Advisor Commentary · Q1 2026
A genuine stress test — not of the economy, but of how markets respond under pressure. Shock. Adjustment. Recovery. Beneath the index numbers, leadership shifted: value over growth, smaller over larger, non-U.S. over U.S. The dispersion wasn’t random. It tracked the pricing structure that exists across global equity markets right now — and that is where this commentary begins, and where it ends.
The past seven weeks were a genuine stress test—not of the economy, but of how markets respond under pressure. A geopolitical shock forced a rapid repricing of risk. What followed was not disorder, but sequence: shock, adjustment, recovery.
But the move itself is less important than how it resolved.
Markets did not reprice randomly. They re-priced along the structure that already existed beneath the surface. The areas of the market with the highest starting valuations and the longest-duration cash flows gave back the most. Areas with lower starting valuations, nearer-term cash flows, or higher embedded income held up—and in many cases, advanced.
That pattern is the story.
Markets had been on stable footing through early February. Inflation was trending lower, and expectations for interest rates were beginning to ease. That shifted abruptly when U.S. and Israeli strikes on Iran forced a reassessment of risk across global markets. Energy prices moved higher, inflation expectations followed, and interest rates adjusted upward in response.
The S&P 500 declined roughly 8% from its late-February peak to its March low. By late April, it had retraced that decline and moved back toward prior highs. The recovery occurred even as the underlying risks—conflict, energy pressure, and inflation—remained unresolved. What changed was not the backdrop, but expectations. The conflict did not widen, energy prices stabilized, and interest rates stopped moving higher.
But beneath the index, leadership shifted decisively.
Value outperformed growth. Smaller companies outperformed larger ones. Non-U.S. markets held up better than the U.S. Real estate investment trusts generated positive returns even as broad equities declined.
That dispersion was not a reaction to headlines. It followed the pricing structure already embedded in global equity markets.
Global Market Returns · March vs. Quarter and Longer-Term Context
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Returns are index returns and do not reflect client-specific performance. US Stock Market represented by Russell 3000 Index; International Developed Stocks by MSCI World ex USA Index (net dividends); Emerging Markets Stocks by MSCI Emerging Markets Index (net dividends); US Bond Market by Bloomberg US Aggregate Bond Index; Global Bond Market ex-US by Bloomberg Global Aggregate ex-USD Bond Index, hedged to USD; Commodities by Bloomberg Commodity Total Return Index. Past performance is not a guarantee of future results.
Equity Markets: Differentiation Under the Surface
Markets began to differentiate along the lines most exposed to higher rates and changing inflation expectations. U.S. equities declined for the quarter and underperformed global markets, while international developed and emerging markets held up better overall. Within the U.S., growth stocks sold off sharply, while value-oriented segments held up and, in some cases, produced positive returns.
The same pattern held globally. Value outperformed growth. Smaller companies outperformed larger ones. Leadership shifted away from the largest, most expensive parts of the market.
This was not a broad-based repricing. It was a selective one—focused on the parts of the market where expectations were highest and most sensitive to change.
Cash flows further out in time were discounted more heavily. Nearer-term and more income-oriented exposures held up.
US Equity Dispersion · Returns in USD as of March 31, 2026
US Market — 63% · $62.6T
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Returns are index returns and do not reflect client-specific performance. Marketwide represented by Russell 3000 Index; Large Cap by Russell 1000 Index; Large Value by Russell 1000 Value Index; Large Growth by Russell 1000 Growth Index; Small Cap by Russell 2000 Index; Small Value by Russell 2000 Value Index; Small Growth by Russell 2000 Growth Index. Past performance is not a guarantee of future results.
International & Emerging Markets · Returns in USD as of March 31, 2026
Developed ex-US — 26% · $26.6T Emerging Markets — 11% · $11.7T
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Returns are index returns and do not reflect client-specific performance. Developed ex-US Marketwide represented by MSCI World ex USA IMI Index; Developed ex-US Large Cap by MSCI World ex USA Index; Developed ex-US Small Cap by MSCI World ex USA Small Cap Index; Developed ex-US Value by MSCI World ex USA Value Index; Developed ex-US Growth by MSCI World ex USA Growth Index. Emerging Markets Large Cap represented by MSCI Emerging Markets Index; Small Cap by MSCI Emerging Markets Small Cap Index; Value by MSCI Emerging Markets Value Index. Past performance is not a guarantee of future results.
Real Estate Investment Trusts · Returns in USD as of March 31, 2026
US REITs — 70% · $1,107B · 100 REITs Global ex-US REITs — 30% · $467B · 277 REITs
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Returns are index returns and do not reflect client-specific performance. US REITs represented by Dow Jones U.S. Select REIT Index; Global ex-US REITs represented by S&P Global ex US REIT Index (net dividends). Past performance is not a guarantee of future results.
Valuation Across the Equity Map
That behavior reflects how the market is priced today.
Looked at across geography and size, the global equity market is not uniformly expensive. It is expensive in one corner.
U.S. large-cap equities—particularly growth—trade at a substantial premium to the rest of the world. By contrast, U.S. value, smaller companies, international developed markets, and emerging markets all trade at materially lower multiples on both earnings and book value.
Equity Valuation Across Geography and Size · As of March 31, 2026
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Valuation metrics are market-value-weighted across each Morningstar category. P/E and P/B reflect the underlying holdings of funds within each segment; returns are total return for the quarter. Source: YCharts. Past performance is not a guarantee of future results.
