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A Message from Chief Investment Officer
Johara Farhadieh
Hello, and thank you for taking the time to read our first Quarterly Investor Letter of 2026.
Before turning to markets, I want to begin with something more human. In this quarter’s letter, you will hear a lot about the economic and investment implications surrounding the ongoing war in Iran. But we know this conflict is not just a market event or headline. It carries real consequences for the people, families and communities who are grappling with fear and loss and deep uncertainty.
Moments like this remind me how closely intertwined markets and real life truly are. It is impossible to separate portfolio discussions from the reality that global events affect human lives first. At the same time, I know many of you are asking thoughtful and understandable questions about what this conflict means for your organizations, your missions and your long-term financial stewardship.
That is where our responsibility comes into focus. Our role is not to react emotionally to every headline, but to approach uncertainty with discipline and preparation. We build portfolios with the expectation that shocks will occur, and we rely on diversification, scenario analysis and rigorous research to guide decisions when the world feels unsettled. And when near-term events evolve into longer-term shifts and dislocations, we seek to adapt by identifying the opportunities and risks most relevant to your portfolios. This is all part of our process and what we are trying to do on a daily and long-term basis, on behalf of our investors.
The pages that follow provide more detail and context. I hope they will offer some clarity and perspective on the current geopolitical environment, and the many other forces shaping markets today. As always, we remain engaged, prepared and focused on supporting you with care during a difficult and uncertain moment.
Thank you for your trust and partnership.
Key Takeaways from Q1
• War in Iran: Mounting geopolitical tensions in the Middle East escalated into open conflict in Iran on February 28, following a series of coordinated U.S.-Israeli strikes and subsequent retaliatory actions, drawing in neighboring actors and raising concerns about stability in the region. This rapid escalation dominated global headlines and heightened geopolitical uncertainty around the world.
• GDP: U.S. GDP growth came in at 0.7% for the fourth quarter and 2.1% for full-year 2025. This was below the pace of 2024’s 2.8% growth rate, with Q4 results also coming in below consensus estimates due to the prolonged government shutdown. As of late March, consensus estimates for U.S. GDP in 2026 called for 2.4% growth, up 26% from where estimates stood at year-end.
• Inflation: February’s inflation data showed a modest 0.3% uptick from January, with year-over-year results indicating a 2.4% increase, the lowest level since May 2025. While this inflation backdrop was largely benign, the onset of the Iran war has driven energy prices sharply higher, reigniting supply-side inflationary pressures.
• Jobs: The latest U.S. employment figures were weaker than anticipated, with an estimated 92,000 jobs lost in February, per the Bureau of Labor Statistics. The unemployment rate rose to 4.4%. Though the February report was impacted by seasonality and labor strikes, the overall employment picture remains softer. The U.S. gained just 181,000 jobs in 2025, its weakest result outside of a recession year since 2003.
• The Fed: The U.S. Federal Reserve (Fed) met twice in the first quarter, keeping the federal funds rate at a range between 3.50% and 3.75%. Interest rate expectations have shifted dramatically from the beginning of the year, when multiple cuts in 2026 were expected. By the end of the quarter, markets were pricing in the Fed keeping interest rates steady in 2026.
• Stocks: The quarter was underpinned by an increase in dispersion and continued rotations in market leadership. The S&P 500 Index declined 4.3% in Q1, while international equities, as measured by the MSCI ACWI ex-U.S. Index, declined 0.7%. The Magnificent 7 stocks trailed the broader market, and the tech-heavy NASDAQ fell nearly 7% in the quarter. Meanwhile, the Russell 2000 Index of small-cap stocks gained 0.9%. But these quarterly returns only tell part of the story, as small caps cooled down and international stocks lagged their U.S. counterparts in March, following the escalations in Iran.
• Bonds: The Bloomberg U.S. Aggregate Bond Index was nearly flat (-0.05%) in Q1. Bond volatility was a dominant theme in the quarter, particularly in March, where emerging market bonds lagged. The U.S. Treasury curve steepened, with longer-dated yields rising following the start of the war. U.S. commercial and residential mortgage-backed securities were relatively unscathed.
War in Iran Brings Geopolitical Risk to the Forefront
The first quarter of 2026 began with economic momentum broadly in line with expectations. U.S. growth remained resilient, inflation pressures were firm but manageable, and markets entered the year focused on familiar themes such as artificial intelligence, market concentration and expectations for easier financial conditions later in 2026. As the quarter progressed, however, tensions in the Middle East escalated into a multi-pronged war in Iran, and geopolitical risk quickly catapulted to become the dominant driver of market sentiment.
What followed was an interesting inflection: return patterns across asset classes and regions began to be reshaped. Markets moved from pricing growth and innovation to reassessing inflation risk, energy exposure and regional vulnerability. Volatility rose meaningfully, leadership broadened, and dispersion across sectors and geographies increased.
