gas up more than 40% from its lows back in January, diesel at the pump is up more than 51% from its low on January 11 through today. So again, we're seeing a pretty big impact as you would expect in energy.

Interestingly, when I look at equity markets, despite everything that we're talking about—so think about it. You have a conflict in the Middle East. You had, and we'll talk about later, you've had hyperscaler CapEx that you've yet to see real flow through on return on invested capital.

You have private credit situations. Despite all of that, US equity markets are down barely 5%. So again, we've seen some volatility but not as much as you would expect. Interestingly, when I look at fixed income, right, you would expect that, you know, with that type of disruption, that there would be a flight to quality and treasuries.

Interestingly enough, we've actually had yields rise and prices fall during this conflict. So at least today, fixed income, whether it's looking at the 2-year or the 10-year, has not been that safe-haven trade. Even on gold, look at what gold's done. An incredible run. We've been talking about gold for a while. Look at what gold has done during this conflict, off almost 20%.

So you've seen a pretty significant drawdown as it relates to gold in this, which you'd think would be sort of a flight to quality we haven't seen.

Phil: I think one thing on gold is something we were reminding folks of in previous months. This is a volatile asset class, and to say that you know exactly how something that does not spin off income or dividends or interest, exactly how that's gonna behave, I think, is a bit presumptuous. Spent a lot of time on the road of late, and something I've heard from clients is absolutely the move in energy prices has an impact. That goes without saying. But in some ways, I think we're hearing even more concern over the move higher in interest rates.

The reason is that we have clients that of course are exposed to the price of gasoline, diesel, et cetera, but all of our clients are exposed to interest rates, right? No matter if you are in the innovation economy or you're in the traditional economy or in agriculture, whatever it might be, interest rates have an impact, whereas energy prices may, they may not. So energy is impacting rates because of inflation concerns, et cetera, but rates are the real story here in terms of our clients.

Brent: Yeah, and we're going to unpack that a little bit more when we get to the monetary policy section, discuss where the Fed may or may not be going. A question that, you know, you and I get on the road all the time is, OK, what’s really happened with equities? And here, we're looking at the S&P 500 in and around major geopolitical conflicts, and we're looking at almost every major conflict from World War 2 all the way through to Liberation Day, tariffs of last year. I want you to really focus on the boxes at the bottom. What we're highlighting is what is the average time to bottom, right, what is the time to recovery and what was the size of the sell-off?

And what's really interesting here, Phil, is that we're not measuring that time to the bottom or time to recovery in months, quarters or years. We're actually measuring it in days.

Phil: Right.

Brent: And you could see mean and median, time to bottom has been about 15 days. Right? So very short-lived. When I look at the time to recovery, median has been only about 16 days.

Phil: About 3 weeks.

Brent: It's about 3 weeks, yeah. And if I look at the average, you're talking about just a couple of months. And you can see the size of the drawdown, whether I look at mean or median, has been around 7%.

So broadly and, you know, many of these geopolitical events have varied. You can look at the chart and look at those days. But by and large, geopolitical events have not had a major disruption in the price of equity trajectory. And I think importantly for listeners is if you go to that far-right box and you look at what have we seen in the S&P 500 12 months post-bottom, you can see, you know, double-digit returns both mean and median.

So again, while geopolitical events are very varied and can be volatile, at the end of the day they tend to not have the disruption in equity markets that many expect.

Phil: Stocks return to fundamentals.

Brent: That's right.

Phil: And we're gonna talk about fundamentals later. But as long as fundamentals are decent, and we just spoke to the S&P 500 being down roughly 4% year to date, well, a lot of that is because the fundamentals are still okay. Do geopolitical events eventually change those fundamentals? That's the question. But clearly, the market often looks through them pretty quickly.

So let's turn to the economy. There is a real economy in the US, that we still have to, of course, dig into. So, first, let's just start with real GDP growth. You could see where consensus is in the in these in these lined bars. Really a rebound, right? It's pretty impressive. Look at 2025 into 2026. And then the diamonds show where GDP growth was expected 90 days ago. We've seen in coming quarters, numbers have moved up, not down.

Brent: Right.

Phil: Now, could these numbers adjust based on how long crude remains at these levels? Yes. But at least coming into this environment, we were at war with Iran, this higher-energy environment, you were seeing decent growth expectations within the US. This is finding its way into earnings, which we'll talk about in a moment.

So what about oil prices, around historical shocks, right? So what are we showing here? This light blue line is Iraq invades Kuwait in the Gulf War in 1990, and then Russia invades Ukraine in 2022 is the yellow line. And then we're showing the price of crude in, recently in the Middle East war, in the dark blue line.

And what you'll notice is, yes, it's above the Russia-invades-Ukraine level, as it should be. This is right in the middle of the Gulf, but we have still yet to move up to where we were in 1990 when you index this to the start of those conflicts.

Crude oil is higher, but as something we pointed out, if you look at nominal or real prices of WTI, it is well below past highs.

