Weekly Investment Perspective

U.S. equities moved lower again last week as investors contended with a difficult mix of geopolitical risk, tighter financial conditions, and softer economic data. For the week, the S&P 500 fell 1.6%, the Dow Jones Industrial Average dropped 2.0%, the Nasdaq Composite lost 1.3%, and the Russell 2000 declined 1.8%. The war in Iran remained the dominant market driver, with the closure of the Strait of Hormuz and broader disruption to Persian Gulf energy flows pushing WTI crude up another 8.2% on the week and leaving prices up more than 47% since the conflict began. At the same time, Treasury yields moved higher as investors pared back expectations for Fed easing amid rising inflation concerns, while headlines around private credit added another layer of unease. Over the weekend, however, markets appeared to find some footing after U.S. officials said the Trump Administration is preparing to announce a coalition of countries to help escort ships through the Strait, which may help stabilize sentiment to start the week even though there are still no clear signs of de-escalation.

The biggest question for markets remains whether the Iran conflict proves more prolonged than initially expected. Thus far, Tehran appears intent on pressing its leverage through the Strait of Hormuz rather than backing down quickly, and recent reports suggest U.S. officials privately expect fighting to last weeks or longer. The Administration is now shifting toward a more coordinated international effort to reopen the waterway, but details remain sparse and some reports indicate escorts may not begin until active fighting has subsided. That helps explain why oil markets remain on edge near $100 per barrel despite policy efforts such as reserve releases and shipping waivers. While markets have largely followed the historical playbook of geopolitical shocks so far, the risk of a longer disruption to energy flows would raise the odds of additional inflation pressure and a broader drag on global growth.

Another area drawing greater scrutiny is private credit. Last week brought several more signs of stress, including J.P. Morgan marking down some software-related loans held by private credit groups and restricting additional lending to the funds holding those loans. Morgan Stanley and Cliffwater became the latest among a growing list of asset managers to restrict redemptions from private credit funds amid surging withdrawal requests. These developments are worth monitoring because tighter conditions in private credit can spill over into banks, lower-quality credit markets, and broader financial conditions. That said, the size and structure of the market still suggest this is more likely to be a contained source of stress than a systemic threat. In our view, the episode reinforces the importance of discipline in fixed income positioning. With spreads still tight in many areas of credit, we continue to favor high-quality bonds over reaching for yield in more speculative parts of the market.

On the economic front, last week’s data reinforced a stagflationary tilt, though it understandably took a back seat to geopolitical headlines. February CPI was in-line with expectations coming in at 2.4% year-over-year, but the data already seems stale in light of the recent surge in oil prices. The Fed’s preferred inflation reading, core PCE, rose 3.1% year-over-year in January, keeping inflation firmer than the Fed would like. Meanwhile, fourth-quarter GDP was revised sharply lower to just 0.7% from 1.4%. Consumer spending and business fixed investment were both marked down, which is an indication of the negative disruption from recent government shutdowns. The overall message was one of weaker growth alongside upside risk to inflation that was previously moderating but stuck above target. That combination helps explain why bond markets remain volatile and why the Fed is unlikely to offer much reassurance in the near term.

Looking ahead, this week’s FOMC meeting will be a key focal point. The Fed is widely expected to leave rates unchanged, but investors will be watching closely for any signal that officials are becoming more concerned about the inflationary impact of higher energy prices and the softer growth backdrop. Updated economic projections are expected to show higher inflation, slower GDP growth, and somewhat higher unemployment. Beyond the Fed, Nvidia’s GTC (GPU Technology Conference) will be another closely watched event as investors get a glimpse at the future AI roadmap from the leading advanced chip developer powering the data center infrastructure boom. Corporate efficiency efforts are also back in focus, with Meta Platforms becoming the latest large enterprise to announce a significant headcount reduction, potentially impacting up to 20% of its workforce. That joins recent reports from companies like Amazon and Oracle who are also looking for efficiency gains and operating cost savings as they massively ramp up capital investment in AI infrastructure in the year ahead.

2026 The Long View | First Merchants Bank