Market Summary The resiliency of the U.S. economy is being tested once again by the war in Iran. The economy certainly proved its mettle in recent years following the shocks from Covid, Russia’s invasion of Ukraine, the most aggressive Fed tightening campaign in decades, and Trump’s tariffs. The question of how well it stands in the face of this latest shock remains unknown and will likely hinge upon how long the conflict lasts, and more specifically, how long the Strait of Hormuz remains closed. The longer the shock lasts, the greater the specter of stagflation becomes. Rising inflation and slowing growth have not been a good mix for stocks in the past. After mostly treading water for the first two months of the year, the S&P 500 began giving way once the war began, albeit the losses thus far have been more muted than we would have expected under the circumstances. Investors appear to be banking on a quick resolution to the conflict – either resulting from regime collapse or Trump’s well-noted tendency to back down once the pain of his executive decisions becomes too great to bear. For the quarter, the S&P 500 Index finished down -4.3%. The performance of our Clients’ portfolios was weighed down by another quarter of weak returns from our software holdings amidst what we believe are misplaced fears about AI disintermediation. A lack of energy exposure in the portfolio at a time when oil prices spiked also was a headwind. Lastly, healthcare, typically a safe haven amidst war and growing uncertainty about the economic outlook, proved anything but a safe haven in the first quarter. Economic Outlook The U.S. economy is not as vulnerable to an oil shock as it once was. Thanks to the shale revolution we are producing a lot more oil and gas. Domestic oil production has more than doubled in the past twenty years. At the same time, we are consuming far less as a percentage of output – about 2/3 rd less - compared to fifty years ago, the result of more fuel-efficient vehicles and the shift from a manufacturing-based economy to a service-oriented one. As such, we are now a net exporter of oil. Even though we are less dependent on foreign oil, we are not immune to an oil shock, especially since oil is priced on the global market and such prices affect businesses and consumers both here at home and around the world. Historically, oil shocks of this magnitude have been associated with recession and bear markets. The last one in 2022, when Russia invaded Ukraine, led to a bear market but not a recession. This perhaps has given investors confidence that recession can be avoided this time as well. The U.S. economy entered this conflict with improving momentum. The Fed’s latest round of interest rate cuts along with a boost from the One Big Beautiful Bill Act’s tax cuts were staged to provide stimulus. However, the gas pump now increasingly consumes more of those tax refund checks. After ending 2025 on a softer note with fourth quarter real GDP growth of just +0.7% quarter-over-quarter annualized, the current forecast for first quarter real GDP from the Atlanta Fed’s GDPNow model shows a modest step up to +1.6%. Those more muted growth rates mask the underlying strength of end demand. Real final sales to private domestic purchasers, a measure of consumption and private fixed investment, have been growing steadily for the past two years, averaging +2.6%. Consumer spending has been supportive, with a stable - though somewhat fragile - labor market, rising wages, and appreciating asset values, especially for higher income earners. Heavy investment in AI data centers continues to provide a healthy tailwind for the economy, complimenting consumption, and offsetting a weak housing market that remains stuck due to persistent affordability constraints. Surging capital spending by cloud hyperscalers continues to support robust demand for chips, networking, storage, cooling, power, and related infrastructure. Our Clients’ portfolios continue to maintain healthy exposure to this AI investment wave. Unfortunately, investors have continued to indiscriminately sell software stocks in a “shoot first, ask questions later” response to AI-related headlines based on irrational fears that AI agents and tools will displace many of the established enterprise software solutions and related services. We think this is wrong. But it hasn’t prevented P/E multiples for software stocks from collapsing despite ongoing growth in revenue, profits, and free cash flow. In fact, earnings estimates for all our software holdings continue to rise. So long as that continues, the market will eventually be forced to reconcile that and re-rate the stocks accordingly. As Warren Buffett once famously noted, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” Many software stocks now offer exceptional value for above-average earnings growth and, as such, we have taken advantage of this dislocation to add to some of our favorite software holdings. In doing so, we are adhering to our investment discipline. The oil price spike revived inflationary fears. Inflation had been gradually working its way back towards the Fed’s 2% long-term target. Headline and core CPI 1 recently bottomed at +2.4% and +2.5% year-over-year, respectively. Those rates are poised to head higher now – headline inflation first, fueled by higher costs for energy and food, and later, core inflation, as higher oil prices bleed into the costs of most other goods and services. Without knowing how long the war will last and how long the Strait of Hormuz will remain effectively closed, it is impossible to have any confidence in forecasts for the coming year. We expect inflation to head back above 3% over the coming months. That spike will likely prevent the Fed from responding aggressively to any weakening in the labor market caused by demand destruction. For now, we expect the Fed will remain on hold as they wait to see what happens in the Persian Gulf. Meanwhile, profit forecasts continue to be revised higher. We’re skeptical that can continue with oil at $100 a barrel or more. S&P 500 EPS estimates have moved up strongly over the past three months from $312 to $323 for 2026, +17% year-over-year. At some point, the combination of higher input costs and weaker demand should begin to pressure profit margins outside of the oil patch, barring a resolution that allows oil to recede quickly. The combination of falling stock prices and rising EPS estimates has caused the forward P/E multiple for the S&P 500 to contract from nearly 23x to just under 20x presently. While this is still above its historical average of 16-17x, valuations are now less elevated than they have been. At the same time, investor sentiment has turned decidedly more cautious. The Investors’ Intelligence Bull-to-Bear ratio 2 is nearing 1.0x, down from a reading above 4.0x only a couple months ago. Readings below 1.0x usually indicate sentiment is washed out, which is actually bullish from a contrarian standpoint. Amidst heightened war uncertainty and the possibility of mounting stagflationary pressures, we believe that a diversified portfolio of attractively valued, high-quality growth stocks offers the best combination of offense and defense for our Clients. We continue to emphasize technology, communication services, healthcare, and financial services in our Clients’ portfolios. The Consumer Price Index (CPI) is an economic indicator that measures inflation in the United States. The Investors Intelligence Bull-to- Bear Ratio is a weekly contrarian market sentiment indicator which measures the ratio of bullish to bearish investment advisors.