Market Commentary
That 70’s Show
The 1970s were a decade marked by iconic fashion such as bell bottoms and platform shoes, as well as significant geopolitical turmoil and rising inflation, driven in part by conflict in the Middle East and sharp increases in energy prices. The first quarter of 2026 began in a similar fashion as conflict with Iran emerged following the breakdown of negotiations aimed at preventing nuclear proliferation.
While military operations greatly reduced Iran’s traditional military capabilities, Iran responded by, in effect, closing the Strait of Hormuz, through which over 20% of the world’s oil and LNG passes each year. As a result, the price of oil (WTI) rose 51% in March and more than 76% for the quarter. Higher oil prices raised concerns around inflation and interest rates, with the 2-year treasury gaining 32 basis point (bb) over the same period. The S&P 500® Index declined 5.1% in March and over 9% from recent highs before rebounding 2.9% on March 31st.
While the year began on a challenging note, we note that tensions in the Middle East may ease in the coming weeks, which could lead to a decline in oil prices from elevated levels. The market is a discounting mechanism; as such, we are likely to see a significant rally upon more concrete signs of a resolution. In the meantime, we continue to manage portfolios with a focus on long-term risk-adjusted returns using diversification to help navigate periods of uncertainty while staying invested.
Top performing sectors during the quarter included: Energy (+37.2%), Materials (+9.3%), and Utilities (+7.5%).
Underperformers included Financials (-9.8%), Consumer Discretionary (-9.4%), and Technology (-9.3%).
Artificial Intelligence (AI) continues to negatively impact multiples of stocks in several industries, including software, travel, and payment processing. Software was particularly weak, down 23.9% as measured by the S&P Software and Services Index.
In spite of the oil-supply shock, the economy has been quite resilient. The labor market remains stable in the face of caused by AI headwinds, which have particularly impacted demand for recent college grads. Non-farm payrolls came in higher than expected at 178k, and the unemployment rate dropped to 4.3% in March. While Q1 GDP is estimated to be a 1.6% by the Federal Reserve Bank of Atlanta, weather likely weighed on activity, particularly in February. Inflation will be the big question going forward as February’s 2.4% CPI does not include the large spike in oil prices since the war began.
Much will depend on reopening the Strait of Hormuz. If the flow of oil were to reopen soon, inflationary impacts would likely be transitory. In the meantime, the Federal Reserve is likely to keep its Fed Funds rate steady until it can determine whether progress towards its 2% inflation target has been reversed or if this will be a short-term blip.
Following recent market weakness, we believe it is important to highlight the value of staying invested, as long-term returns are driven by the power of compounding. Pullbacks of 5% or greater are common, and as of early April, the market pulled back approximately 9% before regaining 2.9% or nearly a third of the drawdown on March 31. The market rally continued into April as the probability of a near-term solution has increased. Rather than attempting to time the market, we remain disciplined in managing your portfolios utilizing diversification to remain invested and help ensure participation in eventual recoveries.
Coming out of the conflict, there are several catalysts that could support higher equity prices later this year. Productivity should benefit from harnessing the power of AI. This should drive profit margins higher as earnings growth has been strong and expectations are for double-digit earnings growth again in Q1. AI is also contributing to economic growth through increased investment in datacenters and electrical infrastructure, benefitting industries such as Industrials and Utilities. Additionally, the economy is expected to benefit from fiscal stimulus and tax cuts provided by the One Big Beautiful Bill (OBBA).
Though we acknowledge that we likely are in a period of higher near-term volatility while energy prices remain elevated, the inflation impact may be much less than seen in the past. Despite an increase of more than 50% in oil prices, the market reaction has been rather muted with the S&P 500 down 4.6% in Q1 compared to more sizeable sell-offs in the S&P 500 during the 70’s, including -48% during the Oil Embargo in 1973 and -27% during the Iranian Revolution in 1979. The economy today is much better able to absorb the rise in energy prices, as the US economy shifted away from manufacturing towards services, with manufacturing as a percent of GDP dropping from 24% in 1970 to 10.5% in 2026. That said, the ultimate economic impact will depend on how long energy prices remain elevated.
Our top three contributors to performance for the quarter were as follows:
Quanta Services, Inc. (PWR) reported significant growth in revenues, EPS, and free cash flow along with a $44 billion backlog. Nationwide data center construction is providing substantial growth opportunities and is the largest piece of the company’s backlog. The company continues to forecast double-digit growth for the current year.
Qnity (Q), which was recently spun out of Dupont (DD), reported much stronger than expected organic growth. The company provides specialized materials and chemicals for advanced chip manufacturing for high-performance computing and has been a leader in materials innovation within the semiconductor industry. Qnity’s most recent product release, the Emblem CMP pad platform, has received strong positive feedback and recognition from customers and helps to maintain the company’s competitive advantage in the quickly evolving tech landscape.
Williams Cos Inc (WMB) completed several expansion projects, providing growth opportunities in LNG exports with new transmission infrastructure and strategic partnerships. In addition, the company is focused on easing grid constraints by enhancing natural gas infrastructure. Williams reported a solid increase in EBITDA in the latest quarter and maintains a positive growth outlook for the current year.
