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While the Iran War is front of mind now, the AI buildout and other tech-led advances remain the longer-term drivers of the global economy and markets.
Since President Trump’s return to the White House, there has been no shortage of drama, which one might say is on brand for a former reality-TV star.
The first three quarters of 2025 were consumed by trying to rewire international trade via tariffs at levels that ranged from “ouch” to “yikes,” and the fourth quarter saw a record 43-day federal government closure that shaved nearly a percentage point off GDP growth for that three-month period. The first quarter of 2026 started with the capture of Venezuela’s president and ended with the U.S. at war with Iran.
Quick question: When do we get a quiet quarter for a change?
Stocks fell abruptly after the initial attack on Tehran and kept falling for the next month – every full week of March was negative for the S&P 500. From February 28 to March 30, the large-cap index fell roughly 8% and the drop for international stocks was in the low double digits. But since March 31, markets have bounced back in a big way as investors started seeing glimmers of peace on the not-too-distant horizon.
We count ourselves among those who believe the Iran War is approaching a conclusion – both the U.S. and Iran have more incentives to bring it to a close than to keep it going. As we write this commentary, a ceasefire remains in place and negotiators are still talking privately while they rattle their sabers publicly.
An end to the active hostilities, however, would just be the starting point for returning the global economy toward where things stood pre-war.
The Persian Gulf is still bottled up – until that is sorted out, 20% of the world’s oil production will not flow efficiently to where it is needed in Europe and Asia. In the U.S., a spike in oil prices has pushed headline inflation back above 3% for the first time since mid-2024 – that will take some time to ease off. Interest-rate cuts are likely on hold for a while as the Federal Reserve waits for more data on inflation and jobs. Despite these challenges, we feel increasingly confident in our pre-war views, which were more upbeat about markets and the global economy. We invite you to keep reading as we get into the reasons for our optimism in the sections to follow
1. Markets see the Iran War as a short-term event with trading signals provided by President Trump’s social media.
During the Iran War, the equity market signals that investors seem to be most focused on are President Trump’s social-media posts. No deep analysis involved here – if the president’s words and tone suggest that the conflict may get hotter, time to sell; if he holds out even the faintest hint at progress toward a deal with Tehran, time to buy, buy, buy.
Perhaps the clearest example of how this works came in late March, as the war was hitting the one-month mark. On March 26, the president threatened to escalate U.S. air attacks – the S&P 500 dropped nearly 4% over three trading sessions. But on March 31, after Trump indicated he might end the fighting before the Strait of Hormuz was reopened, the S&P jumped 2.9% and the Nasdaq almost 4% in their best day since May 2025. On April 8, the day the current ceasefire was announced, stocks picked up another 2.5%.
The result of this market dynamic is that Trump the bad cop and Trump the good cop have pretty much balanced each other out – stocks that were at one point down roughly 10% have since recovered all (U.S.) or nearly all (international) of that dip. As of mid-April, our benchmark ETF representing U.S. large-cap stocks was up 2.0% since the war started (2.7% year to date), while ETFs for non-U.S. developed markets were down 2.0% (+7.3% YTD) and emerging markets are essentially flat since late February and up 13.7% in 2026. The story is even more sanguine for fixed income – the Vanguard Total Bond ETF is virtually unchanged since the war started even as inflation worries pushed up 10-year Treasury yields to their highest level in close to a year.
Our takeaway is that the market views the Iran War as largely a contained event that will have a limited impact on the main drivers of asset prices. Energy will be most affected – crude oil is up about 35% since the war started, and a gallon of regular gasoline on average costs a dollar more than it did in late February. Of course, high energy prices create economic pain for businesses and consumers, and are the key driver for the sharp increase in inflation in March (more on that later in this Insight). But markets have a history of looking through the impact of energy-price shocks as long as they do not persist.
We are more focused on the corporate revenue and earnings outlook as indicators of what to expect for stock performance. For the first quarter, revenue for the S&P 500 is expected to climb just under 10% and earnings 12.6% over the same period a year ago, according to the latest weekly report from data firm FactSet. For each of the next three quarters, earnings growth is projected to be in the 19% to 21% range, with technology leading the way but most of the other sectors also contributing.
Non-U.S. stocks also have a compelling earnings-growth story that positions them well for another year of strong price performance. FactSet estimates earnings for international developed markets will grow 11% and emerging markets a whopping 41% in 2026. Both are trading at more attractive valuations than the S&P 500 while profitably participating in the global AI infrastructure buildout.
