Over the past few weeks, a rising tide of optimism has been gathering in the equity markets. This positive momentum reached a crescendo last week when Iranian Foreign Minister Abbas Araghchi announced that, in line with the ceasefire in Lebanon, the Strait of Hormuz would reopen for commercial vessels after being closed for approximately seven weeks beginning in late February.
For investors, this came as welcome news. West Texas Intermediate fell to $83.85, which was down 11.5 percent from the prior day, while Brent Crude fell 9.1 percent to $90.38. U.S. equities pushed sharply higher for the 12th of the past 13 trading days as markets breathed a collective sigh of relief. The optimism quickly faded on Sunday, however, when Iran reclosed the strait, citing the ongoing U.S. naval blockade as a “breach of trust.”
As of April 20, 2026, the Strait of Hormuz remains at a virtual standstill. Despite a brief attempt to reopen the waterway over the weekend, it has been effectively shut down again due to an intensifying military standoff between the U.S. and Iran, with Tehran stating the waterway will remain closed until the U.S. lifts its own naval blockade of Iranian ports. Oil prices returned to their previous volatile state, jumping nearly 7 percent on Monday as the hope for a reopening faded.
As outlined in our most recent Quarterly Market Commentary, we forecasted that the stage was set for a broadening economy entering 2026. Lower interest rates from recent Federal Reserve cuts, combined with fiscal stimulus from the OBBB and deferred government spending from the previous year’s fourth-quarter shutdown, would provide a nearer-term tailwind to economic growth. Add in a dose of deregulation and the productivity boosts from companies using artificial intelligence (AI), and we believed the ingredients were present for market gains to expand beyond a narrow group of technology stocks to a broader growth of equities.
However, the outbreak of the Middle East conflict in late February introduced opposing forces. Rising energy prices, higher interest rates and geopolitical uncertainty threatened to slow economic growth. This hesitation was visible in recent economic data. The National Federation of Independent Business (NFIB) Small Business Optimism survey fell three points, noting that while the 20 percent small business tax provision in the One Big Beautiful Bill Act helped small business owners, the overseas conflict spooked consumers and business owners alike. Similarly, the Federal Reserve’s Beige Book highlighted that firms were adopting a “wait-and-see” posture regarding hiring and capital investment due to geopolitical uncertainty.
Read more: Fed Weighs Stubborn Inflation and Middle East Conflict
We believe that the financial markets are a reflection of the U.S. and the global economy. Equity markets began to broaden in the aftermath of the second Federal Reserve rate cut in 2025 on October 29. This day coupled with October 30 also marked a period of time when five of the “Magnificent Seven” stocks announced earnings. From October 29, 2025, until the conflict escalated in late February, the markets had begun broadening as market leadership shifted beyond AI-leveraging Big Tech stocks. While the Magnificent Seven and broader tech sectors experienced 9 to 11 percent pullbacks, equal-weight S&P indexes, U.S. Small- and Mid-Cap companies, and international developed markets all rallied by roughly 9 percent to 13 percent.
We believe this commentary has three important takeaways for investors. First, while uncertainty remains elevated in the nearer term, we continue to believe that markets are set to broaden in the intermediate to long term given the substantial valuation discounts that exist in U.S Mid-Cap and Small-Cap stocks. Current relative valuations remain similar to what existed in the late 1990s and early 2000s, characterized by a similarly narrow economy driven by heavy internet and Y2k spending. However, the coming years saw markets broaden as the benefits of the internet broadened to the greater economy and markets. This is similar to our forecast, and we note that Ramp Economics AI index shows that over 50 percent of businesses have adopted AI as of March 2026, up from 23 percent at the end of 2025.
While markets responded to the start of the conflict with a slight pullback as tensions showed signs of easing in late March, the markets began their push higher—but this time, in a narrow manner. Investors flocked back to the familiar safety of the Magnificent Seven and AI-themed technology stocks. Since the market bottom on March 30, the tech sector and Magnificent Seven have surged nearly 20 percent, which has pulled the S&P 500 higher by 13 percent. More concerningly, a basket of nonprofitable tech stocks has skyrocketed 27 percent.
