A year ago, we were writing about resilience. The S&P 500 had just closed out 2025 up nearly 18%, the AI trade was printing winners across mega-cap technology, and the Federal Reserve had pivoted back toward accommodation. Valuations were stretched, yes — but earnings growth gave investors every reason to stay the course. Momentum was the strategy, and momentum was working.
That was then. The first quarter of 2026 didn’t just change the conversation. It rewrote it entirely.
The Great Rotation: S&P 500 Sector Returns
Full year 2025 vs. Q1 2026 · Reversal sectors changed direction entirely
| Sector | Full Year 2025 | Q1 2026 | Change |
|---|---|---|---|
| Energy | +8.7% | +38.3% | ▲ +29.6pp |
| Materials REVERSAL | −10.5% | +9.7% | ▲ +20.2pp |
| Utilities | +16.0% | +8.3% | ▼ −7.7pp |
| Consumer Staples | +3.9% | +7.7% | ▲ +3.8pp |
| Industrials | +19.4% | +4.6% | ▼ −14.8pp |
| Real Estate | +3.2% | +2.8% | ▼ −0.4pp |
| Health Care REVERSAL | +14.6% | −4.9% | ▼ −19.5pp |
| Comm. Services REVERSAL | +33.6% | −6.9% | ▼ −40.5pp |
| Info. Technology REVERSAL | +24.0% | −9.1% | ▼ −33.1pp |
| Consumer Discret. REVERSAL | +6.0% | −9.2% | ▼ −15.2pp |
| Financials REVERSAL | +15.0% | −9.4% | ▼ −24.4pp |
From Tailwinds to Headwinds — Fast
What began as a year of cautious optimism unraveled with remarkable speed. January started quietly enough, with the S&P 500 posting a modest gain and manufacturing data showing real signs of life. But by March, three forces had collided simultaneously — and markets felt every bit of the impact.
The S&P 500 ended Q1 down 4.3%, snapping a three-quarter winning streak. The Nasdaq 100 fell nearly 6%. The companies and sectors that led markets in 2024 and 2025 — software, AI platform giants, consumer discretionary — were among the worst performers of the quarter. This is not a minor rotation — as we projected at the beginning of February, and took deliberate steps to reposition at that time. It is a structural repricing. Compare that to one year ago: broad tech leadership, AI euphoria, and rate-cut optimism carrying everything higher. The contrast could not be starker.
The Triple Threat
Three forces converged this quarter in ways that individually would have been manageable. Together, they created something far more challenging.
The Oil Shock. On February 28th, coordinated U.S.-Israeli strikes on Iran triggered the closure of the Strait of Hormuz — the chokepoint for roughly 20% of global petroleum flows. Crude oil, which began the year near $57 a barrel, surged above $100 and briefly touched $115. The average American is already paying nearly $1.00 more per gallon of gasoline than they were in late February. Capital Economics has projected that even in a contained three-month scenario, Brent crude could average as high as $150 a barrel — with prices not fully normalizing until 2028. History offers a sobering reference point: Brent crude above $104 per barrel has preceded every recession since 1970 — and we are sitting at $100 right now. This is not a routine geopolitical flare-up. It is a supply shock of historic proportions, and its full impact on inflation and growth has not yet been felt.
Tariffs. Just as the tariff narrative from 2025 appeared to be fading, Q1 brought a fresh chapter. The Supreme Court struck down the broad “reciprocal” tariff framework, and the administration responded with a flat 10% levy on all imports. Layered on top of energy price pressures, the inflationary implications are real and compounding. You cannot simultaneously fight inflation and support growth with the same tool — and that is precisely the impossible position the Federal Reserve now finds itself in.
AI and Power Demand. The AI buildout is no longer a software story — it is a capital-intensive infrastructure story, and it is colliding directly with an energy market under severe strain. Data centers require enormous amounts of power. As AI deployment scales across industries, the demand for energy generation isn’t shrinking — it’s accelerating. The intersection of an oil shock, tariff-driven cost inflation, and AI-driven power demand is not a passing disruption. This potential for structural challenges in the short and intermediate term makes us cautious — and it is precisely why we have maintained positions in high-quality technology companies even as we reduced our broader sector exposure. We believe in the long-term thesis; we are simply more selective about how we express it.
Fortis Portfolio Positioning · Q1 2026
Cash Raised
Current Cash Position
All Strategies
We’ll be honest with you: sometimes we look like geniuses, and sometimes it really is just the discipline working. This is one of those times when we’re genuinely pleased to report it’s a little of both — but mostly the discipline. All of our strategies are significantly outperforming their respective benchmarks heading into Q2. At the start of the year, we made a deliberate decision to reduce our technology exposure and broaden our allocations across sectors that had been overlooked during three years of AI-driven concentration. That broadening — into energy, materials, utilities, and value-oriented names — was not a dramatic call. It was a risk management decision rooted in valuation discipline. The overweight to energy, in particular, has played out exceptionally well.