Economic Backdrop: Resilience Meets Renewed Inflation Risk
U.S. economic conditions remained broadly supportive through much of Q1. Consumer spending and services activity held up well, manufacturing showed signs of renewed expansion, and estimates for economic growth tracked ahead of earlier expectations. Still, inflation remaining above 2% and continued softness in the labor market kept monetary policy expectations generally balanced, even before geopolitical risks intensified.
That balance then shifted further as the war in Iran escalated throughout the quarter. Rising energy prices fed directly into global inflation concerns and complicated the interest-rate outlook. While the U.S. is relatively better positioned given its energy production and structural advantages, higher oil prices are felt around the world. Notably, Europe and parts of Asia will likely experience a more pronounced strain due to increased energy costs. As a result, markets moved away from confidence in near-term rate cuts toward a more uncertain policy path, reinforcing the difficulty of short-term forecasting in a fluid environment.
Equity Markets: Rotation, Volatility and Broader
Leadership
Equity markets began the quarter focused on familiar themes (AI, valuations, large-cap leadership, etc.), and overall returns were relatively muted through February, with some noticeable sector/style dispersion evident in the U.S. and international stocks outperforming their domestic counterparts.
Then, like the underlying economic picture, this backdrop evolved quickly in March as geopolitical risk rose and volatility increased. Market movements became more headline-driven, and equity leadership shifted again. Indeed, January’s and February’s returns tell a different story than the final month of the quarter. The MSCI ACWI ex-U.S. Index fell nearly 10.8% in March, while the MSCI Emerging Markets IMI dropped 12.8%, with both entering correction territory. The Russell 2000 Index was modestly lower than the S&P 500 Index in March. This disruption to the rotation into small caps and international stocks underscores concerns that geopolitical conflict and higher oil prices could dampen global growth.
By contrast, value-oriented and real-economy sectors such as energy, utilities, industrials and materials outperformed for the quarter, supported by higher commodity prices and more resilient cash flows, and held up better following the onset of the war. The Russell 2000 Value Index, for example, declined a more modest 3.6% in March.
Fixed Income: Higher Yields and a Risk-Off Tone
Like equities, fixed income markets in Q1 were driven by rising geopolitical risk, inflation uncertainty and diverging global policy paths. After declining earlier in the year, intermediate and longer-term yields rose in March, leading to a steepening of the yield curve. The U.S. dollar strengthened, while gold sold off and energy prices surged. Contributing factors included persistently sticky inflation, heightened concerns about fiscal conditions and deficit spending, and increased issuance (especially from large technology companies financing AI-related investments).
In this environment, investors showed a preference for higher-quality and more-liquid exposures, and risksensitive segments of the bond market faced pressure. Credit spreads widened later in the quarter, emerging market debt underperformed amid a stronger U.S. dollar and heightened uncertainty, and longer-duration securities detracted as yields rose.
Private Markets: Private Credit Faces Growing Scrutiny
Following a multi-year period of rapid growth for private credit, the market has faced heightened scrutiny and a rash of negative headlines since late 2025, including the bankruptcies of auto part manufacturer First Brands and auto retailer/finance company Tricolor. Several large private credit managers have since experienced increased redemption pressures, prompting some to restrict investor withdrawals. This dynamic has been particularly concentrated within evergreen private credit funds, which have grown in popularity among retail investors who have embraced the accessibility and flexible liquidity of this structure compared to traditional closed-end funds.
With headline risk on the rise, private credit fundamentals have shown to be somewhat mixed recently. While industry-wide information varies given the private nature of the market, some leading research and ratings agencies have reported modest upticks in defaults. It remains to be seen whether this is indicative of small pockets of stress or a broader market decline, but these indicators, coupled with heightened investor scrutiny, underscore the importance of manager selection, underwriting discipline and structural awareness in private market allocations. We will continue to monitor default rates, and if they increase, we will remain focused on asset manager-level performance outcomes, recognizing that managers with strong underwriting discipline and high-quality deal flow will likely be best positioned to succeed.
From the Wespath Team: On the Road with Wespath!
During the first quarter of the year, Wespath spent time on the road showing up where our clients, partners and peers gather to share ideas, build relationships and learn from one another. We were proud to participate in a range of faith-based, higher-education and values-aligned investor forums, including:
• The Gathering, co-hosted by the Methodist Ministries Network
• The National Association of Independent Colleges and Universities Annual Meeting and Advocacy Day
• The Council for Christian Colleges & Universities International Forum
• The Interfaith Center on Corporate Responsibility member conference
• The annual conference of the Association of Business Administrators of Christian Colleges
And even more meetings with clients and partners! Each of these events offered meaningful opportunities to listen, exchange perspectives and connect with organizations that share a commitment to mission-driven work and long-term stewardship.
