Q1 2026 Commentary and Investment Outlook
- Mar 31
- 4 min read
The U.S. economy entered 2026 with cautious optimism. The quarter started with a normalization of government operations following the disruptions in the previous period due to the shutdown. Delayed economic data was disseminated and the markets reacted to it with an abundance of caution, as initially it was viewed as old news. Against this backdrop, economic resilience persisted, underpinned by residual fiscal support and growing sentiment that the Federal Reserve would be more accommodative in the future. At the beginning of March, this all changed. The United States and Israel began a war with Iran and its proxies, creating a geopolitical issue that will have future ramifications on the economy, inflation, and interest rates. As the markets adjust to the ongoing conflict, rates have experienced volatility, and the forecast for future monetary policy has become unclear.
Federal Reserve Policy
The Federal Reserve halted its easing following three consecutive cuts delivered in the second half of 2025. The federal funds target rate range remained unchanged at 3.50%–3.75%, as policymakers emphasized patience while assessing inflation progress and labor market conditions. The Iran war started in early March, and Fed messaging indicated that it would be too early to know the impacts of the war but cautioned of downside risks to the economy. Participants emphasized “the importance of being nimble in adjusting the stance of policy in response to incoming data, the evolving outlook and the balance of risks.”[i]
Economic Conditions
Inflation continued to moderate during the quarter, though progress remained uneven. Headline CPI inflation drifted down to 2.4%, while core CPI inflation was 2.5% (mid-range), reflecting lingering shelter and services inflation.[ii] Core PCE inflation moved lower (2.97%) in February, but stayed above the Fed’s long‑run target, reinforcing the case for a cautious policy stance.[iii]
Labor market conditions softened modestly. Job growth slowed further from late‑2025 levels, with monthly payroll gains generally subdued. The unemployment rate edged higher but remained historically low at 4.4%. Wage growth decelerated into the mid‑3% range, helping ease inflation pressures while continuing to support real household incomes.[i]
GDP expanded at a more sustainable rate, driven primarily by consumer spending and services activity. However, aggregate consumer sentiment soured over the quarter as spending patterns continued to diverge across income demographics, reinforcing the uneven nature of the k-shaped recovery.
Fixed Income Markets
U.S. Treasury yields were volatile in the first quarter. Yields initially declined through the first two months as soft economic data and improving inflation data increased consensus that the Federal Reserve would cut rates sooner than expected as indicated by the 10-year Treasury yield falling below 4%. The trend reversed quickly in March following the conflict in Iran, which pushed oil prices sharply higher and changed market expectations that higher energy price inflation could delay Federal Reserve easing. As a result, yields rose across the curve, and long maturity Treasuries experienced significant price declines. Treasury returns were flat for the quarter.[ii] The shift up in the yield curve was very dramatic as noted in the chart below.
A similar scenario took place in credit spreads. Early quarter optimism about rate cuts and corporate fundamentals fueled tight spreads, then gave way to rising Treasury yields and a higher repricing of credit risk. Investment-grade spreads widened, but significantly less than high-yield. However, spreads still remained well below historical averages.
Investment Outlook
Looking ahead, the investment outlook remains attractive for fixed income, supported by attractive yields. With rate volatility elevated and yields expected to be range‑bound, returns should be increasingly driven by income rather than capital appreciation, favoring a neutral-duration stance. Credit remains generally sound as corporate balance sheets continue to be robust. Tighter historical spreads favor investment grade corporates over high-yield. As credit risk is repriced due to the macro picture, certain asset classes will experience more volatility due to their own fundamentals, such as the private credit market. Overall, high-grade traditional fixed income will play an increased role as a source of income, diversification, and lower volatility.
SWS Capital Management’s philosophy remains rooted in a value-oriented, active management approach that prioritizes liquidity, risk control, and disciplined security selection. Our strategies reflect a consistent framework, integrating interest rate forecasts with fundamental economic analysis to deliver long-term value.
SWS Capital Management, LLC
[i] Bureau of Labor Statistics
[ii] Bloomberg U.S. Treasury Index – 3/31/2026
Disclosure
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Past performance is no guarantee of future results, and the opinions presented cannot be viewed as an indicator of future performance. Investing involves risk including loss of principal. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.
