The past seven weeks have been a genuine stress test, not of the economy as a whole, but of investor behavior. Markets entered March from a position of stability, with inflation trending lower and expectations for interest rates beginning to ease. That setup changed abruptly at the end of February, when U.S. and Israeli strikes on Iran forced a rapid repricing of risk across global markets. What followed was not a breakdown, but a sequence, shock, adjustment, and recovery, that defines how markets function under pressure.
Shock and Repricing
The initial impact was concentrated in energy. Oil prices surged, gasoline moved sharply higher, reaching as much as $6 per gallon in California, and those costs moved quickly through transportation, supply chains, and pricing decisions. Headline inflation followed, rising from roughly 2.4% to about 3.25% year-over-year. As inflation expectations shifted, interest rates moved higher across the curve, tightening financial conditions and placing pressure on both equities and fixed income.
March returns reflect that adjustment. U.S. equities declined 4.97% for the month, developed international markets fell 9.74%, and emerging markets declined 13.06%. Global real estate also moved lower as financing conditions tightened. The move was broad, but not uniform. Energy was the only sector that held up, rising roughly 10%, while most other sectors declined, with growth-oriented areas among the weakest. Bonds did not provide a cushion. The U.S. aggregate index fell 1.76% as intermediate-term yields rose 30 to 40 basis points, and mortgage rates reset higher to 6.38%, reversing the easing that had taken place earlier in the quarter.
Commodities moved in a different direction, rising 11.5% in March and 24.4% for the quarter, driven almost entirely by energy. Gold did not behave as expected. After gaining 7.9% in February, it declined 11.6% in March and failed to provide protection during the period of stress. Despite the intensity of the headlines, the drawdown remained contained.
A Non-Uniform Recovery
What stands out is what happened next. After declining approximately 8.2% from its late-February peak to its March 30 low, the S&P 500 retraced roughly one-third of that decline in a single session on March 31. That move was not driven by resolution, but by a shift in expectations. The conflict did not expand. There were no new fronts, no broader regional escalation, and the tone shifted toward containment. That was enough. Markets did not wait for clarity, they responded to the absence of further deterioration in the outlook.
The recovery carried into April. The S&P 500 has since risen roughly 12%–13% from its March low and is now up approximately 4.5% year-to-date. Developed international markets followed a similar path, recovering roughly 10% from the trough and now up about 9% year-to-date, while emerging markets rebounded more fully, rising 12%–13% and moving above late-February levels, up roughly 10% year-to-date. At the same time, interest rates stabilized, with the 10-year Treasury holding near 4.30%, removing a key source of pressure.
Beneath those headline numbers, the structure of returns shifted. In the U.S., growth stocks absorbed most of the decline, with small growth down 6.30% in March and large growth -5.21%, while value held up relatively better. Over the full quarter, that difference became more pronounced. Small value finished up 4.96% and large value 2.10%, while large growth declined 9.78% and small growth 2.81%. The same pattern appeared globally, with growth underperforming value across both developed and emerging markets. The market did not move as one thing, it repriced unevenly.
Inflation, Growth, and Energy
The economic picture has held together so far. With just over a quarter of S&P 500 companies reporting results for the first quarter, Wall Street’s expectations for earnings suggest big U.S. companies are far healthier than wider economic concerns might indicate. Payrolls increased by 178,000 in March, and there is little evidence of broad economic damage at this stage. But the backdrop is shifting. The energy shock is not only an inflation story, it is also a growth story. Higher costs are beginning to weigh on consumer demand even as they keep upward pressure on prices. That combination, slower growth alongside higher inflation, complicates the outlook for policy.
Oil prices reflect that uncertainty. They surged on the initial shock and have remained elevated, even as the situation stabilized. The premium embedded in energy markets is tied to risk that has not fully cleared. Even with the possibility of a ceasefire or negotiated outcome, the underlying exposure remains.
Expected Returns and Positioning
The starting point matters. Valuations remain elevated, and the recent recovery has pushed prices higher without improving what those prices can earn going forward.
