Rough Winds Do Shake the Darling Buds of March
The year began with a constructive tone in equity markets, supported by continued economic growth and solid corporate earnings. That momentum was interrupted by a period of increased volatility late in the quarter, driven in part by the outbreak of war with Iran. The S&P 500, which was up approximately 2% at its peak in January, reversed course and declined nearly 9% by late March as investors reacted to rising uncertainty—another reminder of how quickly sentiment can shift in response to geopolitical events. For the full quarter, the S&P 500 declined 4.33%.
The conflict in Iran adds to an already complex global backdrop, with ongoing wars in Ukraine and Lebanon. As in prior periods of geopolitical tension, the United States has not been directly impacted. However, global energy markets have responded, with higher oil and gas prices likely to exert some upward pressure on inflation while also acting as a modest headwind to economic growth.
The ultimate path and duration of the current conflict remain uncertain. Geopolitical events are inherently difficult to predict, and their economic consequences can vary widely depending on how they evolve. At present, however, it does not appear that these developments are sufficient to derail the continued expansion of the U.S. economy. The Federal Reserve’s median projection for US GDP growth in 2026 is 2.3%, largely unchanged from earlier forecasts.
Turning to valuations, recent market declines combined with continued growth in corporate earnings have made equities more reasonably valued. The S&P 500 currently trades at approximately 29x trailing earnings, but closer to 22x forward earnings, as profits are expected to grow by roughly 32% in 2026. Some of this growth reflects a rebound from prior tariff-related pressures that weighed on corporate profitability last year. More broadly, it reflects the increasing adaptability of corporate management teams. After several years of navigating supply chain disruptions, inflationary pressures, and shifting demand patterns, companies have become more agile in responding to changing conditions.
A significant contributor to both GDP growth and corporate earnings is the substantial investment underway to build out infrastructure supporting artificial intelligence (AI). This is one of the largest capital investment cycles in decades, and its effects are already visible across multiple sectors.
The early winners of this cycle are relatively clear. Companies supplying the foundational infrastructure for AI—semiconductor manufacturers, producers of advanced chips, data center operators, server manufacturers, and semiconductor equipment providers—have seen strong demand. In addition, the buildout of data centers requires significant physical infrastructure, including power generation and electrical capacity, benefiting utilities, electrical contractors, and related industrial companies. These businesses are seeing both increased order volumes and improved pricing power as demand exceeds near-term supply.
Less clear, but equally important, are the emerging losers. AI has the potential to disrupt a wide range of existing business models, particularly those built around information processing, routine analysis, or content generation. Companies that fail to adapt may see pressure on revenues, margins, or long-term relevance. Entire categories of service-based businesses could face structural challenges as AI systems become more capable and cost-effective alternatives.
The impact extends beyond companies to the labor market. Certain job functions—particularly those that are repetitive or rules-based—may be increasingly automated, leading to workforce displacement in some areas. At the same time, new roles and industries will emerge, as has been the case with prior technological shifts. The net effect on employment and productivity will likely unfold gradually, but the transition may be uneven.
As with many transformative technologies, the long-term implications of AI remain uncertain. While the productivity benefits could be substantial, the timing and distribution of those gains are difficult to forecast. What is clear is that AI is driving a significant reallocation of capital, with meaningful implications for both economic growth and corporate profitability over time.
Subsequent to quarter-end, equity markets have rebounded and are once again trading near all-time highs. First quarter earnings reports have generally come in ahead of expectations, with a majority of companies exceeding analyst estimates. This strength in earnings, combined with a reduction in immediate concerns surrounding the conflict in Iran, has supported the recent recovery in market prices.
At Ironwood, our approach remains consistent. We do not invest based on macroeconomic forecasts or geopolitical predictions. Instead, we focus on identifying high-quality businesses with durable competitive advantages and on purchasing them at attractive valuations. We then allow management teams the time necessary to execute their strategies and create long-term shareholder value.
As always, we appreciate your continued confidence and support.
Sincerely,