Brent: For sure.

Phil: It's easy to forget that in 2008, the price of West Texas Intermediate hit nearly $150.

Brent: Yes. So here and an inflation adjustment too.

Phil: Here we're $90 to $100. Yeah. Once you inflation adjust, it's even more extreme. So okay, there's two sides to that coin. One side is, yes, crude can certainly go higher from here. To say that we can't go higher is not true. But at the same time, when you think about impacts to the economy, we are still well below previous shocks, whether you're looking at the 1990 example or even 2008.

So what is the impact of crude as we flip ahead here? One, nobody consumes crude oil. What they consume is refined product.

Brent: That's right.

Phil: Diesel, as you mentioned. Retail gasoline prices we're showing here, and you can see pretty material percent move higher. And these numbers will continue to move higher. In fact, they have just today. And the reason is that remember there's a lag, right? That crude oil has to get refined, and it finds its way into your pump. There is a lag.

Again, below previous peaks—inflation adjusted well below previous peaks—but moving up and likely to move up higher. The consumer impact on this, as we've talked a lot about a K-shaped recovery, lower income consumers feel this more than higher income. Why is that? Gasoline is just a bigger part of their spending.

Brent: That's right.

Phil: So does this have a consumer impact? It 100% does. Unfortunately, it does have an impact on lower income folks.

What is interesting, though, is on the right side. This is gasoline, a motor fuel spending share of disposable personal income, going all the way back to 1960. And what you'll notice is this has trended down, right? There are peaks, there are troughs, but we have seen a trend down.

The reason is we just use less gasoline day to day. Our cars are more efficient, right? So think the average engine is more efficient, but also, electrification, hybrids, electric vehicles. So does it have an impact on the consumer? One hundred percent for sure. Is it the same impact that you would have said in 1975? It is not because it's just not as big of a wallet share. Now there are other things taking up that wallet share.

Brent: Right. Unfortunately.

Phil: We'll talk about inflation in a second here, but it is not what it was, say, a few decades ago in terms of its percentage of income.

Brent: Yeah. And not that we want to, you know, bring this in as it relates to the timing of cash flows, as it relates to savings for consumers, but, you know, we do have the One Big Beautiful Bill, right? Tax refunds are coming in.

I don't think many consumers were like, jeez, I really hope I can spend all my money on higher food and gas prices. But at the end of the day, when you think about the timing of cash flows for the average consumer, it is a little bit good that they will have some cash flows coming in. Again, how that might affect consumer spending. Will that find its way really into, you know, real PCE spending? Probably so. We'll just have to see what that looks like.

Phil: And, of course, it really depends on how long this spike in gasoline prices persists. If this is short-lived, it hurts. It does not hurt as much. If this is something we're talking about 6 months from now? Yeah, then it's a different story.

Brent: Correct. So then let let's carry that forward, let's talk about inflation. We've been talking about inflation since 2021, Phil. And one of these days, we'll stop talking about it.

Phil: I can't wait for that day.

Brent: Yeah. The time is not now. You can see what we're looking at here is the gold line here is CPI, and the dark blue line here is the PCE expenditures. And you can see certainly significant moderation lower from the highs that we saw back in 2021 and 2022. Unfortunately, this last 5 yards is taking quite a quite a while to get back towards that Fed target of 2%.

Will we ever get back to 2% in the near future? Time will certainly tell. Certainly been some fits and starts. CPI at, you know, right now, 2.4%. You know, Core CPI at 2.5%. Core PCE at 3.1%.

It been vacillating above 2% for quite some time. And when I think about on the next slide where market's expectations as to where this might go, what are we looking at here? Dark blue line is 1-year implied inflation. Gold line is 2-year and the dotted line is 5-year.

You can see from the start of this conflict on February 27 a significant increase up, as you would expect, in market participants' expectations for inflation 1 year out, 2 years out or 5 years out. And again, you can see how that moved up significantly with the conflict and everything that we talked about, but we've seen a little bit of a moderation back down, right, as developments have progressed. And I would argue that the path from here should basically follow the path of escalation or de-escalation. Let's hope that de-escalation is the protocol from here. Time will certainly tell, and this is going to be a very fluid event.

Phil: And for monetary authorities, the Fed and globally, this is the worry. It's inflation expectations. Realized inflation of course matters, but if it's in the soup as it was a few years ago, that becomes a real concern for monetary authorities.

Brent: And when you think about the ultimate flow-through on consumption, which we've talked about many times, this is the primary driver of real GDP. Consumption is 68% of that number. Dark blue line is nominal spending. And the gold line is inflation-adjusted spending.

You can see both of them from, let's just say, 2023 to now, have broadly moderated lower. The rate of moderation is more significant, as you would expect for inflation-adjusted spending. And I think what's interesting, if you sort of draw a line through nominal spending, it's certainly been variable, but it's held in there more specifically than inflation-adjusted spending, and that's going to be critical.

