First Quarter 2026 Update

April 27, 2026

Key Points

• From a macro standpoint, a soft‑landing scenario remains plausible. Inflation has eased from its highs but remains above target, prompting the Federal Reserve to pause and emphasize patience rather than rapid easing. This stance reduces the risk of overtightening while allowing policy makers to assess how labor‑market slack and easing supply constraints feed through to prices over coming quarters.
• At its March 17–18, 2026 meeting, the Federal Open Market Committee (FOMC) held policy steady for a second consecutive meeting, maintaining the target range for the federal funds rate at 3.50%–3.75%, a level broadly viewed as near neutral after last year’s easing cycle.
• Equities struggled in the first quarter, with major indexes posting modest declines and sector performance becoming more uneven. Markets were pressured by firmer inflation readings, a less accommodative Federal Reserve, and rising bond yields, even as corporate earnings expectations remained broadly supportive.
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1st QUARTER 2026 MARKET COMMENTARY

Below, we’ve highlighted broad market returns for the current quarter and year-to-date time periods:

Source: Refinitiv

THE GLOBAL ECONOMY

After accelerating in the summer, the U.S. economy decelerated meaningfully into the winter: according to the Bureau of Economic Analysis’ (BEA) second estimate, real Gross Domestic Product (GDP) grew at an annualized 0.7% in Q4 2025, down from 4.4% in Q3. That slowdown sits alongside a more uneven labor backdrop: nonfarm payrolls fell 92,000 in February 2026 following a downwardly revised January gain, and the unemployment rate rose to 4.4%, signaling a clearer cooling in hiring and broader slack emerging in the job market. Against this mixed backdrop, the Federal Open Market Committee (FOMC) held the federal funds rate at a 3.50%–3.75% target range on March 18, 2026, reinforcing a cautious stance as it weighs weakening labor data against still-elevated inflation. The Fed’s March Summary of Economic Projections places 2026 PCE inflation at 2.7%, acknowledging persistent, yet easing, pressures as policy navigates between softening growth and a cooling labor market.

EQUITIES

Equities struggled in the first quarter, with major indexes posting modest declines and sector performance becoming more uneven. Markets were pressured by firmer inflation readings, a less accommodative Federal Reserve, and rising bond yields, even as corporate earnings expectations remained broadly supportive. While inflation continues to ease from its peak, its persistence above the Federal Reserve’s target has complicated the policy outlook and dampened risk appetite. Investor sentiment also reflected ongoing geopolitical tensions and fiscal uncertainty, contributing to higher volatility and more selective positioning. By quarter‑end, the S&P 500 Index ended the quarter with a loss of 4.3%, marking a weaker start to the year after strong gains in 2025. The MSCI EAFE Index of developed markets stocks was lower by 1.2%. Emerging markets stocks were also lower, as the MSCI Emerging Markets Index slipped 0.2%.

FIXED INCOME

At its March 17–18, 2026 meeting, the Federal Open Market Committee (FOMC) held policy steady for a second consecutive meeting, maintaining the target range for the federal funds rate at 3.50%–3.75%, a level broadly viewed as near neutral after last year’s easing cycle. The decision reflected heightened uncertainty around inflation and global risks, even as labor‑market momentum has cooled. Fixed income markets lost momentum during the first quarter, as firmer inflation readings, elevated issuance, and a more cautious Federal Reserve tempered the late‑2025 rally. Treasury yields generally moved higher, with the 10‑year yield rising modestly from December 31st as investors repriced the path of policy easing and digested stronger nominal growth and energy‑price pressures.

SUMMARY

The economic backdrop continues to point toward measured cooling rather than outright contraction. Incoming data show slower payroll gains and a modestly higher unemployment rate, yet layoffs remain restrained and hiring has adjusted mainly through reduced openings rather than widespread job losses. This reinforces the view that firms are adapting to softer demand cautiously, emphasizing labor retention and productivity improvements instead of aggressive cost cutting, consistent with the prevailing “low‑hire, low‑fire” dynamic. Household conditions remain an important source of stability. Real wage growth has turned positive on a year‑over‑year basis, helping offset higher borrowing costs that have dampened interest‑sensitive spending. While consumers have become more selective, outlays on services—particularly health care and other non‑discretionary categories—have held up, supporting employment and aggregate demand.

Corporate fundamentals also continue to cushion the slowdown. Profitability has moderated from late‑2025 peaks but remains solid, and liquidity conditions are still ample, enabling firms to meet debt obligations and sustain core investment, particularly in technology and efficiency‑enhancing projects. Rather than sweeping layoffs, management teams are focusing on margin discipline, targeted capex, and delayed hiring, preserving operational flexibility, which may help growth re‑accelerate later in the year.

From a macro standpoint, a soft‑landing scenario remains plausible. Inflation has eased from its highs but remains above target, prompting the Federal Reserve to pause and emphasize patience rather than rapid easing. This stance reduces the risk of overtightening while allowing policy makers to assess how labor‑market slack and easing supply constraints feed through to prices over coming quarters.

Consensus views still highlight manageable but meaningful risks. A sharper labor‑market deterioration, renewed energy‑price pressures, or geopolitical disruptions could alter the outlook. Structural challenges—such as demographic trends and participation constraints—remain headwinds, even as technology adoption offers near‑term adjustment costs alongside longer‑term productivity gains. On balance, current evidence supports an outlook of slower yet sustained growth, with policy and corporate strategies focused on resilience and stability rather than stimulus‑driven acceleration.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

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