Holdings within the portfolio that were negative contributors to performance were as follows:
Salesforce (CRM) reported a record full year revenue of $41.5 billion, up 10% year over year and $11.2 billion, up 12% for the latest quarter. In addition, the company announced a $50 billion share repurchase authorization, reflecting confidence in its financial strength. Agentforce, which deploys AI agents that collaborate with employees using a company’s customized data, is seeing strong traction, growing 200% year-over-year, marking a pivotal shift towards agentic enterprise solutions. The company has traded lower along with a host of software-based (SaaS) companies as the market wrestles with terminal values for seat-based licensing models. The transition to consumption-based pricing, however, should help to alleviate some concerns for those companies able to successfully navigate and evolve their pricing models. The key concern for investors is how quickly the transition can occur relative to the potential erosion of existing seat-based revenue.
Accenture (ACN) reported a strong quarter with $18 billion in revenue, with record bookings of $22.1 billion, while also planning on returning $9.3 billion to shareholders through stock purchases and dividends. The company is focusing on AI-driven opportunities through internal development and acquisitive initiatives. The stock was under pressure in the quarter as investors debated the need for the scale of its services going forward, given new and improving frontier model releases. Enterprise customers have clearly shown the need for Accenture’s implementation and monitoring services across existing platforms with conversions to AI-based solutions. However, questions arise over new AI-native organizations that may be the developing model for future enterprises, which may require less of these types of services going forward.
Abbott Labs (ABT) delivered revenue growth of 10.5% in its medical devices segment, driven by diabetes care, while also positioning for future growth with its acquisition of Exact Sciences, which adds its cancer diagnostics offerings. Weakness persisted in its nutritional segment due to a loss of the WIC (Women, Infants, and Children) contract and market challenges in China. Even with the nutritional headwinds, the company is forecasting 7% organic sales growth and 10% eps growth for 2026.
Given our outlook for greater short-term volatility in early 2026 due to geopolitical concerns and AI fatigue, several defensive and stabilizing positions were added to the portfolio to help mitigate spikes in volatility.
Waste Management was purchased given its steady operational performance, which is less prone to market cyclicality during periods of greater market volatility. The company reported robust operating margin expansion of 150 basis points centered around its focus on sustainability, including bringing seven new renewable natural gas facilities online and implementing automation upgrades at five recycling facilities. Waste Management expects free cash flow to grow nearly 30% and announced a 14.5% increase in the quarterly dividend rate and a new $3 billion share repurchase authorization.
Proctor and Gamble was also added to the portfolio. The company reported nearly 3% growth in organic sales, reflecting resilience across most product categories, and returned $4.8 billion to shareholders through stock purchases and dividend payouts.
Although no securities were sold in the portfolio, several positions were trimmed to lock in gains and reduce exposure to market cyclicality. Positions included Caterpillar, Wells Fargo, Morgan Stanley, and Charles Schwab. Other notable activity included the re-weighting in Apple, Google, and Microsoft after previously trimming the positions.
At quarter end, the model portfolio was overweight Industrials, Materials, Financials, and Real Estate while underweight Technology and Communication Services. We are in line with our benchmark in Health Care, Consumer Staples, Energy, and Consumer Discretion. The current dividend yield of the portfolio is 1.4%, which remains greater than the S&P 500’s yield of 1.1%.
After three consecutive quarters of positive returns, greater market volatility returned in the first quarter, driven by a 1970’s-style oil supply shock. Although the events in the Middle East have added uncertainty, the economy is much less dependent on oil than in the past. A resolution to the conflict could support solid returns through year-end, driven by increasing industrial activity tied to data center buildouts and re-shoring of manufacturing. Lower interest rates and fuel costs could further support consumer spending alongside the tailwinds provided by tax cuts.
While it is difficult to determine whether the market bottomed during the recent pullback, several indicators suggest markets may be oversold, providing meaningful upside potential over the long term. We remain focused on investing for the long-term and believe that maintaining a diversified portfolio is the most effective way to navigate periods of heightened volatility while remaining invested. We continue to look for opportunities to take advantage of market pullbacks by adding to new or existing positions with strong underlying fundamentals and attractive risk/reward profiles.
Important Disclosures
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. There can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Connors Investor Services, Inc. “Connors”) or any non-investment related content referred to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer reflect current opinions or positions. Moreover, you should not assume that any discussion or information in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Connors. Please remember to contact Connors in writing if there are any changes in your personal/financial situation or investment objectives to review/evaluate/revise our previous recommendations and/or services or if you would like to impose, add, or modify any reasonable restrictions to our investment advisory services. Unless and until you notify us in writing to the contrary, we shall continue to provide services as we do currently. Connors is neither a law firm nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the Connors’ current written disclosure Brochure discussing our advisory services and fees remains available upon request. Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Connors account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Connors accounts; and (3) a description of each comparative benchmark/index is available upon request.