RFO Capital CIO Quarterly Letter – Q1 2026

First Quarter 2026 | Market Review and Portfolio Outlook 

The first quarter of 2026 was defined by a sharp break in market expectations. Investors entered the year focused on familiar concerns: persistent inflation, uncertain monetary policy, and the evolving repricing of artificial intelligence beneficiaries. What markets did not anticipate was the outbreak of war in the Middle East in late February, which rapidly reordered risk across asset classes and rendered many early-year positioning assumptions obsolete within days.  

The result was a quarter in which diversification rewarded patient investors, concentrated growth exposure came under meaningful pressure, and the macroeconomic backdrop shifted from gradual normalization to genuine uncertainty. For long-term investors, the period was a timely reminder that resilient portfolio construction matters most when markets change course without warning.  

Q1 2026 Market Performance at a Glance 

The first quarter saw a meaningful repricing across equities, energy, and fixed income as inflation expectations, geopolitical risk, and market leadership all shifted. The figures below highlight the principal moves that defined the quarter.  

Three Market Themes That Defined Q1 2026 

 1) AI Disruption and the Repricing of Risk 

One of the quarter’s defining themes was the market’s reassessment of who stands to lose as artificial intelligence capabilities accelerate. Software-as-a-service companies, long valued for recurring revenue, high margins, and durable switching costs, came under significant pressure as investors began to question whether new AI capabilities could lower barriers to entry and weaken pricing power. US software stocks fell 23% between January 1 and February 27 alone. Platform-level technology companies such as Microsoft, Nvidia, and Apple also weighed on broader index performance, even as their underlying businesses remained fundamentally sound. What changed was not operational quality, but the market’s willingness to continue rewarding concentration at the same valuation levels.  

There was, however, a constructive side to this rotation. After several years in which S&P 500 performance was driven by a narrow group of large-cap growth and technology names, market breadth improved meaningfully. The average S&P 500 constituent outperformed the headline index by nearly five percentage points in the first quarter. Value stocks, smaller-cap equities, and dividend-oriented businesses all found renewed support. The view of the RFO investment team is that this reinforced a principle that remains highly relevant for family capital: diversification continues to matter, particularly when a narrow group of market leaders has driven performance for an extended period.
 

2) The Middle East Conflict and Market Implications

The quarter’s most significant macroeconomic shock emerged in the final week of February with the onset of the Iran conflict. Oil markets responded immediately. After rising earlier in the quarter on supply concerns, crude prices moved sharply higher as the conflict intensified, with WTI up more than 70% by quarter-end and at its highest level since mid-2022. The Strait of Hormuz became a focal point for markets, given its importance to global energy flows and its particular significance for Asian economies.  

The inflationary effects were swift. Higher gasoline prices added fresh pressure to an already uncomfortable inflation backdrop, while bond markets rapidly pared back expectations for interest rate cuts. By March, the Federal Reserve had shifted to a hawkish hold, keeping rates unchanged while revising inflation expectations materially higher. For emerging markets, the consequences were also immediate. Asia-Pacific equities came under pressure because of the region’s structural dependence on imported energy, while broader emerging market performance was supported only by strength in select AI-linked markets earlier in the quarter. 

3) The Tariff Landscape Shifts

A significant legal development also altered the direction of US trade policy during the quarter. The US Supreme Court ruled against the use of the International Emergency Economic Powers Act to justify the sweeping reciprocal tariffs announced in 2025. In response, the Administration pivoted to a flat 10% tariff on all imports.  

This decision has important implications for businesses and investors. More than 330,000 importers are estimated to have paid between US$165 billion and US$170 billion in duties under the now-invalidated framework. While no automatic refund process has been confirmed, a mechanism is being established. For affected companies, this could create a prospective liquidity tailwind, albeit an uncertain one, while also offering a modest disinflationary offset over time. In a quarter already shaped by inflation shocks and geopolitical disruption, the shift in tariff policy introduced another meaningful variable into the market and economic outlook.  

THE MACROECONOMIC BACKDROP 

1) Growth

The United States entered 2026 carrying forward the uneven momentum of 2025. Real GDP growth had slowed sharply to an annualized 0.7% in the Q4 2025, reversing the 4.4% surge recorded in the third quarter. Consumer spending moderated, government outlays declined following the 43-day federal shutdown, and exports gave back earlier gains. By the end of the first quarter, the Atlanta Fed’s tracking model suggested Q1 2026 growth of approximately 2.0%, pointing to a degree of stabilization. The IMF’s 2026 Article IV consultation projected full-year US GDP growth of 2.4%, broadly in line with consensus expectations.  