And we're gonna talk about corporate earnings and profitability in just a bit. You know, we tend to live, you know, corporate earnings and profitability, in a nominal world. Consumers are spending nominal dollars, but the value of what they get for those dollars is going to vary based on that path of inflation.

Phil: And this remains key. I mean, if real spending kind of paces at around 2.5% where it's been, we're OK. Even inflation-adjusted, we're fine.

The real question is, can this persist, particularly with gas prices going up? That is the million-dollar question. And really, as we pointed out previously, how long are gas prices at the elevated level?

So let's talk about small businesses versus larger businesses. And what we are seeing is smaller businesses are facing slower employment growth.

So if you look back to—this goes all the way back to the beginning of 2024—but particularly look at this vertical line. That's the Liberation Day tariffs announced. What's interesting is large businesses are actually still hiring, right?

That gray line, they're going up. When you look at medium size, that is actually falling, and then small, one to 250 employees, is kind of flat. So it's interesting. We talk about the big getting bigger, the top end of the consumer. We're seeing that a little bit in the labor market as well, and I think that the reason is that small businesses might be very exposed to things like tariffs, lower income spending, whereas big businesses, they might be more related to something like technology, right, software, or they're just able to handle tariffs more because they're bigger, right, and they have more power.

So, interesting that we are seeing a divide there. We do hear this on the road. I think that the average small business is struggling much more than the average big business, and you see that in the data in terms of their ability to hire.

So where are we in terms of the labor market? Well, we've bee,n we're in this, and we've been saying this for some time, kind of this low-hire, low-fire environment. So look at the level of nonfarm payrolls here on the left. This is indexed to the beginning of 2025.

What you'll notice is, yes, we saw this incredible recovery after the big drop from the pandemic, but now that curve has flattened. Now, it has not turned over, right, but it is flattened, and we're kind of in this inflection point, hopefully higher, but this is something that we are watching incredibly closely.

The monthly change in US payroll to that point is basically zero. The most recent employment report we saw job losses, but on the 3-month average it's basically flat. What are we watching? We're watching things like initial jobless claims, which are still low. Those come out each week on Thursday morning, something we watch and then we hope you all will as well at 8:30 in the morning.

As long as that is low, we're still in this kind of low hire, low fire. If that were to turn, this is a major risk to the outlook and something that we have to continue to monitor and acknowledge.

So to that low-hire, low-fire environment, let's look at the left side. This is the number of job openings per unemployed person. Something we've shown in the past, when we had a very tight job market—think 2022, early 2022—there were two job openings for every unemployed person. This is this short little period where labor kind of had the power over employers, right? If I leave my job, there's two jobs waiting for me.

Brent: Please don't leave your job.

Phil: Yeah. I'm not, Brent. And now we're back out at kind of one-to-one, right?

That's actually below where we were before the pandemic. So the job market has loosened pretty noticeably but has not deteriorated, right? Basically, it's just a normalization and a loosening, where there's roughly one job opening for every unemployed person.

But look at the right side. This is the low fire. This is layoffs. Yes. There have been some high-profile layoff announcements, but economy-wide is what we're really concerned with, and if you look at that 5-year, 3-month average, either one, still very low.

So the question is, does that change? So, far, it's not. We do understand that the AI theme is out there, and yes, there's been select announcements, but keep in mind, also sometimes companies want to trim, and AI is a nice explanation, and that it may not be pure AI is the reason for these reductions.

Brent: Exactly. Well, we'll talk a little bit more when we get into corporate earnings and profitability, and at least the fundamental backdrop is positive for the labor market as it relates to the ability to pay workers, and we're just gonna have to see how that all plays out.

Phil: So Brent, we've talked inflation, and we've talked to the labor market.

Brent: Let's bring it home.

Phil: That's the Fed's dual mandate. Well, what is the Fed to do here?

Brent: Yeah. They're caught between a rock and a hard place. And what we're looking at here is the upper bound of federal funds rate, and you can kind of see. We have to go back, Phil, before this conflict started February 27, right?

Market expectations were pricing in roughly 2.5 cuts between then and the end of 2026. Given what we just highlighted with the conflict and what's happening with implied inflation expectations is that between now and the end of the year, we have an equal probability of hikes and cuts priced in. And if I take that all the way out and look at market futures, you don't see a greater than or equal to 50% probability of a cut until September 2027.

So that sort of dynamic has changed the potential trajectory of where Fed policy goes from here. And you can see that sort of that lighter blue line was where we were on February 27th, and now we have street, which is that gold line on market pricing as it relates to expectations.

And to your point, our clients are very concerned about rates and where the path of rates go, and we've gotten a lot of questions about will it change in the Fed as it relates to, you know, Jay Powell and Kevin Ward's transition change, any of those things? I think ultimately, at the end of day, I think you and I would agree that the underlying dynamics and fundamentals, inflation, the path of the labor market and the bottom-up data will really inform, we believe, where the Fed goes from here. So I don't think that change in Fed president will really have an impact on where the trajectory of the Fed goes.

