Stocks started last week on an upbeat note as the administration delayed a deadline to strike Iranian energy plants by five days, also announcing that the U.S. and Iran were in negotiations to end the conflict. As the new Friday deadline approached, the administration announced an additional 10-day pause, extending the timeline to Monday, April 6, at 8:00 p.m., to allow negotiations to continue. Despite these diplomatic efforts, the tech-heavy and “Magnificent Seven”-concentrated S&P 500 index of U.S. Large-Cap stocks finished lower for the fifth consecutive week, with oil prices and Treasury yields rising as investors pondered how long this conflict might continue and what its ultimate impact will be on the U.S. economy.We have continuously described the U.S. economy as positioned in a “delicate balance.” This equilibrium has relied on heavy investment in artificial intelligence (AI) and by higher-income consumers, who have seen their wealth bolstered by rising equity markets over the recent past. However, future risks remain split between sticky inflation that is threatening to rise further, and labor markets that are showing increasing signs of weakness. This narrow and delicate balance has been further disrupted by the Middle East conflict, which threatens to lead to elevated energy prices, potentially increasing inflation while slowing growth, a combination of risks that has pulled equity prices lower.While there was limited hard economic data last week, two important sentiment gauges, the S&P Global Purchasing Managers’ Index (PMI) and the University of Michigan Survey of Consumers, showed potential mounting risks to inflation, labor markets and economic growth. Flash PMI data from S&P— which provides an early estimate of economic activity ahead of the full report—released last week warned that the conflict in the Middle East has had a negative impact on economic growth while fueling inflation. Notably, the report found that employment had fallen for the first time in over a year as firms sought to reduce overhead.Meanwhile, 47 percent of respondents from the University of Michigan survey cited high prices as a dominant factor eroding their personal finances, highlighting inflation’s growing negative impact on household budgets. Stock market volatility has also significantly weighed on consumer sentiment, as the S&P 500 has dropped nearly 6 percent since the onset of the Iran conflict in late February. Middle- and higher-income consumers with stock wealth have been “buffeted by both escalating gas prices and volatile financial markets in the wake of the Iran conflict,” exhibiting “particularly large drops in sentiment,” Surveys of Consumers Director Joanne Hsu noted. The report noted that continued turbulence in financial markets could generate additional downside risk for consumers with those assets, potentially dampening their willingness to spend.The economy was already dealing with uncertainty surrounding the balance of high inflation and a weakening labor market prior to the Middle East conflict. Geopolitical risk, which always exists but is currently heightened, has added to these pressures, a reality reflected in financial markets over the past few weeks and one likely to continue in the coming months. This increasingly delicate balance, coupled with mounting questions about the overall impact of AI and the debt levels used to fund its expansion, has further clouded the long-term outlook for both economic growth and inflation.In this environment, we continue to encourage investors to focus on “controlling the controllable” by leaning on diversification as the primary tool to navigate economic uncertainty and market volatility. Diversification has become a critical tool for managing concentration risk over the past several years, as a select group of Mega-Cap technology stocks tied to the AI trade have driven the majority of gains in today’s historically narrow market environment, dictating the movement of the entire S&P 500. While diversification cannot guarantee that one will not experience losses, it increases the probability that those losses will not be as large as they would be in a concentrated “all-eggs-in-one-basket” approach.While the past few years have been marked by narrow markets that have reflected the narrow economy, the recent past has shown the benefits of diversification as uncertainty and risks have grown, a trend that has not been interrupted on a relative performance basis since the onset of the conflict.We expect the market to continue to expand in the future. The previous drivers of market performance, U.S Large-Cap technology stocks and the Magnificent Seven heavyweights, peaked on October 29, 2025, and have fallen by 17 percent overall. This has pushed the S&P 500 lower, but by a lesser degree of 7.09 percent. Even more importantly, the equal-weighted S&P 500 index—which further reduces concentration risk away from technology and the largest seven stocks—is up 1 percent. During this period, 62 percent of the stocks in the index have bested the return of the headline index. This stands in stark contrast to the previous three years, during which less than 30 percent of stocks beat the index.We also note that U.S. Small- and Mid-Cap stocks have remained up 3.1 percent and 2.1 percent, respectively, since late October. Interestingly, during this past month, these more economically and interest rate-sensitive segments of the market have slightly outpaced their Large-Cap S&P 500 counterparts. Additionally, a broad basket of commodities—an asset class we believe possesses significant diversification benefits—are up 26 percent. Another way to view the benefit of diversification is through the lens of drawdowns. While the S&P 500 index is 8.7 percent off its 52-week high, the average stock in the index is down 20 percent, and the median is down 18 percent. This suggests the potential benefit of owning the broader index rather than attempting to select a few individual stocks.As long-term-focused investors, we continue to believe that the U.S. economy and markets will broaden, just as they have after every other narrow period in history. The exciting part for patient investors is that the parts of the market we believe will benefit from this broadening—Small- and Mid-Cap stocks—remain relatively inexpensive and underinvested. This is where we see opportunity, and why we encourage you to continue with a steady hand and adhere to a