Monthly Economic and Market Summary

• AI in Focus Across Markets-Two broad narratives shaped Q1 markets: the S&P 500 stayed in a relatively tight range amid underlying volatility, while software dominated headlines as AI disruption and displacement themes drove sector moves. Earnings expectations for S&P 500 constituents are for double-digit percentage growth in Q1.

• U.S. Consumer Reports Mixed-University of Michigan consumer sentiment fell to 55.5 in March from 56.6, marking a three-month low, while the Conference Board consumer confidence rose to 91.8 from 91.0, highlighting a divergence between weakening expectations and firmer views on current business and labor market conditions as rising gasoline prices and geopolitical tensions weigh on the outlook.

• Yields Remain Volatile-U.S. Treasury yields moved higher throughout March, with the 10-year surpassing 4.4%, as geopolitical tensions and rising oil prices drove inflation concerns and expectations for a more hawkish Fed. Later in the month, deescalation rumors prompted a shift back into Treasuries as growth fears eased, reversing some of the selloff amid ongoing global bond market volatility.

• Fed Holds Rates, Signals Caution-The Federal Reserve held rates at 3.50–3.75% in March, with most officials signaling fewer cuts than previously expected, citing uncertainty stemming from the Iran conflict. Updated projections indicate slightly higher core inflation and steady unemployment at 4.4%, suggesting rate cuts may not come without further progress on inflation.

• Dollar Strength Defies Market Weakness-The U.S. dollar recorded its strongest month since July, rising 2.3% as Middle East tensions increased demand for the world’s primary reserve currency. Heightened geopolitical and economic uncertainty reinforced the dollar’s role as a safehaven asset, countering concerns that it is losing its reserve status.

Elevated geopolitical risk drives market volatility

Elevated geopolitical risk is driving a broad repricing of risk across equity and fixed income markets as investors face a complex mix of geopolitical uncertainty, higher oil prices, persistent inflation risk and potentially slower economic growth at the same time. The recent Iran conflict has increased fears of a broader disruption in energy markets as higher oil prices can act like a tax on the economy by reducing household purchasing power, raising input costs for businesses and putting upward pressure on inflation expectations. This has pushed investors to become more defensive as they weigh the potential impact on consumer spending, corporate earnings and interest rate expectations.

Equity markets are reflecting this increased uncertainty. Although stocks rallied on the final trading day in March, the broader market sentiment remains cautious, given the S&P 500 remains well below its all-time high. A correction is generally defined as a decline of 10% or more from a recent peak. While the rebound was encouraging, it does not fully erase the recent deterioration in market sentiment, particularly in more economically sensitive areas of the market.

Volatility in the stock market is reinforcing a similar message. The VIX, an index which measures expected volatility in the S&P 500, rose to about 31, its highest level since April 2023. At these levels, it suggests investors are demanding a higher premium to own equities while uncertainty remains elevated.

In this environment, markets are not simply reacting to one headline, but repricing a broader set of risks tied to inflation, growth and geopolitics. In the bond market, rising Treasury yields and weaker bond prices reflect concerns that higher oil prices could keep inflation elevated even as economic growth cools. This dynamic may complicate the path for monetary policy, as persistent inflation could limit how quickly or how aggressively the Federal Reserve can ease. For now, corporate earnings and the path of inflation will likely determine whether this period of risk aversion becomes a deeper correction or a temporary repricing of geopolitical risk.