Phil: And what changed since February 27 is it's all about inflation. Realized inflation, but also those inflation expectations. The labor market has not improved, right? So, you think about the dual mandate. This is all about inflation, hence crude oil and the Strait of Hormuz and why that is driving markets in such a marked way.

Brent: Yes. And a question you and I get on the road an awful lot is, well, you know, the Fed's already cut rates seven 25-basis-point cuts. I know that we got the 50-basis-point cut in September 2024. How come my 30-year mortgage isn't lower? How come yields aren't down and prices up in my 10-year treasury bond? And what we're showing here in the dotted line is the Fed's path of rate cuts, and you can see that there—a total of 175 basis points lower than where we were back in the beginning of September 2024. That light blue line is 30-year mortgages. The gold line is the 10-year treasury. And if you look closely, right, from the very first cut in September 2024, you had mortgage rates around 6.3. They actually went up a full percentage point to about 7.3 shortly thereafter and are now slightly above that 6.3.

So even though the Fed has lowered Fed funds by 175 basis points, mortgage rates are effectively unchanged from back in September 2024. And again, looking at the 10-year treasury, we saw some moderation in yields as we got into the later part of 2025, that second half, but now they've kind of come back up.

If it was as easy to draw a correlation between monetary policy actions and 10-year treasuries, we'd have a great model and we'd be making a lot of money for clients in fixed income. But again, when you think about that Greenspan conundrum of being able to sort of predict where rates go or where mortgage rates go relative to Fed policy, they're just not related.

Phil: Yeah. These are these are active markets.

Brent: That's absolutely right.

Phil: Yeah, these are free markets, the 10-year treasury, while it had might have a loose relationship with the Fed funds in many environments, it doesn't track it directly, as you can see here.

Brent: Yeah, so let's talk about markets, Phil, and let's kind of get into it. We've shown this graph before. What we're looking at is sort of that breadth of what's happened in markets.

Let’s just highlight some things here. That gold line is international markets. right? So that light blue line, small cap, dotted line is the equal-weighted S&P 500. Dark blue line there is cap-weighted S&P 500, and that lower line is the Mag 7.

And you can see, despite the markets moving lower, the relative stacked ranking of that dynamic and breadth change and change in various asset class performance remains broadly intact, and we've had a little bit of a pop up where, you know, small-cap stocks have now become the leading performer in that stack ranking.

But by and large, it's stayed relatively the same. And again, what's very interesting is a significant juxtaposition where the Magnificent 7 for years had been driving the performance in the S&P 500, and that has continued to be the worst performer year to date. And as the markets have vacillated back and forth, it's interesting to see that that relative disposition has stayed the same.

Phil: Yeah. A major theme we were highlighting before the war was the theme of broadening. We were seeing after years of the largest stocks being the outperformers, they were the laggards and things like small cap were outperforming. And while some of those gaps have narrowed, that's still the case year to date.

Brent: That's right.

Phil: Which is a positive in our view.

Brent: Yeah. Exactly. We, you know, we wanted to see that healthy rotation out of the largest names in the S&P 500 to continue to see that breadth and this bull market continue. And a question that you and I get an awful lot on the road is, OK, guys, well, how have equity markets returned—not necessarily around just broad geopolitical events, but let's make it more specific around past oil price shocks.

And there's, you know, a lot of lines here on this graph, but what I really want you to focus on is that gold line, which is sort of the average S&P 500 performance around oil shocks, and that red line is sort of where we are today. And what you can see is that usually for that first 60 to 80 trading days is where you see a little bit or the most of that pain as it relates to drawdowns. But then as you sort of get extended past that 6-month time period, 12-month time period, on average 18 months post the start of an oil price shock, the S&P 500 has averaged about 10%.

So again, outside of that dark blue line, which when I sort of look at that Arab oil embargo, which you have to remember, that was around the '73, '74 recession in the United States, so there were other things that were causing equity US equity markets to fall, not just oil price shock—but by and large, when I think about previous oil price shocks, shorter-term pain and then normalization in equity markets as fundamentals start to come back.

Phil: And you pointed to it. Oil is not the only game in town, right? In past periods, there's always something else going on. Today, we're talking about AI and private credit and corporate earnings.

There are fundamentals. Sometimes I think we can get very myopic, focusing on just the price of gasoline and ignoring that that is actually a small percentage of our economy relative to everything else.

So let's talk about some of those fundamentals. Looking at there S&P 500, here we're showing earnings growth. In 2025, we grew about 13.6%. And we have an earnings season right around the corner. First quarter earnings season, which is going to give us, I think, really great color and perspective from the C-suite of the biggest companies in the country, earnings growth is expected to grow 12.5%.

Brent: That's incredible.

Phil: So it really does highlight that that business is still getting done, even as all eyes are on the Middle East. 2026 estimates now for the full year, 16.3%. This was what, 14.7%?

