Performance Attribution
The first quarter of 2026 was defined by two distinct narratives. It began with a continuation of familiar themes—AI-driven market leadership, expectations for Federal Reserve rate cuts, and a resilient earnings backdrop. That changed abruptly on February 28, when coordinated U.S. and Israeli airstrikes on Iran triggered the most significant disruption to global energy markets since the 1970s, sending Brent crude oil above $100 per barrel. This marked a sharp reversal from the benign oil outlook entering the year.
Economic data continues to reflect a resilient backdrop. Real Gross Domestic Product (GDP) growth for 2026 is estimated at an annual rate of approximately 2.3%. The labor market remains relatively stable. The Unemployment data for March ticked down to 4.3%, with job creation in sectors like health care and construction, and suggests a relatively stable "low-hire, low-fire" environment. Further, the Institute for Supply Management indexes for both services and manufacturing remain in expansion territory, improving from last year’s lows.
All this may be backward looking, but it does support a picture of a particularly resilient economy. Yet, steady employment paired with a spike in an energy-driven inflation has placed the Federal Reserve in a difficult position. Current estimates of Consumer Price Index (CPI) remain stubbornly firm at 3.0% for the year, stalling the progress toward the Federal Reserve’s 2% target. After three rate cuts in late 2025, the FOMC held the federal funds rate steady at 3.50%–3.75% during its March meeting, while they signaled that further cuts may be postponed until the impact of the oil shock is fully understood. A sharp contrast to expectations as we began the year.
Equity markets reflected this uncertainty through increased stock-specific dispersion and rapid thematic shifts. Software stocks were particularly volatile, as concerns around AI disruption led to a broad and largely indiscriminate compression in valuations. Large-cap stocks initially carried forward prior momentum but stalled in March as the “higher-for-longer” rate narrative resurfaced. Small-cap stocks, which reached record highs in late 2025, faced renewed pressure—particularly within growth-oriented segments—due to rising borrowing costs and sensitivity to energy prices. Despite this, small caps modestly outperformed their large-cap counterparts.
For the first quarter, major indices delivered modest results that masked significant intra-quarter volatility. The S&P 500® posted a total return of -4.33%, while the Russell 2000® finished the quarter with a marginal gain of 0.88%. Against this backdrop, our portfolio underperformed the benchmark.
Our top three contributors to performance for the quarter were as follows:
Sterling Infrastructure (STRL), a large civil and commercial construction company, led performance for the quarter. A strong contributor over the past year, the company continues to benefit from infrastructure construction demand. The management team has a strong record of delivering its project work on time and has demonstrated an ability to navigate economic cycles. Our perspective is that the company’s prospects continue to be supported by a strong backlog, hyperscale company activity, and on-shoring trends.
Matador Resources (MTDR), an independent energy company, performed well along with other energy companies for the obvious reason of higher oil prices. We initiated our position earlier in the year based on their high-quality acreage and strong management team. With higher realized prices, we anticipate continued debt reduction, dividends, and opportunistic expansion of acreage for production growth.
Power Integrations (POWI), an analog semiconductor device manufacturer, rounded out our top performers. Their designs and products manage high-voltage power conversion in a range of products from consumer appliances, industrial applications, electric vehicles, and emerging data center applications. Having been down for several years, we believe inventory corrections are behind them, and a focused new management team and new products around gallium nitride (GaN) technology should support continued growth.
Holdings within the portfolio that were negative contributors of performance were as follows:
Phreesia (PHR), a healthcare software company that addresses patient engagement and intake processes, weighed on performance. Though early in the quarter there was some renewed sell side support and a positive article in Barron’s, it was one of our holdings caught up in the story that AI is going to kill all SaaS software companies. Like the prior quarter, management reported quarterly results better than estimates and continued to improve free cash flow and profitability. On guidance, they maintained profitability on higher projected margins but provided revenue guidance below street estimates. The lower revenue guidance and perceived threat of AI led to lowered price targets.
Simply Good Foods (SMPL), a packaged food company, also impacted performance for the quarter. The company’s focus on healthy protein snacks with known brands Quest, Atkins, and OWYN, we believe, is attractive. A revitalization of the Atkins brand is taking longer than initially thought and the taste issue, which has been resolved, in their OWYN protein drink product have weighed on results. The company is a deep value play in which we feel the brands and recent return of the former CEO present an attractive opportunity for better execution in a market segment with positive trends.
Cellebrite (CLBT), a software company focused on digital forensic evidence, was also caught up in the software volatility. The company’s platform supports law enforcement and intelligence agencies in the collection, review, analysis, and management of digital data from the start of a case to closure. Though the stock has been punished along with all software companies, the platform’s demonstrated speed and efficiency for users, along with strong and improving fundamentals, keep us optimistic on this differentiated company.
Our activity was quite elevated with turnover of about 22% during the quarter as we worked to adjust to the rapidly changing dynamics driving the market. We exited Phreesia (PHR), Harmony Biosciences (HRMY), Varonis Systems (VRNS), Green Dot (GDOT), and Credo Technology Group (CRDO). Additionally, we booked sizable gains in Omnicell (OMCL), Healthcare Services Group (HCSG), Sterling Infrastructure (STRL), Semtech (SMTC), Sentinel One (S), Zeta Global (ZETA), and Axos Financial (AX).
Alternatively, we increased our holdings in Euronet Worldwide (EEFT), Simply Good Foods (SMPL), Technoglass (TGLS), and Gentherm (THRM). New names to the portfolio include previously mentioned Power Integrations (POWI) and Matador (MTDR). Also new to the portfolio were industrial technology focused Crane NXT (CXT) and Itron (ITRI), life science and diagnostic company Haemonetics (HAE), property and casualty focused Palomar Holdings (PLMR), and manufactured housing leader Champion Homes (SKY). We also initiated a position in ALPS Medical Breakthroughs ETF (SBIO), to participate in the emerging biotech opportunities.
