First Quarter Review
Enthusiasm characterized the feelings pertaining to the U.S. economy as the year began. This enthusiasm was reflected in the increased estimates for first quarter GDP implemented by numerous economists over the three-month period. Specific contributions to this anticipated growth were benefits from the passage of the One Big Beautiful Bill Act (OBBBA) that would flow through the economy, as well as an ever-growing level of capital expenditures to support the ongoing buildout of AI.
Offsetting these positive expectations as the quarter progressed were another round of tariff changes and outbreak of conflict in the Middle East. These developments led to heightened uncertainty and a questioning of the anticipated level of growth going forward. The most visible by-product of these two events is the increase in the price of oil, which closed the quarter at $101.15 after starting the period at $57.26. This price increase for oil has not yet flowed into inflation data will be reflected in future data releases.
Second Quarter Outlook
Estimates for GDP growth in the first quarter remained pretty much unchanged with the Bloomberg survey of economists projecting an increase of 2.4%. In fact, the current estimate is higher than the projected 2.1% at the beginning of the quarter. The second quarter has, however, seen a reduction in the anticipated level of growth. At the onset of 2026, the expected rate for GDP growth for the second quarter was 2.0%. As the first quarter progressed, the estimate rose to 2.2% but then declined to the current forecasted level of 1.8%. While this figure represents a reduction in anticipated growth, it also does not reflect recession. While recession probabilities have increased, they have not risen to the level where an economic downturn is imminent. This is reflected in the current Bloomberg survey’s recession probability forecast of 30%.
As previously stated, the expectation for the second quarter is for continued growth. There are multiple drivers to deliver this growth, including the aforementioned capital expenditures of the hyperscalers. Estimates for these outlays continually increased throughout the first quarter and our latest estimate across the largest firms is approximately $700 billion for all of 2026. Also, consumers have remained resilient as retail sales were stronger than forecast for the month of February. Admittedly, this data is prior to the onset of the Middle East conflict but it does illustrate that heading into that event consumers were confident spending at a higher than forecasted level.
Other indicators supporting continued growth are the Citi Surprise Index, which continues to be in positive territory, and the ISM surveys of the manufacturing and service sectors which are also delivering readings that indicate continued growth.
As we proceed into the second quarter, while we expect to see the level of growth discussed above, we were reminded in the first quarter that unanticipated events could lead to alterations in our outlook.
Asset Allocation
This is Not Your 2022 Market
Market performance initially aligned with our projections for a measured start to the first half of 2026, with an expected acceleration in the latter half of the year. However, volatility increased in March as both domestic and international equities retreated. This shift was driven by investor concerns echoing the 2022 oil shock, a period marked by $5.00 per gallon gasoline and a 19.2% market decline. Consequently, U.S. equities ended the quarter down 4.3%, while international markets saw a more modest decline of 0.6%.
The bond market delivered a marginal total return of 0.1% for the quarter, as a 1.0% coupon yield was nearly offset by a 0.9% decline in price. This downward pressure on prices was driven by rising inflationary expectations, which continue to challenge real returns for fixed-income investors.
Our Asset Allocation Stance
Looking at the other side of the current environment, our asset allocation thesis still holds up from last quarter. While recent equity market drawdowns have introduced volatility, we do not anticipate a recurrence of 2022 market results, which was defined by declines in both equity and fixed income returns following an energy shock. This divergence is driven by two critical fundamental factors. In contrast to 2022, corporate earnings per share (EPS) are growing steadily. Secondly, the Federal Reserve has been on a path of monetary easing characterized by lowering rates instead of raising rates as it did in 2022.
Our 12-month outlook remains disciplined rather than reactive. While improved valuations have made equities more attractive, we maintain a neutral stance and do not currently have a high enough conviction to overweigh equities relative to fixed income.
Equity Positioning: Domestic vs. International
We maintain a neutral weighting across our equity allocations. While 2025 was characterized by investors paying a premium for future earnings potential, we view 2026 as a “show-me” year, where market performance is contingent upon the actual realization of those earnings.
This ongoing valuation rationalization is most evident in the compression of price-to-earnings (P/E) ratios, a trend currently led by the U.S. markets. Although global prices have retreated, the sustained growth trajectory of U.S. corporate earnings has resulted in a more rapid decline in domestic P/E ratios, increasing the relative attractiveness of local markets. Nevertheless, persistent momentum factors supporting overseas markets continue to support our decision to maintain a neutral stance toward international equities.
We will close with our standard recommendation for investors to use the quarter-end as a timely reminder to review their investment goals and objectives.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
This content is provided for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and should not be interpreted as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.