Indeed, international got off to a hot start in 2026 – emerging markets gained 9% in January alone and developed markets were not far behind. They lost some ground in March but have remained in positive territory during the Iran War, and they have bounced back stronger than U.S. stocks as peace prospects have picked up momentum. They also stand to benefit further if the U.S. dollar continues to weaken – the greenback lost about 2% of its value in the first half of April. We continue to like international markets based on their return outlook and are maintaining our allocations at target levels.
2. The accelerating AI buildout will more than offset any drag in GDP growth created by higher energy prices.
Both the U.S. and global economies are still in growth mode, albeit at a somewhat reduced pace due to higher energy prices resulting from the Iran War. While we expect that the war will not be prolonged, its aftermath will include a longer period of elevated energy prices that will likely weigh on growth, though not nearly enough to trip the global economy into recession.
The current 2026 real GDP growth forecasts for the U.S. are not spectacular – the International Monetary Fund, World Bank and the Federal Reserve are all in the 2% to 2.5% range – but they are solid and similar to the numbers for 2025. The first quarter is expected to be weaker than the full year, with the Fed downgrading its Q1 estimate from 3.0% before the war to 1.3% now. Most of that difference is due to less consumer discretionary spending in the face of higher energy and food prices – the latest consumer sentiment measure by the University of Michigan is at an all-time low.
While the war and its impacts are dominating the headlines, we believe the more important economic stories for 2026 are the accelerating buildout of AI and the provisions of last year’s One Big Beautiful Bill Act (OBBBA) that financially benefit consumers and businesses.
AI-related spending has been going gangbusters since the start of the year, with the “Magnificent 7” hyperscalers – which include Microsoft, Google and Nvidia – laying out tens of billions of dollars on their own infrastructure programs and for investments in promising startups. Demand for AI capabilities, including agentic bots and the behind-the-scenes human talent needed to deploy the technology effectively, is expected to double this year to more than $200 billion, according to the consultancy KPMG.
The OBBBA’s most stimulative impacts took effect in the first quarter of 2026. For families, these included making permanent the lower tax rates put in place in 2017, cutting taxes on tips and overtime, and increasing deductions. The result has been higher federal tax refunds compared to 2025 – the IRS reports that the average refund being paid out this spring is nearly $3,500, up more than 10% from the previous year. For businesses, OBBBA’s more generous rules on depreciation and expensing stand to increase investment in property, equipment and research. In addition, the Federal Reserve has proposed changes in bank capital requirements that could reduce interest rates for mortgages and other lending.
OBBBA unlocks chart on right side of slide 13 (slide title “Tax breaks fuel…”) about here America’s status as a major energy producer provides some insulation from the downside of higher energy prices – most of the largest non-U.S. developed and emerging-market countries do not have that same protection. As a result, these economies will likely be hit harder by higher oil and natural gas prices and supply-related issues resulting from the Iran War. In its April update, the IMF predicts that 2026 real GDP growth in Europe will be around 1% and Asian emerging markets close to 5%. Given that Europe and Asia are more reliant on Middle East oil and natural gas than the U.S., the short-term disruption caused by the war will likely require more time to work through but we do not see it derailing their longer-term, positive economic growth trends.
3. A jump in inflation combined with ongoing weakness in the jobs market complicates the Fed’s approach to interest rates.
By law, the Federal Reserve’s “dual mandate” is to promote maximum employment and stable prices in order to keep the U.S. economy humming along.
Weakening job creation has led the Fed to prioritize the labor market in recent months. Since last August, the U.S. has added a total of 95,000 new positions, or barely 12,000 per month, according to the Bureau of Labor Statistics. Wage growth is at its slowest since 2021 and labor force participation – the percentage of Americans working or looking for work – fell to its lowest level since Jimmy Carter’s time in the White House. The Fed cut short-term interest rates three times in late 2025 to help employment, and heading into this year, the market expected two more supportive rate cuts.
But the nearly 1-percentage-point jump in the Consumer Price Index to 3.3% in March, almost all due to the Iran War’s sharp increase in oil prices, upended that outlook – now the market’s prevailing forecast is for zero rate reductions in 2026. We agree that the Fed should not lower interest rates now given current inflation conditions (its preferred inflation measure came in at 3% annually for February, before the war started), but we can still envision a single rate cut late in the year, especially if the employment side of the dual mandate continues to deteriorate.
