March Madness
College basketball March Madness begins this week. Picking the winners in each division can sometimes be little better than chance due to unexpected outcomes. Uncertainty has increased on the investing front as well as last year’s stock market winners, the Magnificent Seven stocks, are all lower this year and underperforming the S&P 500 Index in the aggregate. The Magnificent 7 stocks are down over 6% as a group, while the S&P 500 is down less than 2% year to date. The underdog sectors have actually come on strongly this year. Six sectors of the S&P 500 Index are in positive territory through mid-March, including Energy, Utilities, Consumer Staples, Industrials, Materials and Real Estate. Three sectors, including Energy at the top, are up 10% or more year to date. This comes after the S&P 500 has been trading near all-time highs recently and after three strong years of market returns. Considering the energy shocks we have experienced during the past few weeks, markets have been remarkably resilient so far and corporate earnings have held up as well.
An Interest Rate Cut Is Not a Layup
Considering the turmoil in energy markets and geopolitical uncertainty, all eyes will be on the Federal Reserve’s Open Market Committee, which sets interest rate policy and concludes its meetings today. The Fed is widely expected to leave the Fed Funds rate range unchanged at 3.5-3.75%. However, some voting members may offer a “dovish dissent” in favor of a quarter point interest rate cut rather than holding steady. The statement to be released this afternoon by the Fed is not expected to change much in terms of the economic assessment or forward guidance. However, it is expected to include a new mention of the conflict in the Middle East with heightened uncertainty for the US economic outlook and near-term risks related to upward pressure on inflation and slower economic activity. The March FOMC meeting will feature an updated summary of economic projections as well. We will probably see upward revisions to headline and core inflation for 2026 on the back of higher oil prices. Any other changes to 2026 are expected to be fairly minimal, including the two-sided risk surrounding the growth outlook, with AI investment being a slight tailwind and energy and supply chain issues as a slight headwind.
Most expectations are for the the Fed’s 2026 median interest rate goal to remain at 3.375%. While the market was pricing in more than two rate cuts for 2026 last month, it is currently pricing in only a quarter point cut later in the year. The 2027 and 2028 median expectations are also expected to remain unchanged at 3.125%, although there is the possibility of an uptick in long-run rate expectations. In terms of Powell’s press conference, the second last one of his term, the market seems most interested in how he frames the risks from the conflict in the Middle East. However, he is expected to focus more on the overall uncertainty backdrop and may avoid any major new signals on policy. When it comes to other factors that could put a dovish or hawkish spin around the press conference, Powell’s take on the weak February employment report and the extent to which he mentions tariffs as an inflation driver are possibilities.
An Earnings Double-Double
According to the latest corporate earnings estimates, S&P 500 earnings growth is expected to come in at +11.6% in the first quarter following the +14.1% recorded for the fourth quarter of 2025. This would mark six straight quarters of double-digit earnings growth. Eight of eleven sectors are expected to post year-over-year earnings growth in the first quarter, led by Technology, Materials, and Financials. Heading into fourth quarter earnings season last year, eight of eleven sectors were expected to post earnings growth, though all sectors ultimately delivered an increase.
Earnings will be a key area of focus when it comes to propping up the market in the face of elevated geopolitical uncertainty and above-average equity valuations. The fundamental backdrop going into the Middle East conflict was relatively healthy. In the near-term, the AI investment boom and U.S. Government fiscal support should continue to offset an earnings drag from modestly weaker economic activity resulting from the increase in energy costs. Navigating higher energy input prices and some supply chain disruptions successfully will be key to how earnings stack up for the year. For example, several airlines noted yesterday that flight bookings are strong due to robust demand for travel, although this may be in part due to anticipation of higher fares ahead.
Year to date, the S&P 500 is down about 1.8% while the equal weighted index is up about 1.6%, highlighting a broadening of investor interest in sectors beyond just technology. The S&P 500 is dominated by larger capitalization technology companies that have mostly lagged this year while the tech-heavy Nasdaq index is now down about 3%. Meanwhile, the 10-year treasury yield had been trending lower as U.S. Treasury demand remained strong due to safe-haven buying, but hovers around 4.2% currently. While volatility will persist and uncertainty is high due to the Middle East conflict and its potential duration, geopolitical events have historically had limited longer-term impact on U.S. financial markets or the economy. Through St. Patrick’s Day yesterday, equity markets started the week in the green, although the wholesale inflation report could reverse that.
Singer Adam Levine turns 47 today, Queen Latifah turns 56, and Vanessa Williams turns 63.
Christopher Crooks, CFA®, CFP® 610-260-2219