long-term approach. Concentration may tempt, but diversification endures.Wall Street Wrap Stock volatility weighs on consumer sentiment: The final University of Michigan Consumer Sentiment Index for March 2026 showed a notable deterioration in consumer confidence compared with the preliminary March reading and February data, driven primarily by worsening expectations and rising economic uncertainty. The headline index fell to 53.3 in March from 56.6 in February, a decline of about 3.3 points month over month, marking a three-month low and a sharper drop than initially expected. We note that interviews for this release were collected between February 17 and March 23, with about two-thirds completed after the start of the Middle East conflict.At the component level, the Current Economic Conditions Index faltered modestly from 56.6 in February to 55.8 in March. Meanwhile, the Index of Consumer Expectations fell from 56.6 to 51.7, reflecting growing pessimism about future income, business conditions and the broader economy.When it comes to inflation, the survey reflected a split between rising short-term views and stable long-term expectations following the Iran conflict and rising energy costs. Short-term inflation expectations rose significantly to 3.8 percent from 3.4 percent in February, the largest monthly increase since April 2025, fueled by the spike in expected gasoline prices. Long-run (five to 10 years) inflation expectations edged down to 3.2 percent from 3.3 percent in February, however, suggesting that consumers remain optimistic that the energy shock will be temporary. This is consistent with other long-term measures the Fed examines, such as the five-year, five-year forward inflation expectation rate—which remains stable and near the U.S. central bank’s target, registering 2.06 percent as of March 27.Geopolitical uncertainty weighs on growth: The March 2026 S&P Global Flash US PMI report showed the Composite Output Index falling to 51.4 in March from 51.9 in February, an 11-month low and the second consecutive month of slowing growth. The data indicates the weakest quarter since late 2023, largely driven by service-sector deceleration and heightened geopolitical uncertainty as the Middle East conflict has posed additional risks to the delicate balance of the U.S. economy.The services PMI fell to 51.1 from roughly 51.7 in February, remaining in expansion territory but marking one of the weakest growth rates in nearly a year amid softer consumer demand, weaker new business inflows and stubborn inflation that has recently been exacerbated by higher energy prices. Because services make up the majority of U.S. economic activity, this slowdown was the primary driver of the decline in the composite PMI, signaling that overall growth is still positive but losing momentum.The manufacturing PMI, on the other hand, rose to about 52.4 in March from 51.6 in February, reflecting a rebound in industrial activity after recent softness. Output and new orders improved, helping lift the sector back into a more solid expansion range—though some of this strength may reflect temporary factors, including pre-emptive purchasing ahead of expected cost increases from tariffs.Looking at employment, private-sector headcount contracted overall in March, marking the first decline in employment since February 2025. This drop was primarily driven by the services sector, where staffing levels fell for the first time in 2026 as firms sought to reduce overhead amid a weakening inflow of new orders and rising economic uncertainty. While manufacturing employment did not contract, it rose at its weakest pace in eight months.Regarding inflation, the Prices Paid Index spiked higher to 63.2 from 60 in February, the largest rise in selling prices in over three and a half years, as the recent energy shock resulted in companies passing on higher costs to customers. Rates charged for services rose on average at a rate not seen since August 2022, while goods prices increased at the sharpest rate since last August.Finally, the reports reflected a noticeable divergence in future expectations, with manufacturing optimism hitting a 13-month high while the services outlook fell to its lowest since last October. This manufacturing boost was directly attributed to “reduced worries over the adverse impact of tariffs” alongside hopes for stronger domestic demand.“The PMI data is indicative of GDP rising at an annualized rate of just 1.0 percent, with a modest 1.3 percent expansion signaled for the first quarter as a whole. The survey’s price gauges, meanwhile, point to consumer price inflation accelerating back to around 4 percent, hinting at a growing risk of the U.S. moving into an environment of stagflation,” said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. “The Fed will therefore need to juggle these intensifying upside risks to inflation against the growing risk of the economy losing growth momentum, with much depending on the duration of the war and its impact on energy prices and global supply chains.”The Week Ahead Tuesday: The Conference Board’s U.S. Consumer Confidence Survey will be released at 10am EST. We will be watching to see how it compares to the University of Michigan’s March sentiment index’s 6 percent decline for a fuller picture of how rising prices have impacted household spending.Wednesday: The Institute for Supply Management will release its March Manufacturing PMI report at 10am EST. The report could serve as a key indicator as to whether manufacturers remained optimistic due to lower effective tariff rates or if the Middle East conflict’s energy shock has disrupted production.Separately, advance estimates of U.S. retail and food services sales for February will be released by the U.S. Census Bureau at 8:30am EST. January sales fell 0.2 percent, missing expectations as consumers adjusted to higher prices.Thursday: The Challenger, Gray & Christmas March 2026 Job Cut Report is scheduled for release at 7:30am EST, detailing the number of job cuts and hiring plans announced by U.S.-based employers in March. Those employers announced 48,307 job cuts in February 2026, a significant decrease from January.Friday: The U.S. Bureau of Labor Statistics will publish the Employment Situation for March, which includes key data on nonfarm payrolls and the unemployment rate, at 8:30am EST. We will be watching this report carefully following a contraction in the February data.Original Post