“What I love most are the people and relationships behind every trip, both at Wespath and with our partners. Sometimes, that means eight hours in a car with our colleague Frank Holsteen, powered by beef jerky, Coke Zero and Skittles,” said Karen Manczko, Director of Institutional Relationships. “But every mile is worth it when it turns into meaningful conversations, fresh ideas and stronger long-term partnerships.”
What Is “Systematic” Investing…?
Wespath recently implemented a new systematic equity strategy within the U.S. Equity Fund – I Series. Systematic investing uses a disciplined, rules-based approach to portfolio construction, drawing on large datasets and quantitative signals to identify patterns and opportunities across the market.
In the context of a U.S. equity portfolio, the systematic strategy plays a specific role: providing broad large-cap equity exposure while seeking modest, diversified sources of excess return above the benchmark, all with tight controls around risks and costs. This approach complements both passive indexing and traditional active management by offering a repeatable, research-driven way to take measured risk in one of the most efficient segments of the U.S. market.
The addition of this strategy reflects Wespath’s commitment to continuously improving how diversified U.S. equity portfolios are structured. We’re seeking to mitigate the impact of unintended style drifts, increase clarity around sources of risk and return, and apply the most effective tools available to pursue long-term outcomes for investors.
Themes to Watch in 2026
Just three months into 2026, we are already seeing an investment landscape which has noticeably evolved since the beginning of the year. With that in mind, let’s revisit the six “Themes to Watch in 2026” that we shared in our Q4 letter:
1. AI-Driven Market Opportunities and Risks: Last quarter, we highlighted AI as a compelling long-term theme, while noting that elevated valuations and concentration left the space vulnerable to rapid shifts in sentiment. That risk surfaced at least somewhat during the quarter, as a poorly received earnings report from Microsoft triggered one of the company’s worst single-day declines in years. While geopolitical developments moved to the forefront later in the quarter, AI innovation continued at a rapid pace, and it’s clear this theme will continue to capture attention for some time. As noted previously, we expect to see investors becoming more selective and increasingly focused on whether current levels of business spending and AI investment can be sustained.
2. Geopolitical Tensions and Shifts: As discussed throughout this letter, geopolitical risk has been a persistent source of market volatility already in 2026, quickly moving this theme from a concern to the primary focus so far this year. The war in Iran and the many other armed conflicts and political tensions around the world reinforce the importance of incorporating global political dynamics into portfolio construction, as second-order effects have rippled across regions and asset classes. While the longer-term implications are still emerging, the first quarter underscored how quickly geopolitical events can reshape market conditions.
3. Global Deficit Spending and Accommodative Financial Conditions: We noted in the Q4 letter that elevated deficit spending and broadly accommodative financial conditions have supported economic activity and asset prices, even as government debt levels remain historically high. During the first quarter, elevated fiscal support remained an important counterbalance to tightening pressures elsewhere in the system, shaping market conditions alongside geopolitical developments.
4. Interest Rate Crosscurrents and Central Bank Policy: Monetary policy is still very much in flux around the globe. In the U.S., expectations entering the year for lower short-term rates became less certain as inflation risks and geopolitical developments intensified, while long-term interest rates rose globally and credit markets increasingly reflected growing economic and policy uncertainty. Although a transition in Fed leadership introduces the potential for change at the margin, many of the same structural trade-offs and policy constraints are likely to persist.
5. Market Concentration and Active vs. Passive Dynamics: Previously, we noted strong momentum and increasing dispersion among mega-cap tech companies. Over the past quarter, market leadership broadened meaningfully, with small- and mid-cap stocks outperforming as mega caps faced renewed pressure. This environment creates meaningful opportunities for active managers, though it is always critical to maintain risk discipline and benchmark awareness during periods of heightened volatility.
6. Opportunities and Challenges in Private Markets: Last quarter, we highlighted liquidity considerations and structural complexity across private markets as higher interest rates continued to work through this slower-moving asset class. During Q1, private equity transaction activity showed early signs of reopening, while stress became more evident in the direct-lending segment of private credit. While private credit remains a broad market with healthier areas such as asset-based finance, these developments underscore the importance of selectivity. We continue to identify emerging opportunities amid these challenges and are positioning to act opportunistically as conditions evolve.
Bottom Line: The themes playing out this year reinforce why we focus on long-term objectives. Periods of heightened volatility and shifting leadership can be unsettling, but they also highlight the value of diversification, strong governance and disciplined decision-making. Our priority remains helping clients stay aligned with their missions by building resilient portfolios that are designed to navigate uncertainty while remaining positioned for long-term success.