Brent: Yeah. Back in December when we did our 2026 outlook.

Phil: So earnings estimates are up, not down. I think that's really something to pause and think about. When you look at the average since 1950 of earnings growth, it's about 7.6%. So the truth is, anything double digits is quite excellent, and even more impressively maybe is margin expectations. This is next 12 months on the right side, operating margin estimates. We are now north of 19%. That's incredible. For how many years have we heard the phrase peak margins, Brent? And the truth is we haven't hit the peaks.

One day we will, but this is something to think about. And just to step back on these fundamentals, something we talked about in our outlook and justifiably everyone was talking about was the market was quite expensive coming into this year, and that is true. And we talked about just because the market is expensive, it doesn't necessarily tell you that much about near-term returns. What's interesting, though, is if you’re concerned about the market being expensive, it is cheaper today than it was entering the year. Why is that?

Brent: Yes.

Phil: One, the S&P’s down, but more importantly, earnings growth expectations are rising.

Brent: Yeah. That denominator effect.

Phil: Yes. So you have a market that is several turns cheaper than it was coming into the year. That's interesting. And I think that when, could the market fall further? Absolutely. But when you think about a floor under the market, if these fundamentals persist, it does actually create entry points. Now the truth is, we've only sold off 4%, but it's just a reminder that the fundamentals do matter, and when you do see earnings growth, that valuation contracting actually looks pretty attractive.

Brent: And think about the stack ranking of the S&P 500 in the top 10. Are any of them really broadly affected by industrials, materials or chemicals? Not as much as you would expect. So the durability of next 12-month operating margins at 19.5% and the earnings expectations, again, is getting better not worse despite the conflict.

Phil: And to that point, what are many of those big companies exposed to? The AI theme, or artificial intelligence. Here, we're showing a chart we've before, something we'll be watching very closely and updating during this earnings season, is capital expenditure spending on generative AI. So 2026, right now, the current estimate's about $650 billion.

The vast majority of that is by those really big hyperscalers. To put that in perspective, that was less than $100 billion in 2020. And by the way, each earning season this number goes up.

So we'll see, but this number could be higher in about 5 weeks. This theme is not going away. And again, as you said, this theme has very little to do with the price of oil and natural gas and fertilizer, et cetera. The real question is adoption.

I was lucky enough to spend a lot of time on the road so far this year, and anecdotally, adoption is going up—and I'm talking in the real economy. We are seeing more and more stories of adoption. Does it justify the spend? That's the $1 million question.

Brent: Yeah, that's the thing.

Phil: But we are seeing adoption move up and real use cases arise. So this story is still young, amazingly. We've talked about it for 3 years. But if you go back to the '90s, in 1995 we've been talking about the personal computer and internet for years. It was still early, right? So this remains a theme, something we are not losing sight of, and we don't want you to lose sight of in lieu of the Middle East.

So price target. Our S&P 500 price target is unchanged today at 7,300 is our base case. When we set that, it was up, moderately single digits. Now, of course, with the recent drawdown, it's up about 10% to 11%.

To be clear, this is a pretty cautious price target. Coming into this year, we had the market up, but we called it, you know, we were cautiously constructive, right? We came to this year expecting uncertainty.

You could see our bear case and our bull case if you really think that that one is the more extreme. We have a pretty contained price target when you think about the year, given that we're down 4% to 5%. But 7,300, and this does assume a little bit of valuation contraction and OK earnings in the base case. If things really were to deteriorate, start to look toward that bear case, right? And I think that you can't ignore the fact that with prices increasing in the energy space, the probability of the bear case has gone up, right?

But then, let's say we're talking quick resolution, earnings are great, I'd start to look towards that bull case.

Brent: And I think there's a significant difference from, as an equity investor's eyes, when I have multiple compression, which is a behavioral mechanism, versus an erosion in the fundamental side of the equation. Big difference, right? At the end of the day, and as you just covered, the fundamental story has gotten better, not worse. So again, the variability in what an investor is willing to pay for a dollar of next 12 months' earnings is in the eye of the beholder.

Phil: That's right.

Brent: But the fundamental side of it is on paper.

Phil: Yeah. The multiple is what Keynes called animal spirits, and the truth is if those animal spirits are becoming a little bit more contained, we'd like that for the long term.

Brent: For sure. So let's shift gears away from equities, Phil, and let's talk about fixed income. The gold line here is the Treasury, US Treasury yield curve latest on March 23. Dark blue line is where we were the beginning of the year.

What you can see is, this movement in the gold line is what we call in fixed income terms a bear flattener—in essence where we have yields that are sort of moving more toward a street than you have a curve. And we've seen much of the movement here in recent weeks on the shorter end of the curve—so think inside of 7 years has really seen significant amount of move, but we've seen about 40-ish basis points as we highlighted early in what's happened in the 10-year treasury, but much of that move is on the short end of the curve. A natural reaction to inflation expectations and what's going on there.

Phil: And the Fed.