We took a closer look at that using a simple sensitivity framework. Over the past 50 years, U.S. equities delivered roughly 7.7% real returns, but a meaningful portion of that came from valuation expansion. That tailwind is no longer available. Today, the earnings yield is roughly 2.5%–2.7%, materially lower than historical norms.
The next question is growth. Recently, real earnings growth has run closer to 3.5%–4.5%, supported by margin expansion, buybacks, and efficiency gains. But over longer periods, that number has been closer to ~2%, which is a more defensible assumption when building a forward-looking model, especially for planning purposes.
That difference matters. If growth remains elevated and valuations stay where they are, returns can look closer to the higher end of the range. But if growth normalizes and valuations compress even modestly, returns fall quickly. The sensitivity is not subtle, small changes in growth and valuation assumptions produce large differences in outcomes.
Taken together, the range of outcomes becomes clearer. Forward returns are likely to fall somewhere between 3% and 5% real, or roughly 5.5%–7.5% nominal. That is below long-term historical experience.
At the same time, the dispersion we saw in March is part of that reset. Value held up better than growth, and non-U.S. markets have outperformed year-to-date. That is not a short-term signal, it reflects where expected returns are now higher.
With lower expected returns for the broad market, outcomes depend more on how capital is allocated within it. Within the Cardiff Park framework, expected returns are more likely to be earned in value, smaller companies, and non-U.S. markets, where valuations and starting yields are more attractive. Exposure to these areas becomes more important, not as a short-term call, but as a way to access return that is not fully reflected in the largest, most expensive parts of the market.
Fixed Income and the Fed’s Narrow Path
The same reset is happening in fixed income. Higher yields have reduced the role of price appreciation and increased the importance of income and reinvestment, while duration risk has become more visible. As a result, forward expected bond returns are more tightly anchored to starting yields, with limited contribution from further rate declines and asymmetric risk if yields rise. Just as equity returns benefited from valuation expansion, bond returns benefited from yield compression; in both cases, those forces cannot be relied upon going forward.
There is also a second layer of uncertainty around policy. The energy shock has not fully cleared, it has shifted. Prices remain elevated enough to keep pressure on inflation, without being severe enough to materially weaken demand. That leaves the Federal Reserve in a difficult position.
Recent data points to the same tension. Progress toward the Fed’s 2% inflation target has slowed, while the labor market remains firm. The result is a narrower path. If policy shifts too early, it risks reinforcing the inflation pressures that pushed yields higher in the first place. If it holds too long, it risks slowing growth more than intended. Markets are adjusting to that constraint.
The Global Layer
The global picture has not cleared. The Strait of Hormuz continues to anchor energy markets, and even after sustained military response, the underlying structure has not changed. Oil remains elevated relative to where the year began, and geopolitical risk continues to influence pricing.
Markets incorporate new information quickly. Prices adjust as expectations change. Investors tend to respond more slowly, often reacting to the move rather than the information that caused it. Market returns reflect how conditions evolve. Investor returns reflect how investors respond to that evolution. The signal from the quarter is not that everything is fine. It is that the system is still functioning.
What We Are Building Around You
This is where the broader work matters. Cardiff Park is not managing a portfolio in isolation. The portfolio sits inside a larger wealth management system—cash flow, tax positioning, account structure, estate and beneficiary coordination, charitable planning, retirement distributions, implementation, and reporting.
Markets are one input into that system. The work is to keep those pieces connected so that the system holds together when the path becomes uncomfortable.
If something is not lining up the way you expect, whether it is the portfolio, reporting, cash flow, tax coordination, or the broader experience, we want to hear that. That is part of the process.
Markets will keep moving. Our role is to keep the structure around you intact—portfolio, cash flow, tax positioning, and decision-making—so it can absorb that movement and continue to compound through it.
If you have questions about your asset allocation, or if something doesn’t feel aligned with what you’re seeing, let’s talk.
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.
Sources: Barchart, Bloomberg, FactSet. Market data reflects the most recent available period.