Secondly, it is crucial for investors to remain vigilant when thematic excitement reaches a fever pitch. Current events feel eerily reminiscent of the late 1990s dot-com bubble. Recently, two struggling companies captured AI thematic investors' attention simply by rebranding. Allbirds, an eco-friendly shoe company, announced a shift to buying and renting AI servers, renaming itself “NewBird AI.” Its stock surged from $2.49 to nearly $17 before settling back at $10.80 on Friday. Similarly, the social media firm Myseum rebranded to “Myseum.AI,” causing its shares to more than double in a matter of days. Just as companies in the late ’90s added “.com” to their names to chase internet buzz, today’s market is seeing a similar rush toward AI labels.
Thirdly, while these speculative spikes serve as a cautionary tale, the reality is that the years ahead hold tremendous opportunity for investors who stay invested through a disciplined and diversified strategy. Uncertainty remains elevated. The way one deals with uncertainty is not through concentration or attempting to time the market but rather through diversification with assets that behave differently in shifting economic environments. In a period of time when technology stocks have captured investors’ fancy, we note that a broad basket of commodities have been the best-performing asset class over the past five years ended March 30,2026, with the Bloomberg Commodities index rising 14.2 percent annualized per year. In a show of diversification, this index rallied when stocks and bonds faltered in 2022 and once again in Q1 2026.
Last week’s economic data presents a complex tug-of-war between resilient employment and rate-sensitive slowdowns, but the underlying foundation of the economy remains intact. For investors, these crosscurrents underscore the importance of maintaining a well-diversified portfolio. By focusing on long-term fundamentals rather than short-term data fluctuations, investors can confidently navigate this environment and keep their financial plans on track.
Wall Street wrap
Recent economic data has revealed a mixed picture for the U.S. economy. While economically sensitive segments such as housing, manufacturing and small business optimism are showing signs of strain from elevated interest rates and geopolitical uncertainty, the broader economy continues to push forward. Inflation data—notably the Producer Price Index (PPI)—while elevated surprised to the downside, and employment metrics continue to show signs of stabilization.
Small business sentiment subsides, but silver linings remain: The NFIB Small Business Optimism Index reflected a recent pullback in sentiment, dropping three points from 98.8 to 95.8. This decline pushed the index below its 52-year average of 98 for the first time since April of last year.
The drop was largely driven by a pullback in earnings, which fell to a net -25 percent (down from -14 percent in February). Additionally, sales expectations slumped, with a net -5 percent of owners reporting higher sales in March, the first decline after four months of improvement.
Reflecting current uncertainties, capital outlays have slowed. The percentage of firms with actual capital outlays over the last six months fell to 51 percent, down 9 percent from its recent high in January. Despite stimulative tax laws, only 16 percent of owners plan to make capital outlays in the next six months, marking the lowest level since November 2009.
Fortunately, there is positive news on the inflation and borrowing fronts. The net percentage of owners expecting to raise prices fell four points to 24 percent, the lowest level since July 2024. Furthermore, the average interest rate paid on short-term loans dropped to 7.9 percent—down from 8.2 percent in February and a peak of 10.1 percent in September 2024—marking the lowest borrowing cost since May 2023.
Fed Beige Book shows steady yet bifurcated growth: The Federal Reserve’s latest Beige Book, which summarizes economic conditions across the 12 Fed Districts, pointed to an economy that is doing slightly better than expected. Eight of the 12 districts reported slight to modest increases in economic activity, while two reported little change and two noted slight to modest declines.
However, the report highlighted a growing bifurcation among consumers. Many districts noted signs of financial strain, increased price sensitivity and rising demand at social service organizations among lower-income consumers, while spending among higher-income cohorts remained highly resilient.
Employment was steady to slightly up, with most districts describing labor demand as stable, featuring low turnover and minimal layoffs. Interestingly, while AI has not yet broadly impacted overall staffing levels, some districts noted that AI-driven productivity improvements have allowed firms to delay or reduce new hiring. On the inflation front, price growth remained moderate, though input cost increases generally outpaced selling price growth, leading to compressed profit margins for businesses.
Housing market headwinds loom, but labor market shows increasing stability: The housing sector continues to face significant affordability challenges, driven by a combination of elevated mortgage rates and record-high prices.