Then, in the final days of March — the day before the Iran conflict erupted into full market consciousness — we moved approximately 15% of our portfolios to cash. We want to be clear: we did not predict the strike on Iran. What we did see was a confluence of risks that made raising cash the prudent move. The timing looked prescient. The reality is that it was process, not prediction. We subsequently redeployed a portion of that cash toward more value-oriented sectors at the end of March and currently sit at approximately 10% cash — meaningfully higher than where we began the year.
We are fully aware that markets have been rising sharply on any indication that the Iran conflict may be approaching resolution. We are not losing sleep over the possibility of missing a rally. The triple threat has not resolved. It has simply paused. Protecting what our clients have built is always the first priority. Capturing every point of upside is not. Diversification is not a concept we talk about — it is how we construct portfolios every single day. Quarters like this one are the proof of why it matters.
Where Diversification Delivered
Beneath the headline carnage, something important happened. The equal-weighted S&P 500 and the Russell 2000 each gained nearly 1% — even as the index-level S&P fell 4.3%. Value outperformed growth every single month of the quarter. Energy surged 38%. Materials, utilities, and consumer staples each posted solid gains. The companies and sectors that spent the prior three years as afterthoughts in a growth-obsessed market stepped forward as the genuine leaders of Q1 2026.
Index Performance: Q1 2026
Returns varied significantly by size and weighting calculations for popular indexes · The S&P 500 cap-weighted index is dominated by the largest companies, where the top 10 stocks represent nearly 40% of the index. The equal-weighted version gives each of the 500 companies the same influence regardless of size. The Russell 2000 tracks approximately 2,000 smaller U.S. companies, while the Nasdaq 100 is heavily concentrated in mega-cap technology. As of March 31, 2026.
S&P 500 Equal-Weighted Index
Each of 500 stocks carries equal weight regardless of company size
The average stock gained. Concentration was the problem, not the broader market.
Russell 2000 Small Cap Index
Tracks ~2,000 smaller U.S. companies with market caps typically under $2 billion
Small caps led the market. Less AI exposure meant less vulnerability to the tech selloff.
S&P 500 Cap-Weighted Index
Weighted by market size — top 10 stocks represent nearly 40% of the entire index
Mega-cap names dragged the index down despite most stocks gaining.
Nasdaq 100 Index
Tracks the 100 largest non-financial companies, heavily concentrated in mega-cap technology
Worst performer of the quarter. AI disruption fears and energy shock hit tech hard.
Globally, international equities outperformed the S&P 500 for a second consecutive quarter. Europe and Japan both showed resilience. Emerging markets — particularly Latin America — benefited from rising commodity prices. Valuations outside the U.S. remain far closer to historical norms, and the earnings outlook for developed and emerging markets remains constructive. For investors who stayed diversified, Q1 felt very different than the headlines suggested.
Bonds delivered exactly what they are supposed to deliver in uncertain environments: ballast. The Bloomberg U.S. Aggregate Bond Index finished roughly flat as rising Treasury yields offset income generation. Credit spreads widened but remain well below recessionary levels — the bond market is pricing in caution, not crisis — and high-quality bonds continue to offer meaningful income at yield levels that didn’t exist for most of the prior decade. For portfolios with genuine fixed income exposure, this remains one of the most attractive entry points in years.
What Comes Next
I won’t pretend the road ahead is without risk. The Strait of Hormuz remains closed. Oil is hovering near levels that have historically preceded recessions. Inflation is re-accelerating just as the Fed had hoped to declare victory. The Federal Reserve is, frankly, frozen — caught between slowing growth and rising prices, with few good options.
But here is what I keep coming back to: the fundamentals that drive equity returns over time have not broken down. S&P 500 earnings are still projected to grow over 16% in 2026. Consumer spending, while softening at the edges, continues to expand. AI is not a bubble to be popped — it is a structural force broadening across the economy into healthcare, industrials, energy infrastructure, and beyond. And a resolution to the Strait of Hormuz disruption, when it comes, could release significant pent-up economic momentum very quickly.
Every significant dislocation since 2008 — the rate shock of 2022, the COVID crash, the taper tantrum — eventually presented a compelling entry point for investors with the patience and positioning to take advantage of it. We are building that dry powder deliberately. We are watching. And we are ready.
The quarter that just ended was a reminder that markets do not move in straight lines. The quarter ahead may well be a reminder of why staying invested — selectively, diversified, and with eyes wide open — remains one of the most powerful strategies available.