March saw an unexpectedly strong preliminary report of 178,000 new jobs created, which lowered the national unemployment rate from 4.4% to 4.3%. That is certainly good news but we remain unconvinced that the labor market is moving out of the “low hire, low fire” trend in place for more than a year. In February, the economy lost 133,000 positions so for the two months, the net increase was a much less impressive 45,000 jobs. Year to date, job creation is running ahead of 2025’s paltry average of 10,000 new positions per month but well behind the combined 2023-24 monthly average of 165,000 new jobs.
Given our base case that the Iran War is not prolonged and that tanker traffic in the Persian Gulf starts reverting toward its pre-war norms, we expect inflation to stabilize and then begin to move back down closer to where it was before the war (excluding food and energy, March CPI was in line with the inflation trend dating back to late 2025). This will, of course, take some time given the damage to energy infrastructure and the shipping bottleneck. Minutes from the Fed’s meeting in mid-March indicate that it expects oil-fueled inflation to gradually subside, with an ample majority of policymakers anticipating a rate cut before year-end.
Part of that anticipation could be that the White House has made it abundantly clear that it wants rate cuts immediately if not sooner to goose the economy. President Trump started pounding that point even before his second term began, and he has not eased off even with the war-related inflation spike. Incoming Fed chair Kevin Warsh (assuming he is eventually confirmed for the job) knows what is expected of him, and the already heavy pressure from above will likely ratchet up further as the midterm elections for control of Congress approaches.
4. AI is disrupting the lucrative software industry but forecasts of a looming “SaaS-pocalypse” are likely overstated.
As the spending on AI continues to grow deeper into the trillions of dollars, so too does the list of industries that the technology is predicted to hollow out in the years to come. At the top of that prospective hit list is enterprise software-as-a-service (SaaS), which employs many thousands of well-paid professionals to create innovative products used by many millions around the world.
The threat to this highly profitable business model has acquired an ominous name – the “SaaS-pocalypse” – and it has decimated share prices of SaaS companies, in some cases by more than 40% so far in 2026. The stock wipeout has been an across-the-board occurrence despite sharply rising revenue and earnings growth estimates for many SaaS players – the kind of news that normally makes stocks go up in price. And it comes despite projections from multiple research firms that the SaaS market will more than double in size by 2030 – also a data point that normally generates a tailwind for its beneficiaries.
We are not trying to argue that AI will have no impact on the software business – impact is already happening. AI has and will continue to make certain software businesses obsolete. But the indiscriminate jettisoning of most SaaS stocks makes us think that the market’s assumptions about the future may be too far and too fast and certainly not appropriately nuanced.
Software companies have a track record of changing their business approach to adapt to a changing tech landscape – in this case, by incorporating AI into their product lineups. Examples of this can be seen across the industry. Agentic AI – autonomous tools that can act independently in carrying out complex tasks – is being embedded in existing software to streamline customer service, marketing and other functions. Predictive AI is being built into sales-focused solutions and collaborative AI is being added to enable cross-business teams to work together more effectively.
We think disrupting SaaS will be easier said than done and, at a minimum, would take much longer than 2026’s cratering stock prices would suggest. Any transition will be slowed by the formidable power of incumbency – the product bundle offered by existing providers creates a sizable structural advantage that would be a challenge for upstarts to overcome. Given the choice between a complicated and expensive move to a new AI-native vendor or sticking with their current SaaS platform that has integrated AI into familiar products, we expect many customers would choose the latter.
How software companies make their money will almost certainly change in the coming years, much like how the old one-time fee for a perpetual license was replaced by the SaaS per-user subscription model that now predominates. New powerhouses will rise from today’s frenzied competition to replace those that struggle with the transition. Mergers will help the winners get bigger and consolidate their share of the market as a defense against the next disruptive force that comes over the horizon.
But this level of transformation is years down the road. In the meantime, the SaaS market is expected to keep rapidly expanding and generating attractive revenue and earnings growth. As investors, we see the large drop in share prices as making valuations more attractive for top performers in that sector.
5. Private credit’s scare is an issue of liquidity not quality, as fundamentals remain solid for the broader industry.
Private credit has attracted a negative spotlight over concerns about future repayment issues on loans to software and other companies whose businesses may be especially vulnerable to AI disruption. Some big private-credit funds appear troubled by eroding enterprise value of some borrowers, particularly in the software space, but we think media coverage is exaggerating the risks to the broader industry. Fundamentals remain solid for private credit, making us comfortable to maintain our specific exposure given its attractive return profile and diversification benefits.
A little background: Private credit is a catch-all term used to describe non-bank financial institutions lending to corporate borrowers. Compared to public instruments like corporate bonds or Treasurys, private-credit vehicles typically offer investors higher returns in exchange for a longer investment commitment.
The industry has been around for many years, but its rapid growth began after the 2008 global financial crisis as banks tightened their lending practices to meet new regulations. The new rules did not snuff out loan demand – with banks sidelined, asset managers and other non-bank lenders entered the market. Early on, borrowers were typically considered higher credit risks but over time the industry has evolved: Now, many seeking loans are higher-credit-quality companies that seek more certainty of approval and faster closing times than banks can provide. Private credit has grown to become a $2 trillion industry.
Software companies account for an estimated 20% to 25% of outstanding loans by the largest private-credit funds – for most of those funds, it is the largest sector exposure and now the largest source of investor angst. AI’s perceived threat to software, which we discussed earlier in this report, prompted some nervous investors to seek an exit from their positions in some private-credit funds only to find out that they could not totally cash out due to redemption limits.
The lack of full redemption on demand has fed a media narrative that investors’ money is wrongfully “trapped,” but liquidity limits are intentional and an important feature for private-credit funds. The structure is designed to protect long-term investors by avoiding forced sales of illiquid loans. Some private-credit funds are set up in a way that allows their investors to come and go as they please, similar to the daily liquidity of mutual funds or ETFs. These funds have been the ones most damaged by the current turmoil because of fears that they will be forced to sell assets at discount prices to meet redemptions. Altair has purposefully avoided these funds in our private-credit portfolios because of the dangerous mismatch between long-term assets and short-term liabilities.
Private credit is now facing its first big test as an asset class. It is possible that some funds will have to take eventual writedowns on some of their loans – not just in software but across any sector vulnerable to disruption by emerging AI capabilities – if we see a broad-based deterioration in the economy. And some funds may face losses because they relaxed their lending standards in order to compete in an increasingly competitive market.
But we think the industry as a whole will pass the test. Loan quality appears to be good and many borrowers are owned by private-equity firms that we believe will provide a financial backstop if needed. Defaults in 2025 were up slightly from the previous year but are still well below their long-term average. We think a resilient U.S. economy will continue to support growing revenue and earnings that will enable companies to service their debt. The term of private-credit loans is typically about three years, which improves cash flow visibility and there is usually no interest rate risk because the loans are usually at a floating rate.
We like the private-credit managers we have rigorously selected – they are predominantly “first lien” in the capital structure, meaning they are usually the first lenders paid back if things happen to go bad. Private credit, in our view, is a sustainable asset class that provides attractive returns and diversification benefits for long-term investors.
Our Outlook:
- Our base case is that the Iran War will not evolve into a prolonged conflict that significantly drags down asset markets or derails global economic growth in 2026. Even under this scenario, energy prices are likely to remain elevated after the conflict ends while supply-related issues in the Middle East are addressed.
- The rise in energy prices that has pushed inflation to its highest level in nearly two years will likely prompt the Federal Reserve to keep short-term interest rates steady for the next several months. At this point, we envision one rate cut in the latter part of the year.
- The AI growth story will continue to be a main contributor to economic expansion in the U.S. and other countries, most notably in East Asia. Tax-related provisions of the One Big Beautiful Bill Act for U.S. consumers and businesses will add momentum to GDP growth in 2026.
- Strong revenue and earnings growth expectations will be a key driver of U.S. stock performance. For full-year 2026, revenue growth is predicted to be 9% above that of 2025, according to analysts surveyed by FactSet, while this year’s earnings growth is expected to come in at close to 18% above the previous 12 months.
- Earnings growth this year also stands to be a positive catalyst for international stocks. Non-U.S. developed markets are forecasted to see earnings growth just under 12%, according to FactSet’s analyst survey, while emerging markets are expected to see 41% earnings growth this year, in large part due to the AI buildout.
Quotes of the Quarter
- “Had we not had this war, we were on the way to upgrading our (global GDP) growth projections for 2026. And now, given the impact of the war, we are going to downgrade them.” — Kristalina Georgieva, IMF Managing Director
- “Iran is no longer an abstract, far away foreign-policy problem. It is a pocketbook problem, and that’s something voters understand.” — Colin Dueck, Fellow at the American Enterprise Institute
- “I have no intention of leaving the (Federal Reserve) board until the (Department of Justice) investigation is well and truly over, with transparency and finality. — Jerome Powell, Chairman of the Federal Reserve
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The Closed-End Fund Blended Benchmark consists of 60% First Trust Equity Closed-End Fund TR USD Index, 20% Invesco CEF Income Composite ETF, and 20% VanEck Vectors CEF Municipal Income ETF.
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