Brent: Yes. As you mentioned, the lack of cutting rates.

Phil: Yeah. If you're cutting less in the back half of the year, things like the 1-year and the 2-year need to move up, and that's what they've done. So you've seen this flattening.

Brent: Yeah. And I would say, you know, further out of the curve, you know, 20 years and beyond is, again, what we've talked about is more of a referendum on fiscal side of the equation. And at the end of day, we've been predominantly anchored. We've seen that move up a little bit, but I would probably argue the longer end of the curve would likely, in relative terms, be more anchored than the volatility that we'll see in the short run.

Phil: And if it's not, that's something very notable for us to watch.

Brent: That'll be a concern. Let's talk about where interest rates are today across various asset classes. That first column, where were we at the beginning of the year, Phil? And then, you know, where were we right at the beginning of the conflict? And you can see that across various asset classes, we had yields down from the beginning of the year to preconflict, which basically bond prices up when yields come down.

Given this conflict and what's gone on, we've had yields back up a little bit, which means yields up on prices down. But when you think about it, whether I look at core taxable bonds or municipal bonds, investment-grade corporate bonds or high yield, their latest yield to worst, which is, as we've talked about in the past, a great proxy for forward-expected returns over that duration horizon—while we've seen a backup in yields, future expected returns have actually gone up for fixed-income asset classes. So again, that balance in portfolios, if you're thinking about having that balance, fixed-income asset classes across the board remain quite attractive.

Phil: Yes. Certainly still viable. So let's talk about credit spreads. What we're showing here are called option-adjusted spreads.

And all this is if you look at corporate bonds, whether it's investment-grade or high yield, it is the spread above treasuries that they yield. So when this number is high, it means there's more risk because it means investors are demanding a premium above treasuries, the risk-free asset. What you'll notice is earlier this year, yields were—or spreads rather—were unbelievably low. I mean, we're talking some of the tightest spreads we have seen ever and certainly in in recent years.

With the conflict in the Middle East, the risk premium has risen. You have seen spreads move up, both investment-grade and high-yield. What's interesting, though, is look at those dotted average lines. They've actually just moved up to the average, well below the peaks of Liberation Day tariffs last year and certainly well below the periods of 2022 and 2023.

So it's interesting, if you talk to our fixed-income team, yes, spreads have widened. But would you say that these assets are on sale? In other words, very wide spreads. Not really, and security selection still really matters.

Now, we do view this just like initial jobless claims. This is something that we monitor very closely, as it tells you about risk in the marketplace. So we've seen a pretty sharp move higher.

Brent: Yes.

Phil: If this were to persist, that is something we have to acknowledge just as we were last year amidst tariffs. Right now, yes, it has widened, but much like the stock market, the modest sell-down is pretty modest in a historical context relative to averages.

Brent: And the fundamental backdrop, especially if you are a fixed-income analyst and you're looking at the creditworthiness of an issuer and your ability to pay and pay on time, as you just highlighted very nicely, Phil, the fundamental backdrop not only remains robust, it's getting better, not worse.

And that's not just better for a select number of companies. That is pretty broad-based, so whether I look at an investment-grade or sub-investment-grade credits across the board, in aggregate, things have gotten better for those issuers, not worse.

Phil: That's right. So something we're watching closely. Something else we're watching and a topic that, if it was not for the war with Iran, I think it would have a lot more focus is private credit or private debt.

We have seen a lot of noise in this segment. We had an explosive growth as you can see here in private credit assets under management. Look how small it was in the early aughts and even 10 years ago. So one, this is an asset class that has grown dramatically. Two, and Brent, I know you've thought a lot about this, it's an asset class in which there has been retail product and democratization of this asset class.

Could you give us some color from your chief investment officer seat on your views around this and this topic that that is making headlines pretty consistently?

Brent: Yeah. I mean, again, and you would expect, right, when we see a significant amount of liquidity in the markets and in search for higher yield and higher returns, private credit, private equity was a lightning rod for clients' assets as it relates to what's going on.

We spend an awful lot of time analyzing private markets, and private markets are not for everybody, right? So at the end of the day, we believe that private markets should be focused on by qualified purchasers, those that can afford the illiquidity, can afford the variability, the drawdowns and again, this push toward the democratization of private investments and going down market to folks that maybe shouldn't be in these private assets creates more people coming into the space, right?

So when you think about it, if I were a borrower in the private markets, in the past I had a handful of folks that I could go to get that loan. Now those folks were very, very good at this. They'd done it for a long period of time. They were very, very good at extracting value for investors in private credit markets, which was good for the investor, maybe less good for the borrower, right?

When you saturate a market with lots of liquidity and you bring in other lenders or, in essence, what we're talking about here, other asset managers in the private credit space, that allows borrowers to go down the line to find more preferential terms for them, which is worse for the investor. It brings people into the space that maybe shouldn't be in that space. And because you have lots of liquidity and they have to fill these funds, sometimes they might be investing in things that aren't necessarily what they should be investing in.