The gap is not marginal. It is wide enough that it begins to influence outcomes.
When valuations are spread this far apart, returns tend to track them over time. Not precisely, and not on a fixed schedule—but directionally and repeatedly. That is what showed up in the first quarter. The most expensive segment of the market produced the largest drawdowns. The least expensive segments held up or generated positive returns.
This is not a short-term signal. It is a reflection of starting conditions.
The mechanism behind it is straightforward. Higher valuations imply a greater reliance on cash flows that are further out in time. When interest rates rise or inflation expectations shift, those distant cash flows are discounted more heavily. Prices adjust accordingly.
By contrast, assets with lower valuations or higher current income depend less on distant assumptions. There is less embedded expectation and less sensitivity to changes in the discount rate.
That dynamic is not unique to equities. It is the same relationship that governs fixed income.
Fixed Income: The Same Repricing
Fixed income reflected the same repricing we saw across equity markets. After four consecutive quarters of gains, the broad U.S. bond market declined slightly in the first quarter, with the Bloomberg U.S. Aggregate Bond Index finishing essentially flat and falling nearly 2% in March alone.
Treasury yields rose across the curve, with the front end moving more than the long end. The two-year increased by more than 30 basis points for the quarter, while the 10-year ended near 4.30%.
When yields rise, bond prices fall. How much they fall depends on duration.
That is what showed up in returns. Short-duration bonds moved less and held up. Intermediate and longer-duration bonds declined more. Municipal bonds followed the same pattern, and credit spreads widened, limiting the ability of credit exposure to offset the rate move.
The point is simple: it was not the level of yields that mattered. It was the sensitivity to them.
Fixed Income: Stability Under Rate Pressure
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Returns are index returns and do not reflect client-specific performance. Past performance is not a guarantee of future results.
That same sensitivity exists in equities. Long-duration assets—whether bonds or equities—are more exposed when rates rise. The first quarter made that visible across both asset classes.
Expected Returns and Positioning
What matters most from here is the starting point.
Prices have largely recovered. But what those prices can earn going forward has not improved. That is the disconnect.
When expected returns are broken down into their components—what you are paid today, how earnings grow, and how valuations evolve—the math is straightforward. The market is currently offering a modest earnings yield. If earnings grow at long-run rates and valuations remain unchanged, expected real returns fall into the mid-single digits.
Expected Real Return Decomposition · 50-Year Realized vs. Forward Baseline
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50-year realized period: 1976–2026. Realized payout shown as average dividend yield; forward payout shown as Shiller earnings yield (1/CAPE). Realized re-rating reflects CAPE expansion from 11.7 to 36.5. Forward baseline assumes long-run real earnings growth of 1.9% and flat CAPE. Decomposition is annualized; geometric reconciliation absorbs ~70 bps of compounding interaction. Source: Shiller dataset, BLS CPI-U. Past performance is not a guarantee of future results.
There is a higher-return outcome. If recent growth trends persist and valuations remain elevated, returns can look stronger. But that outcome depends on both of those conditions holding. If growth slows or valuations compress, returns fall quickly.
Small changes in those assumptions lead to materially different outcomes. That sensitivity is not abstract. It is visible in the starting point.
Sensitivity: Expected Real Return Across Growth and Valuation Assumptions
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Framework: E[Real Return] = Earnings Yield + Real Earnings Growth + Change in Valuation. Earnings yield is the current Shiller E/P (1/CAPE). Growth assumptions: long-run reflects 1900–2025 real earnings growth in the Shiller dataset; 30-year reflects the trailing 1996–2026 window. Valuation change is annualized over a 10-year reversion horizon. Nominal returns use a 2.51% CPI-U input. Source: Shiller dataset, BLS CPI-U. Past performance is not a guarantee of future results.
The parts of the market with the highest valuations—and the lowest starting yields—are the most dependent on those assumptions holding. The parts of the market with lower valuations and higher starting yields require less to go right.
That is the tradeoff embedded in today’s market.
Within that framework, positioning follows naturally. The objective is not to predict which segment will lead in the next quarter. It is to ensure that capital is allocated across a range of outcomes, with an emphasis on areas where the starting point is more favorable—where the compensation for risk is higher and less dependent on continued expansion in valuation.
That includes maintaining broad exposure, while leaning toward value-oriented segments, smaller companies, and non-U.S. markets, where valuations are more moderate. It also includes structuring fixed income to reflect its role today: generating income and managing risk, rather than relying on price appreciation from declining yields.
What We Are Building Around You
The portfolio is one part of a broader system.
That system includes cash flow, tax positioning, account structure, estate and beneficiary coordination, charitable planning, retirement distributions, implementation, and reporting. Markets are one input into that system, but not the only one.
The objective is to keep those components aligned so that the system holds together when conditions become less predictable.
Markets will continue to adjust. The role of the portfolio is not to avoid that movement, but to be structured in a way that can absorb it—so that the broader system continues to function and compound through it.
If something is not lining up the way you expect—whether in the portfolio, reporting, cash flow, or overall structure—we want to hear that. That is part of the process.
If you have questions about your allocation or how it connects to what you are seeing in markets, we should discuss it.
Regards,
John Gorlow
President
Cardiff Park Advisors
888.332.2238 Toll Free
760.635.7526 Direct
760.271.6311 Cell
Past performance is no guarantee of future results. Index returns are for illustrative purposes and do not reflect actual fund performance. You cannot invest directly in an index. The opinions expressed are those of Cardiff Park Advisory and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice.