The Certuity Q2 2026 Economic & Market Outlook

“Every picture tells a story, don’t it?”

By Scott Welch, CIMA®, CEPA®, Chief Investment Officer & Partner

Reviewed by Carter Mecham, CMA®, IACCP®

When 2026 began, there was remarkable complacency within the US economy and investment markets. The economy was not necessarily robust but was chugging along, stocks reached an all-time high in late January, and the bond market was behaving. Inflation continued to trend in the right direction (though remaining stubbornly above the Fed’s target 2% annualized rate), and the labor market was proving to be resilient.

And then everything changed. The US is now at war with Iran (declared or not) and, with war, no matter what you think going in, you have no idea how things are going to turn out.

Or, as boxer Mike Tyson famously said, “Everybody has a plan until they get punched in the face.”

We will do our best to decipher the current state of affairs but, ultimately, the answer to where we go from here is a completely unsatisfying, “It depends.” The shorter the duration of the war the less long-term impact it is likely to have. The longer it goes on the more uncertainty needs to be priced into the economy and the markets.

President Trump has every incentive to end the war quickly – the longer it goes on the more likely public sentiment will turn against it, especially if more war fighters are killed or wounded. This could have profound effects on the mid-term elections in November and, therefore, the potential “lame ducking” of his last two years in office.

Iran, on the other hand, has every incentive to extend the war as long as possible, at least politically if not in terms of human suffering or infrastructural damage.

Iran knows full well the lesson the Americans learned in the Revolutionary war and North Viet Nam learned in the Viet Nam war. And what every invader into Afghanistan has learned to their regret.

If it is your country that is being invaded, you don’t have to win – you just have to not lose. Because eventually the human, political, and financial cost of continuing the war will become too great and the invading army will leave. 

When reviewing the current state of the global economy and investment markets, we always recommend focusing on market signals and weeding out market noise. We believe the five primary economic and market signals that provide perspective on where we go from here are GDP growth, earnings, interest rates, inflation, and central bank policy. 

This is not to dismiss national, political, or geopolitical issues. But these are “known unknowns” – we are aware of them but have no way to forecast how they will turn out or what effects they will have (or not) on the economy and investment markets. This is most especially true when talking about war. The expression “fog of war” exists for a reason.

With this as the backdrop, let’s “drop in” on where we stand and where we might go from here. 

Interest Rates

Let’s start with the yield curve (i.e., interest rates), specifically the shape of the curve as illustrated by the closely watched 10-year / 2-year spread (10s/2s).

Perhaps somewhat unexpectedly, after an initial “flight to quality” rally, 10-year yields have crept up to a level not seen since August of last year. Similarly, the 2-year rate has risen sharply since the onset of the war.

One interpretation of this is that, after pricing in two rate cuts from the Fed at the beginning of the year, the market has now backed off that and is pricing in perhaps no rate cuts. 

At the same time, the long end is climbing as the market begins to price in rising inflation if the war continues longer than expected. The overall result is a general flattening of the yield curve.

Source: Ycharts, 12-month data through April 2, 2026. You cannot invest in an index and past performance is no guarantee of future results.

At the same time, the bond market does not yet seem overly concerned with global events, as illustrated by generally declining bond market volatility, as measured by the MOVE index. After spiking immediately after the war began, it has drifted steadily downward since then.

Source: Yahoo!Finance, 6-month date through April 2, 2026. The MOVE index tracks the implied volatility in US Treasury yields using one-month options on 2-year, 5-year, 10-year, and 30-year Treasuries. You cannot invest in an index and past performance is no guarantee of future results.

As will be a common theme in this blog, the answer to where we go from here on rates is, “It depends.”

From an investment perspective, the flattening of the curve suggests there is no real advantage in taking on excessive duration risk within the fixed income portfolio.

More speculative traders have taken long positions in the long end of the curve in the expectation that currently elevated yields will fall as the conflict in Iran winds down.

This translates into taking a barbell approach within the portfolio, balancing short and longer exposure to achieve the desired yield and total return objectives.

Central Bank Policy

The first thing we will say is that we would not want Kevin Warsh’s job if, as expected, he steps into the Fed Chair role in May.

We can envision four potential economic scenarios resulting from the war:

Scenario One: The war ends fairly quickly and has no long-term impact on the US economy or inflation. This would obviously be the best-case scenario.

Scenario Two: The war drags on longer than expected and higher global oil prices begin to drive up inflation. This might suggest that the Fed’s best course of action would be to tighten rates in order to avoid the run-away oil shock inflation we saw in the 1970s and early 1980s.

Scenario Three: The war drags on longer than expected and higher global oil prices begin to create a drag on economic growth. This might suggest that the Fed’s best course of action would be to cut rates in order to stimulate economic growth.