Phil: Yeah. You have to think about the client and a saying in our world is, know thy client, right? And you want investments that are appropriate for a given client. So if a client is viewing something as very liquid and it's not liquid, then that is a problem. That's what we're seeing now amongst some of these funds.

Brent: And this is why we spend—to bring this home, Phil—this is why we spend an inordinate amount of time. We're using drawdown vehicles instead of BDCs. We're not focusing on those retail investments. We spend an inordinate amount of time analyzing these GPs and these firms that invest in private spaces to do rigorous, rigorous due diligence.

We do a ton of due diligence. We hire another firm to do a degree of due diligence. We are making sure from an investment due diligence and an operational due diligence, we're investing with the best managers out there and making sure that we are looking through to those portfolio companies the best that we can. That doesn't mean that we're going to avoid everything—so far, so good—but again, we spend a lot more time putting private investments with the right type of clientele and making sure that the vehicle is the right vehicle for clients to make sure that we don't get caught up in this retail fray.

Phil: That's right.

Amy: Hey. Before we jump into questions, just want to remind everyone that we do have several publications available throughout the month. If you would like to get those updates sent directly to your inbox, you can sign up using the QR code on the screen or visit FirstCitizens.com/Market-Outlook. Many of our publications are also available in podcast format. You can find those on Apple Podcasts, Spotify and YouTube Music.

Well, thank you guys for taking a deep dive into markets and the economy, especially taking an extra few minutes to talk about the conflict in Iran. I know that's top of everyone's mind. No surprise that was what most of the questions that we got in this this time were around.

But since you guys covered that so well, let's take a step back. Let's take a minute and pretend that there is no conflict. And think about what would be the top of the news headlines if that wasn't the case.

Phil: Look, if you rewind roughly a month I think it's the same story, but some of these things have moved to a certain extent. So first, artificial intelligence is still on top of our mind. It would still be dominating headlines. Why is that? That's what's driving the biggest companies, and the fact that the Magnificent 7's underperforming year to date, is something that's not being talked about enough and something I think we need to watch.

The positive of this broadening, in small caps outperforming for example as they are this year, is potential that if you believe that the artificial intelligence story is a major productivity driver, the winners cannot only be the biggest companies. It's supposed to drive productivity and margin outside of the biggest companies, so that broadening theme, it has to happen if you do believe the AI theme.

We are seeing the debt stack increase among the AI theme. Now there's going to be winners and losers there. Many of these companies have unbelievable balance sheets, healthy balance sheets, but nonetheless, that is a theme that I think really is out there.

And then we're about to have another earning season. You cannot watch these results from the hyperscalers closely enough. We want to see indications of this capacity utilization, is something we've shown before, still very high. What if that starts to peak? What if we see capacity utilization of these data centers start to turn over?

That's something we have to watch. This is the theme. It's like saying the personal computer or the Internet in the '90s. Like, it's going to remain the theme and something we're very focused on.

I think the other thing that would something we touched on as well would be private credit and some of the gating we are seeing of certain funds there, something that's very much top of mind for us. But, again, if we do not have the conflict or the war in the Middle East, would be a major topic.

And by the way, there is some relation there because private credit does lend to data centers as well. So it's kind of in the sauce.

Brent: Yeah. I think you have to be really careful when you hear the headlines about funds being gated in the private credit universe. That does not mean there's smoke, right? When you're in an environment where people are starting to demand back and drive that liquidity, you know, funds have to be proactive to make sure that they can maintain the value of their portfolio for other investors. So it's almost akin to a run on the bank.

It doesn't mean that every bank is in bad shape, but when investors come back in and say hey, I want my deposits back, and you end up with a run on the bank, it affects everyone. Then you end up selling what you can, not what you should. So this is a very risk-oriented proactive control by a lot of these GPs as it relates to private credit. Not that there's some type of systematic problem across all of these portfolios. It's more of a risk-mitigating type approach.

Phil: Right. Major headline risk, but it's worth digging into the details.

Brent: And then on the AI side of it, you talked about it in the webinars that, look, before any of this conflict started, the investing community was hyperfocused and sensitive on the return on invested capital for the capital deployment. And the Mag 7 were getting penalized and punished as far as their stock price going down, not because their earnings and profitability or their revenues were a problem. It's because their guidance on what they're going to spend was above market's consensus, and they were being penalized for that, not because of their performance.

So I think you'll see a little bit of that sensitivity, you know, in this first quarter earnings and what that actually looks like. I think some of that has already flowed through to the Mag 7 already, so we'll see. Will there be any type of rebound or an adjustment in the price of some of the Mag 7 stocks if the earnings continue to be good and the market has already digested the expectation of additional spend. We'll see how the market reacts.

Phil: In our 2026 outlook, we discussed this being a show-me year, and that is specifically true for artificial intelligence. We're several years into the story now. We know that a lot of these tools, agentic AI, are becoming much more capable. Well, show us, right? And that is something I think the market's demanding.