The risk to this baseline is clear: should oil prices remain structurally elevated, the probability of a recession by year-end rises. At quarter-end, markets were pricing recession risk at roughly 37% by year-end. That level does not suggest panic, but it does reflect a more fragile outlook in which energy costs, tighter financial conditions, and weaker consumer resilience could begin to reinforce one another.  

2) Inflation and Central Bank Policy

Inflation entered 2026 on an uncomfortable footing. Core PCE remained near 3%, and price pressures further up the supply chain had already begun to build. The energy shock associated with the Middle East conflict intensified those concerns and complicated the path forward for central banks. The Federal Reserve responded in March with a hawkish hold, acknowledging that the data did not yet justify rate cuts and that the risk of renewed inflation acceleration remained material.  

Other major central banks faced similar trade-offs. The European Central Bank left rates unchanged but, indicated that further tightening was once again possible in light of rising energy-driven inflation. Its projections showed Eurozone headline inflation reaching 3.1% year-over-year in the second quarter of 2026, though that estimate was prepared before the conflict escalated. The Bank of Japan also left policy unchanged, while signalling greater sensitivity to upside inflation risk than downside growth concerns. For investors, the message was clear: the path to lower rates has become less certain, and monetary policy remains constrained by inflation.

3) Labour Markets & Consumer Health

The US labour market entered 2026 in a state of subdued dynamism. The economy added 130,000 jobs in January, while the unemployment rate edged down to 4.3%. Job openings fell to 6.5 million, the lowest level in more than five years. Although the labour market has not deteriorated sharply, the data points to a softer and less dynamic employment backdrop than investors had become accustomed to in recent years.  

Beneath the surface, signs of strain were more evident. Delinquency rates across auto loans, credit cards, and student loans rose to multi-year highs and, in some categories, approached levels not seen since the 2008 financial crisis. High-profile bankruptcies, including Saks Fifth Avenue and Eddie Bauer, highlighted the vulnerability of highly leveraged balance sheets in an environment defined by softer demand and elevated financing costs. For investors and business owners alike, these signals matter because they speak to the health of the consumer and the durability of the broader economic cycle.  

4) Credit Markets and Private Credit

Public credit markets weakened during the quarter as the geopolitical backdrop deteriorated and inflation concerns resurfaced. Spreads widened across both investment grade and high yield, while emerging market debt declined 1.1% under pressure from US dollar strength and greater risk aversion. Credit did not experience disorder, but the environment became more selective and less forgiving.  

In private credit, the areas of fragility that began to emerge in 2025 continued to attract attention. The public bankruptcies of several private-credit-backed companies have sharpened investor focus on underwriting discipline, covenant protections, and manager quality. We believe selectivity will become an increasingly important driver of returns across private markets in the years ahead. As capital becomes more discerning, dispersion is likely to rise between stronger and weaker lenders, structures, and underwriting practices.  

PORTFOLIO POSITIONING & OUR CURRENT THINKING

1) Diversification was vindicated.

The first quarter reinforced the value of disciplined portfolio construction. The rotation away from concentrated mega-cap growth was not simply a short-term reversal. It reflected a genuine repricing of risk-adjusted return expectations. In our view, that development supports the case for balanced exposure across factors, geographies, and asset classes rather than dependence on a narrow set of return drivers. For high-net-worth families and long-term investors, this remains a critical consideration when building portfolios designed to endure through multiple market regimes.  

2) The AI investment thesis is intact but requires nuance.

We also continue to believe that the long-term AI investment thesis remains intact, but the opportunity set is becoming more differentiated. The pressure now facing certain legacy software business models is real, and markets are beginning to reflect that distinction. We remain focused on separating infrastructure enablers, where capital investment and earnings revisions remain supportive, from incumbents facing increasing disruption. In our view, the next phase of AI investing will be less about broad enthusiasm and more about careful selection, valuation discipline, and clarity of investment thesis. 

 CLOSING REMARKS

The first quarter of 2026 was a reminder that market shocks rarely arrive in an orderly way. The decisions made during more stable periods, particularly around diversification and concentration, are often what matter most when conditions shift abruptly.  

We are operating in a market environment defined by the interaction of geopolitics, energy prices, inflation, monetary policy, and technological disruption. In our view, this is not a time for reaction, but for discipline. It is a time to remain selective, to think clearly about which risks are being rewarded, and to ensure that portfolio decisions remain aligned with long-term objectives. As always, we remain available to discuss your portfolio positioning and outlook in greater detail. 

Yours sincerely,
Anik Lanthier
Chief Investment Officer, RFO Capital
April 2026