Scenario Four: The war drags on longer than expected and higher global oil prices begin to create both higher inflation and slower economic growth. In other words, this scenario might lead to the situation that dares not speak its name – stagflation. 

This is obviously the worst possible outcome and would leave the Fed and newly appointed Chair Warsh between a rock and a hard place. 

It obviously is too soon to know which way this will turn out, but the market makes its living trading its opinion.

If we examine the path of the Fed Funds Futures market, we see a dramatic change of opinion since the beginning of the war – the market has moved from anticipating 2-3 rates in 2026 to perhaps 0-1.

Source: Atlanta Fed “Market Probability Tracker,” as of March 31, 2026. These are estimates and subject to change as additional data come in.

Source: The Daily Shot, as of April 1, 2026. These are estimates and subject to change as additional data come in.

Source: Polymarket, as of April 2, 2026. Polymarket is a “betting market” estimate and these results will change as additional data come in.

So, what will the Fed do over the remainder of 2026? You guessed it – “It depends.”

Unemployment

Whatever impact the war will ultimately have on the US labor market has not shown up yet in the official numbers. In fact, there is some indication that the job market may actually be expanding. 

First, let’s look at the most recent unemployment rate (U-3) and partially employed rate (U-6). The headline U-3 rate remains well below 5% – historically, the level considered “full” employment for the US economy. The gap in chart below reflects the lack of data during the government shutdown last fall.

Source: St. Louis Fed (FRED), 5-year data through February 2026.

Next, let’s look at some of the “numbers behind the number,” specifically job openings, hires and quits. The quits rate is interesting because it is an indication of how confident employees are that they can find better work elsewhere if they leave their current positions.

What we see is a gently downward sloping but generally stable situation in all three metrics.

Source: St. Louis Fed (FRED), 5-year data through January 2026.

In another positive sign, the jobless claims numbers remain resilient. These are the most contemporaneous labor metrics we have, as they come out weekly. So, any notable change in labor market conditions will appear here first. 

Both metrics have shown remarkable stability over the past three years.

We use the 4-week moving averages of these numbers to smooth out the weekly volatility.

Source: St. Louis Fed (FRED), data through March 28, 2026.

Finally, another contemporaneous labor report is the ADP Private Employment Report, the most recent of which was released on April 1, 2026. It showed a month-over-month increase in jobs of 62,000, concentrated mostly in small businesses, which we view as positive since small companies (companies with less than 500 employees) employ almost 50% of all US workers.

Source: ADP National Employment Report, as of April 1, 2026.

Again, it is too soon to know what, if any, effect the war will have on the overall US economy and therefore employment. Likewise, it is too soon to know exactly how disruptive artificial intelligence (AI) will be on the US labor market.

But, based on the information we currently have, labor in the US appears to be in pretty solid shape.

Inflation

Using the most current information available at the headline level, inflation is continuing to trend in the right direction but remains stubbornly above the Fed’s targeted rate of 2% annually.

Source: The St. Louis Fed (FRED), through January 2026.

But here is where it gets interesting. Four weeks into the war, oil prices skyrocketed to more than $100 per barrel. Both Brent crude (a proxy for non-US produced oil) and WTI (West Texas Intermediate – a proxy for US-produced oil prices) are trading near $110 per barrel.

The US is largely energy independent, so we are slightly insulated from what is happening in the Strait of Hormuz, through which roughly 20% of the world’s oil supply flows. Europe and especially Asia are much more impacted as they are much more dependent on Middle Eastern oil.

Oil, however, trades on a global market so we certainly are not immune to rising oil prices.

Source for both charts: The Daily Shot, as of April 1, 2026. You cannot invest in an index and past performance is no guarantee of future results.

The result has been a sharp spike in US gasoline prices, now averaging over $4 per gallon nationally.

Source: AAA and The Wall Street Journal, as of April 1, 2026.

In addition to oil, the shutting of the Strait of Hormuz also dramatically affects the price of natural gas, urea (necessary for fertilizer), helium (necessary for semi-conductor chip production), and other essential natural resources. Increased prices in these resources pose a fundamental threat to global inflation.

This has potential impact both economically and politically. The longer the war goes on, the more likely inflation will stay high or go higher, or that the economy will begin to falter, or both. 

This will increasingly disenchant US consumers (and voters) as we head into the midterm elections.
So, as with almost everything, the answer to where do go from here with respect to inflation is, “It depends.”

Economic Growth

The current median Q1 GDP forecast is 2.1%, with 2-3 outlier forecasts skewed to the upside This represents solid, if not robust growth but, again, these forecasts were made before any long-term effects of the war worked their way through the economy.

Source: The Capital Spectator, as of March 30, 2026. These are estimates and will change as additional data come in.

Estimates for economic growth and inflation outside the US are muted but positive, and in line with historical averages. This may (probably will) change based on the length and severity of the war.

Source: BNP Paribas, as of March 30, 2026. There is no guarantee that any projection, forecast, or opinion will be realized. Actual results may vary.

We won’t bore the reader by repeating ourselves, but you know the answer to the question of where we might go from here. All together now…

Equity Market Performance, Earnings, and Valuations

Equity performance so far in 2026 has been “a tale of two markets” – before and after the war began.

Through January, we saw a generally rising market combined with a definite broadening out of market performance away from just the mega-cap tech stocks.

Source: Ycharts, data from January 2 – January 27, 2026. You cannot invest in an index and past performance is no guarantee of future results.

Since the market high in late January – and accelerated by the war – we’ve seen markets go more or less straight down.

Source: Ycharts, data from January 27 – April 2, 2026. You cannot invest in an index and past performance is no guarantee of future results.

Smaller cap stocks have maintained their outperformance over large cap stocks.

Source: Ycharts, YTD through April 2, 2026. You cannot invest in an index and past performance is no guarantee of future results.

We see comparable results in factor performance. YTD, quality, value, and dividends have maintained their outperformance over growth and momentum.

Source: Ycharts, YTD through April 2, 2026. You cannot invest in an index and past performance is no guarantee of future results.

Of course, short-term volatility in the markets has little effect on longer-term expected returns. 2026 expected returns remain positive, if diminished from 10-year historical averages.

Source: Capital Spectator, as of April 2, 2026. You cannot invest in an index and past performance is no guarantee of future results. “BB” stands for the Building Blocks model, “EQ” stands for the Equilibrium model, which is based on forecasts of the portfolio Sharpe ratio, volatility, and correlations,  and “ADJ” stands for the Adjusted model, which is the same as the EQ model but adjusted for short-term momentum and longer-term mean reversion factors. All approaches are projections based on defined inputs and so subject to revision and input assumption errors.

The longer the war goes on, the higher potential there is for performance estimates to decline, especially outside the US.

Despite the war, Q1 earnings estimates for the S&P 500 have actually improved, though expected to decline slightly from Q4 2025. Current estimates are for a 12.8% increase in earnings on 8.8% revenue growth.

Earnings are then expected to accelerate as we move the remainder of 2026, driven by anticipated AI-catalyzed productivity gains, depending on the duration and severity of the war.

Source: Zacks Investment Research, as of March 25, 2026. Green bars are earnings and orange bars are revenues. Solid bars are actual results, while hatched bars are estimates and, therefore, subject to change.

Outside the US, earnings growth estimates remain positive though obviously subject to change. India, in particular, has been hard by the war, given its proximity to Iran and its dependence on Middle East oil.

Source: The State Street Global Advisors ETF Chart Pack as of March 2026. These are estimates and subject to change. You cannot invest in an index and past performance is no guarantee of future results.

The general decline in global markets has brought valuations in most regions from their elevated levels back down closer to historical averages (ex-the US, which remains elevated relative to its historical average).

Source: JP Morgan “Guide to the Markets,” as of March 31, 2026. You cannot invest in an index and past performance is no guarantee of future results.

Within the US, the mega-cap tech stock valuations have fallen back down to earth but remain elevated relative to the rest of the US stock market.

Source: Yardeni Research, as of March 31, 2026. You cannot invest in an index and past performance is no guarantee of future results.

If we dive a little deeper into valuations, we notice several things.

1. Despite the decline, the mega-cap tech stocks continue to distort the overall valuation of the S&P 500 index.

2. Despite their recent outperformance, smaller cap, value, and non-US stocks still appear to be more reasonably priced than large cap US stocks.

Source for the previous three charts: Yardeni Research, data through March 31, 2026. You cannot invest in an index and past performance is no guarantee of future results.

While we are long-time advocates of global diversification and investing outside the US – a position we still maintain – one thing to keep an eye on is the direction of the US dollar. 

After falling continuously over most of 2025 (providing a tailwind to non-US investments), the dollar has rebounded sharply so far in 2026, especially after the war started, in a flight to quality trade. This, of course, provides a headwind to non-US investments for US investors.

Source: Ycharts, 12-month data through April 2, 2026. You cannot invest in an index and past performance is no guarantee of future results.

Interest Rates and Spreads

We discussed the level and shape of the curve above, but what about credit spreads?

Not surprisingly, we’ve seen a rise in high yield spreads as a “risk off” mentality takes hold while the war continues, but overall spreads remain tight by historical standards.

Source: Ycharts, 5-year data as of April 3, 2026. You cannot invest in an index and past performance is no guarantee of future results.

Investors still are not pricing in any particular concern over rising delinquency and default rates, but that may change if the war is extended and the economy begins to taper off.

Alternatives and Private Markets

Hedge funds and other diversifying strategies historically have performed best in market regimes characterized by rising interest rates and elevated volatility – which we suggest is the exact market environment we are in right now.