Existing home sales fell 3.6 percent in March to a 3.98 million seasonally adjusted annual rate, the slowest pace since June 2025 and well below the 6.4 million pace seen in early 2022. Consequently, the National Association of Realtors slashed its 2026 outlook for existing home sales from a 14 percent gain down to just 4 percent. Despite the slowdown in volume, the median home price rose 1.8 percent year over year to $408,800, a record high for the month of March.
Additionally, the NAHB/Wells Fargo sentiment index fell to 34 in April (down from 38). A reading below 50 indicates that more builders view conditions as poor rather than good, marking the lowest sentiment level since September 2025. Expectations for sales over the next six months also fell sharply.
Employment data brightens: Despite hesitation in some sectors, bright spots have emerged in the labor market. Initial jobless claims remained historically low at 207,000, bringing the four-week moving average down to 209,750. This continues a broader downshift in claims from the highs seen in mid- to late 2025. While continuing claims ticked slightly higher to 1.818 million, they remain comfortably below the recent peak of 1.963 million from July 2025. Furthermore, the ADP Weekly Employment Pulse for the week ended March 28th rose to a four-week average of 39,000, above the prior week’s 26,000. This continues a recent uptrend in hiring in this report and points to the potential for a strong April jobs report.
Inflation—a welcome PPI surprise: Inflation data provided a much-needed sigh of relief for markets. The PPI for final demand rose 0.5 percent in March. While this pushed the year-over-year reading to 4 percent, the core data was much more encouraging.
PPI excluding food and energy rose just 0.1 percent, significantly beating expectations of a 0.4 percent increase, while the year-over-year core reading held steady at 3.8 percent. The data suggests that recent spikes in energy prices have not broadly flowed through to the rest of the index. However, investors should remain attentive, as certain components of the PPI that feed into the Fed's preferred inflation gauge—the Personal Consumption Expenditures price index—suggest the potential for a slightly hotter reading when it is released on April 30.
The week ahead
Tuesday: The U.S. Census Bureau will release the Advance Monthly Sales for Retail and Food Services report for March 2026 at 8:30am ET, lending insight into whether high gas prices from the oil blockade are curbing consumer spending.
Wednesday: On Wednesday, Kevin Warsh, the nominee for Federal Reserve Chair, is scheduled to testify before Congress. Markets will be hyper-focused on his stance on inflation and rate hikes during this period of energy-driven volatility.
Thursday: Flash PMIs for manufacturing and services will be released at 9:45am ET, providing a first look at April activity and whether the blockade of the Strait of Hormuz has hurt manufacturing supply chains. We will also be looking to see whether services inflation remains sticky even if goods prices fluctuate due to shipping delays.
Friday: The University of Michigan will release the final reading of its Consumer Sentiment Index for April at 10am ET. The preliminary reading released on April 10 was 47.6, the lowest level in the survey’s 74-year history. Survey Director Joanne Hsu noted that 98 percent of the initial interviews were conducted before the temporary ceasefire announcement in April. We will be monitoring to see if the second half of the month’s data—collected during the brief (though now fragile) easing of tensions—pulls the final number higher.
Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company and its subsidiaries. Life and disability insurance, annuities, and life insurance with longterm care benefits are issued by The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM). Longterm care insurance is issued by Northwestern Long Term Care Insurance Company, Milwaukee, WI, (NLTC) a subsidiary of NM. Investment brokerage services are offered through Northwestern Mutual Investment Services, LLC (NMIS) a subsidiary of NM, brokerdealer, registered investment advisor, and member FINRA and SIPC. Investment advisory and trust services are offered through Northwestern Mutual Wealth Management Company (NMWMC), Milwaukee, WI, a subsidiary of NM and a federal savings bank. Products and services referenced are offered and sold only by appropriately appointed and licensed entities and financial advisors and professionals. Not all products and services are available in all states. Not all Northwestern Mutual representatives are advisors. Only those representatives with Advisor in their title or who otherwise disclose their status as an advisor of NMWMC are credentialed as NMWMC representatives to provide investment advisory services.
A message from Advisor Perspectives and VettaFi: Discover something new! Click here to register for our upcoming webcasts.
© Northwestern Mutual Wealth Management
Read more commentaries by Northwestern Mutual Wealth Management
