Weekly Investment Perspective

U.S. equity markets remained under pressure last week and are opening this week on uneasy footing as the conflict with Iran continues to escalate. Oil prices started the week above $100/barrel, a 50% increase since the end of February, but fell back below $90/barrel following optimistic comments from President Trump that he believes the war with Iran could wind down quicker than expected, though not much has changed on the ground.

It is an uncomfortable setup for markets: energy prices are spiking, the labor market data has softened, bond yields have moved higher on inflation concerns, and fresh headlines around private credit redemptions are adding to investor unease. Last week, the Dow Jones Industrial Average fell 3.0%, the S&P 500 declined 2.0%, and the Nasdaq Composite lost 1.2%, while the small-cap Russell 2000 dropped 4.1%. Treasury bonds also sold off, with the 10-year U.S. Treasury yield rising to 4.14% by Friday, while the U.S. dollar posted its strongest weekly gain since August. Even with last week’s pullback, mid-cap, small-cap, and international equities remain among the better-performing areas of the market on a year-to-date basis.

The primary driver of last week’s volatility was the widening conflict in Iran and the growing disruption to global energy flows. The Strait of Hormuz is effectively closed, amplifying fears around production shut-ins across the Gulf. According to the Wall Street Journal, only a handful of ships have made it through the Strait, while over a thousand are stranded. Over the weekend, Iranian state media reported that Mojtaba Khamenei, son of the late Ali Khamenei, has been appointed supreme leader, a development that appears to reduce the odds of a swift diplomatic off-ramp and raises the risk of a more prolonged conflict. Even so, we would still frame this first and foremost as an inflation and rates shock rather than a clear sign of an imminent global growth collapse.

Friday’s February jobs report added to investor anxiety, showing a decline of 92,000 non-farm payrolls and a rise in the unemployment rate to 4.4%. The report was unambiguously weak, but we would caution against overreacting to a single month’s data. As Oxford Economics noted, February was distorted by temporary factors including weather effects and a California healthcare strike, which should reverse in the months ahead. The broader labor trend is clearly softer, but likely not quite as bad as the headline suggests. Wage growth also remained firm at 0.4% month-over-month and 3.8% year-over-year, continuing to support household income growth in real terms.

One important counterweight came from the ISM surveys. Manufacturing remained in expansion at 52.4, while ISM services rose to 56.1, its highest level since August 2022. Those readings suggest that parts of the economy are still showing resilience even as employment growth slows. At the same time, the jump in prices paid and the renewed rise in energy costs complicate the inflation picture and help explain why bond yields backed up last week instead of rallying on weaker payrolls.

That backdrop has also shifted expectations for Federal Reserve policy. Markets have materially reduced the amount of easing priced in for this year as investors reassess the inflationary impact of higher oil prices and broader geopolitical risk. Fed speakers struck a wait‑and‑see tone, emphasizing the need to assess energy‑price pass‑through and the evolving labor picture. Meanwhile, the probability of two or more rate cuts in 2026 has fallen to 46% compared to roughly 75% a month ago, according to data from CME Fedwatch. In practical terms, this means the bar for near-term rate cuts has risen, even as the labor market shows signs of strain.

Another developing watchpoint is private credit. Alongside the geopolitical and macro headlines, markets also saw renewed concerns around redemptions and gating in parts of the private credit universe. This is not yet a systemic event, but it is worth monitoring closely because tighter credit availability can become an additional headwind for economically sensitive businesses and smaller companies if stress spreads further.

The main takeaway is that this is a challenging and headline-driven environment, but not one that calls for panic and reactive portfolio changes. We are closely watching three swing factors in the weeks ahead: first, the duration and severity of energy supply disruptions in the Middle East; second, whether labor market weakness extends beyond temporary February distortions; and third, whether stress in private credit begins to feed more meaningfully into broader financial conditions. While near-term volatility is likely to persist, we believe investors who remain diversified and disciplined with a long-term perspective will be best positioned to navigate turbulent markets.

This week, investors will be watching inflation data, jobless claims, small business sentiment, housing data, and Treasury supply, all against a backdrop of continued sensitivity to energy prices and geopolitical headlines. After last week’s market repricing, incoming inflation data may take on even greater importance as investors try to determine whether this latest oil shock will prove temporary or more persistent.

2026 The Long View | First Merchants Bank