We believe the inclusion of lower-correlated strategies will benefit investors as we move through the next phase of the market cycle.

Throughout 2025, diversifying strategies performed “as advertised” – delivering consistent performance with lower volatility than the equity markets.

Source: FEG Market Summary, through December 2025. You cannot invest in an index and past performance is no guarantee of future results.

These strategies fell off slightly in Q1 2026 as the market whipsawed quickly once the war began, but we still believe they will play an increasingly significant role in portfolio diversification as we move forward through the year.

For those investors who cannot or do not want to build a diversified portfolio strategy by strategy, we believe diversified multi-strategy funds are an excellent alternative.

You cannot discuss private markets right now without discussing the ongoing investor “panic” within private credit. When Anthropic came out with an AI agent that could seemingly replace many of the legal services provided by historical “Software as a Service” (SaaS) firms, the market quickly panicked and assumed that all SaaS firms are now at risk, and the private credit industry as a whole lends heavily into that space.

Retail investors quickly “ran for the door” and piled lending firms with redemption requests that far exceeded the traditional 5% quarterly redemption gate characteristic of most interval funds. Firms had to decide to exceed that 5% gate or hold tight, and different lenders chose different courses of action.

The media quickly grabbed hold and a certain level of “chicken little – the sky is falling” mentality rocked the industry. We are still in the midst of this, though the war knocked at least a little of the attention off this story.

A detailed commentary on this topic is beyond the scope of this blog, though we’ve addressed it in previous blogs. For now, let us just state that our position is that we believe we will see some shake up in the industry as rising rates and forced redemptions may cause temporary disruption in the market.

But, while we may not have seen the bottom yet, we believe the story is somewhat overblown. For most investors invested with quality managers, depending on their personal liquidity and risk tolerance profiles and objectives, we believe the appropriate course of action is to be patient and “ride out the storm.”

Summary and Interpretation

When focusing on what we believe are the primary economic and market signals, the current “condition our condition is in” is highly uncertain. On one level, the economy continues to chug along, and inflation and the labor markets have not reflected any significant adverse effect from the war – yet.

But, as indicated in the title of this blog, “It depends.” The length and severity of the war will determine a great deal as we move through 2026, and it simply is too soon to know how things will turn out. Hopefully, by the time we write the Q3 outlook we will have more clarity. 

To summarize our current investment views:

• US markets have reacted negatively to the war, but our relative geographic isolation and our energy independence have, at least somewhat, mitigated the war’s full impact. Europe, the Middle East, and Asia have been much more significantly impacted. Valuations have come down but still are not “cheap.” The positive news is that earnings – at least for now – are expected to continue to grow, and that will provide a buffer against potentially contracting multiples. That said, no matter which way the war moves, investors should not expect equity market returns similar to the robust ones of 2025.
• We still believe the total return potential for public fixed income is muted. We certainly prefer investment grade versus high yield bonds at this point in the economic cycle and with so much geopolitical uncertainty.
• Diversification, active management, and intelligent risk factor tilts should be rewarded versus passive management. 
• The private credit story is causing a great deal of investor anxiety, and we understand that. That said, the redemption gates are a feature, not a bug, of the Evergreen or interval fund structure. These vehicles invest in long-term assets that offer partial liquidity. This is by design, to allow the underlying assets to run their course and deliver their expected returns. In addition, the media is focused on a very particular sector of the space – Private Equity sponsored direct middle and upper market lending. While this is the dominant sector in the private credit ecosystem, it is by no means the only one. We believe we may not have seen the bottom yet, but we do believe the market will clear itself and the media mania will pass. 
• We still believe in private credit, but emphasize (a) manager selection matters, and (b) these are long-term investments and should not be considered immediate sources of liquidity by investors.

• Specific private equity segments – secondaries, energy infrastructure, sports investing, real estate, and GP stakes – seem to be continuing to offer more interesting opportunities than the traditional spaces of growth equity and M&A.

• We maintain an active search for multi-strategy hedge fund solutions, as we believe the market regime going forward is favorable for lower correlated and more diversifying strategies.

• As always with alternative and private market investments, manager selection is critical to longer-term success.

Our overall asset allocation guidelines can be summarized as follows – we are in a fairly “neutral” frame of mind right now.

Source: Certuity, as of March 31, 2026. Evaluations are subject to change as market conditions change. This is for illustration purposes only and does not represent investment advice. All evaluations are on a relative and not absolute basis. Copper = a negative relative evaluation; gray = a neutral relative evaluation; faded pine = a positive relative evaluation. You cannot invest in an index, and past performance is no guarantee of future results.

As philosophically strategic investors, we continue to recommend focusing on a longer-term time horizon and the construction of “all-weather” portfolios, diversified at both the asset class and risk factor levels. 

We hope you find this helpful and, as always, we welcome your feedback and questions.

---