Exiting the quarter, the portfolio is overweight Technology, Industrials, Utilities, Staples, and Consumer Discretionary. We are underweight Financials, Real Estate, Energy, and Healthcare, while equal with Materials, and currently no exposure to Communication Services.
To begin, addressing the performance for the first quarter, we had noted in prior commentaries our overweighted position in the software industry, reflecting our belief in the expansion of AI out of the data center capex investment dynamic and into implementation within the broader economy. As has been covered broadly, the narrative that AI is going to decimate all software companies resulted in the broad decline of this industry by over 24% during the first quarter. Differentiation among companies within this segment was marginal, regardless of execution. The volatility was persistent, and we acted to reduce our exposure opportunistically. Specifically, we exited Varonis (VRNS) prior to its earnings call as execution issues were outweighing its leading technology. As noted above, we also exited PHR as the broad narratives around software are overwhelming, from our perspective, improving cash flow and margins on execution from management.
For our remaining software holdings, we have reduced Zeta Global (ZETA) and Sentinel One (S) to smaller position sizes. We continue to believe they both are beneficiaries of AI and are delivering improved fundamentals. We discussed above our position in Cellebrite (CLBT) and have maintained our holding for now. Each of these companies is leveraging and implementing AI to show strong results to their customers, offering a platform approach and are differentiated from generic software applications. Though their declines were dramatic, each of our remaining holdings has been marginally outperforming software in general, and we will be attentive to their continued execution and, should that continue and the narrative shifts more positive, possibly increase our positions.
Another factor which impacted performance was the backing up of interest rates which impacted ‘growth’ companies and those with longer duration earnings. Reflecting this, the Russell 2000 Growth® and Russell Mid Cap Growth® indices returned -2.8% and -6.3% respectively. Our portfolio, viewed from the Morningstar classification, is approximately 55% growth which is in-line with our normal positioning. Our holdings in Trupanion (TRUP), Ameresco (AMRC), and Artivion (AORT) each reported good and positively trending fundamentals in their earnings calls, yet traded in sympathy with this dynamic.
Harmony Biosciences (HRMY) is one other holding we would highlight that unexpectedly impacted performance. HRMY is a specialty pharmaceutical company with a leading drug in the treatment of narcolepsy. Their drug has continued to take market share, is approaching $1 billion in annual sales this year, and the company is delivering cash flow and earnings growth while self-funding new product research. However, the company was impacted by the comments of a trial judge, not a ruling, over a generic challenge to their patents. Despite six other generic filers settling with the company and the earliest generic entry coming in 2030, the comments from the judge dramatically changed the risk profile. While the company’s fundamentals remain strong, we chose to avoid the binary risk now associated with the pending legal outcome.
Turning to the broader outlook, we see a resilient macro backdrop that should continue to support corporate earnings. Current consensus estimates for employment remain stable, with estimates for unemployment at 4.4%. While hiring has cooled from post-pandemic highs, the lack of recessionary-level weakness and a more balanced labor supply support a stable picture. However, this labor resilience is balanced by sticky inflation, influenced by tariffs and recent commodity disruptions. The Consumer Price Index is projected to be approximately 3.1% for the year while the Core PCE is projected to be 2.9%. Unknown are how the recent disruptions to oil and its supply chain will permeate through the economy. Optimistically, as of the writing of our commentary, a ceasefire is welcome news.
In contrast to the projection of lower rates as the year began, Federal Reserve policy for the rest of the year has shifted toward a "patient" stance. While the March FOMC "dot plot" still penciled in a single 25-basis-point rate cut for 2026, views have generally shifted to a "higher-for-longer" scenario with zero cuts through year-end. The primary headwind for the Fed remains the rate of inflation and the uncertainty driven by geopolitical instability in the Middle East and domestic fiscal stimulus. These cross-currents are leading to increased volatility in equity markets, particularly in high-multiple growth sectors.
Further supporting the economy, corporate capital expenditure (capex) continues to look robust, though it is still dominated by the hyperscale tech giants. For consumers, who have remained resilient in their spending, recently passed legislation should provide a tailwind to household incomes as tax refunds are trending 14% higher than last year, according to data from Apollo.
All said, below the very noisy news cycle and uncertainty around shifting policy stances, we continue to see broadly supportive themes for continued market gains, though volatility is quite likely.
Strategically, our portfolio changes have been targeted to further our positioning in profitable industrial companies with exposures to infrastructure and a balance between cyclical growth and defensive characteristics. As mentioned, we have reduced our exposure to software, maintaining smaller positions in companies we believe have proprietary data and are beneficiaries of AI. As we execute our positioning, we are focused on balancing the competing factors that are driving the market, both within and across sectors.
We continue to anticipate a higher level of activity in navigating the market in which we believe volatility will persist, working to balance patience against complacency as broad narratives drive market actions that may be contrary to fundamentals. We remain focused on companies we believe are of high quality with solid balance sheets, niche products and services, and good management teams. The portfolio has a structurally solid fundamental profile with higher return on equity (ROE) and margins, lower debt, and in-line to higher estimated growth.
Thank you, and as always, we are available to discuss the portfolio and our outlook in more detail.
Important Disclosure Information
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, made reference 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 contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Connors. Please remember, if you are a Connors client, 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 to 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. Also, remember to advise us if you have not received account statements (at least quarterly) from the account custodian. 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 or at www.connorsinvestor.com. 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.