Brent: Yeah. And that's a longer game on the AI effect on labor. I think it would be naive to think that, in the next year or two that AI is going to completely crater the labor market. I don't think that's the case. I'm not smart enough to realize the underlying ramifications of how long that will actually take.

I would say it would be a more secular type theme that would play out. I would hope that on the other side of that, the productivity gains that we would see would balance some of that out, but there will be some effects in the labor market. It's too soon to tell.

Amy: Thinking about switching over to fixed income a little bit and thinking about the flattening of the yield curve, we have a lot of clients who are very focused on the fixed-income world. What are you saying to clients right now about fixed income?

Brent: So I think, first of all, Amy, we spend an inordinate amount of time doing comprehensive deep dives and due diligence on every single name that we purchase. The beauty of what we do is we're actually going out there and buying underlying issues for clients and holding them in the portfolio. So as long as either the US government doesn't default on any of their payments or the corporate issuers that we're buying don't default, which, knock on wood, has not happened to us since I've been here over the last 11 years, we believe that it's a very bottom-up approach.

So buying a diverse portfolio of issuers, doing all of that homework ahead of time, will allow us to maximize that purchase yield that I get for you. And the price that we pay, the yield at that time, what we call that purchase yield, is a very, very strong indicator of future returns for that. And again, we do a lot of homework on that and we're making sure that that's the case.

Now broadly for our clients, we do believe that the sell-off in fixed income is an opportunity, not something to be cautious of. You know, certainly you have to pick where your key rate durations are across the curve and what that might look like, but by and large we see this more as an opportunity for fixed income to add balance in a portfolio for a client that has a very specific mandate within fixed income. We think that it's a more attractive forward expected return than a less one.

Amy: And I hate to keep you in the CIO spotlight, but just one more question around how we're thinking about portfolios, considering all that is going on in the world today.

Brent: Yeah. I mean, I think it's really important to remember what our process was, absent any of the noise of the day, right? So every single quarter, we are dynamically updating our forward-looking capital market assumptions for that next 3-year horizon and determining what to own when and how much every single quarter, regardless of what's going on in the world.

So we are constantly proactive as it relates to what that stack looks like. We do not whip portfolios around thematically based on the noise or the news of the day. That is a fool's errand, and that will get you into trouble more often than it benefits you. At the end of the day, we have a very fundamental, rigorous approach to how we formulate our views and how we optimize and build portfolios, and we are constantly making the adjustments that make sense.

But you have to do that, Amy, in balance relative to the frictions of portfolios, trading costs, potential taxation if you're a taxable client. What are the changes that you are making on? What is the expected value that you're generating for the clients? So that's what we do every single day, and that's part of our value prop, and we don't put portfolios around based on geopolitical events. We stay very fundamentally grounded.

Now what I will say is that in times like this, Amy, you have to bring it back to your own personal risk tolerance. Whether you're an individual, whether you're a corporation with an investment policy statement, you have to make sure that you have your right inputs so that we can create the right outputs for you. And you should not allow the noise of the day to affect your portfolio and your allocation.

But it is a good environment to test whether or not you can sleep at night with your portfolio. If you cannot sleep at night with your portfolio, you may have a more risky portfolio than you're comfortable with. So you always have to balance that financial plan, your goals and objectives, with the portfolio construct, and we can certainly help you with that, and we do that every single day with our front office teams.

Phil: When you think about your asset allocation, you have short-term, you have medium-term, you have long-term assets. Long term assets are volatile by nature. So when we see that volatility, that should be expected, right? The S&P 500 on average since the 1990s has sold off 15% in a given year. Fifteen percent.

So in a given year, that that is what we as investors should expect. Now while it's happening, when we sold off 19% during the tariff tantrum of last year, it's easy to forget, but what was the story of last year? Hold on. Follow the plan, and the market did recover. That is what we are reminding our clients of.

Brent: Yeah. And Amy, there's no free lunch to Phil's point, right? You get an equity risk premium because you take risk. Again, long-term investors are compensated for taking that risk. And at the end of the day, we believe that the value that we provide in making sure that we're looking forward, not backward, in our process will add value over time. But again, you have to make sure that you understand that there's going to be volatility on the way between today and your goals and objectives.

Amy: Well, tons to think about. Thank you both for taking the time again, taking a deep dive in the markets and economy and for answering questions today. We hope you found this information helpful, and we look forward to seeing you again next month.

Authors

Brent Ciliano, CFA | SVP, Chief Investment Officer

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Brent.Ciliano@FirstCitizens.com | 919-716-2650

Phillip Neuhart | SVP, Head of Market & Economic Research

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

Blake Taylor | VP, Market & Economic Research Analyst

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Blake.Taylor@FirstCitizens.com | 919-716-7964

Jack Pettit | AVP, Research Analyst

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Blake.Taylor@FirstCitizens.com | 919-986-3667

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