You’ve fallen victim to one of the classic blunders! The most famous is never get involved in a land war in Asia, but only slightly less well known is this; never go in against a Sicilian, when death is on the line! Aha ha ha ha...
The Princess Bride (1987)
Executive Summary
Markets are juggling two big questions at the same time: whether the Iran conflict remains just an oil shock or if it becomes a broader growth problem, and whether AI is destroying software economics or simply reshuffling where value accrues.
A prolonged Middle East conflict raises the odds of a stagflationary backdrop, especially if higher energy prices begin to weigh on spending, margins, and confidence.
At the same time, ongoing policy support and firmer productivity trends suggest this is not merely a replay of the 1970s energy crisis.
We continue to favor selective AI exposure and do not believe software is dead. In our view, the market is making a classic blunder by confusing repricing with ruin.
Market Performance Barometer Through 3/18/26
Performance
Recent market performance reflects a backdrop with very little consensus and even less calm. Through 3/18/26, the S&P 500 is down 2.97% quarter to date, while the Russell 1000 Growth Index has fallen 7.51%, trailing the Russell 1000 Value Index, which is up 2.24%. Energy has been the standout, with the S&P 500 Energy Index up 30.82% quarter to date, while information technology has lagged, down 6.30%. International equities have held up better, with MSCI Emerging Markets up 8.36% and MSCI EAFE up 2.08%. Fixed income has done its usual job of being less dramatic, with municipals up 0.95% and the U.S. Aggregate Bond Index roughly flat at 0.04% year to date. Put simply, markets are rewarding energy, giving some credit to diversification abroad, and asking harder questions of U.S. growth leadership.
Iran, Oil, and the Stagflation Question
The market’s first instinct in a geopolitical shock is to focus on oil, and that is fair enough. Oil is usually the first place geopolitical stress shows up, but it is rarely the last. But the bigger risk is not a brief spike. It is the possibility that higher prices stick around long enough to hit consumer spending, compress margins, and weaken confidence.
That is where the conversation shifts from inflation to stagflation. A short conflict can look like a simple price shock. A longer conflict starts to look like a broader macro problem, with sticky inflation arriving alongside slower growth. That is a much tougher mix for central banks and a much less forgiving one for risk assets.
This is one of the classic blunders markets tend to make. They focus on the first-order effect and assume they have the whole story. In this case, oil is only the opening act. If the conflict drags on, the more important issue may be what elevated energy costs do to demand, hiring, and sentiment. For portfolios, that means the story is not just about owning energy. It is about understanding how a prolonged shock can pressure the wider equity market.
Policy Cushion, with an Expiration Date
Markets have been more resilient than the headlines would suggest, and policy is a big reason why. Tax relief, Fed balance sheet expansion, housing-related liquidity support, and the prospect of further deregulation have all helped cushion the blow from the Iran conflict. That support has mattered. It helps explain why equities have acted as though the conflict is serious, but not yet economically decisive.
The catch is that some of this support may more closely reflect a bridge than a foundation. Tax refund season starts to roll off after April. The Fed’s balance sheet expansion is also expected to slow after the tax-season liquidity push. And just as those supports begin to fade, higher oil and food prices may start to do more visible damage to consumers, margins, and capex plans. That is when a market that has taken the shock in stride may have to deal with it more honestly.
There is one more wrinkle. Policy itself could become a source of volatility. A potential fight over Fed leadership in May adds uncertainty at exactly the wrong moment, with markets already trying to balance inflation pressure against slowing growth. So while policy has softened the immediate hit, it may not be able to prevent a tougher second quarter if the conflict drags on and the stimulus pulse fades. For portfolios, that means near-term resilience should not be mistaken for immunity.
1970s Echoes, but Not a Replay
The temptation is to call this a return to the 1970s and move on. That is understandable, but probably too neat. The comparison works on the surface. Inflation pressure was already present, then a Middle East conflict added a supply shock through oil and related inputs. That part feels familiar.
The difference is that today’s economy may have better shock absorbers than the 1970s template. Productivity trends appear firmer, and policy makers are operating in a more flexible financial system. This may end up looking less like a pure 1970s stagflation spiral and more like a tug of war between 1970s-style supply shocks and 1990s-style productivity support.
That distinction matters. It suggests the outlook is more complicated than either the soft-landing camp or the full-stagflation camp would like. In our view, the real classic blunder would be treating today as a clean historical rerun when the setup is clearly more complicated. For portfolios, that means staying balanced rather than betting everything on one macro script.
AI and Software: Repriced, Not Dead
The market’s other major overreach has been in software. There is a growing tendency to jump from “AI changes software economics” to “software is dead.” We do not buy that. AI is likely to reshape business models, but reshaping is not the same thing as eliminating.
What seems more likely is a gradual shift in parts of the industry from seat-based pricing toward consumption-based, transaction-based, or outcome-based models. That can be painful for some incumbents, and it may create real winners and losers. But it does not mean the whole industry has suddenly become obsolete. In fact, it may broaden the opportunity set for companies that help customers deploy AI productively, govern it responsibly, and integrate it into real workflows.
Here again, the market risks falling for the classic blunder. It is treating disruption as destruction. We continue to like selective AI exposure, especially in businesses that enable adoption rather than simply narrate it. The better question is not which software businesses AI pressures first, but which businesses become more valuable as customers try to use AI efficiently, measurably, and at scale.
Portfolio Takeaways
This is not an easy environment, but it is also not one that rewards sweeping conclusions. A prolonged Iran conflict could push the backdrop in a more stagflationary direction. Policy support may cushion the blow, but likely not forever. And the software selloff may prove to be more about repricing than permanent impairment.
For portfolios, the answer remains diversification, selectivity, and discipline. Staying invested through volatility usually matters more than trying to trade every geopolitical turn or every narrative swing in technology. In our view, the steadier course is to stay diversified, stay selective, and avoid letting either geopolitical fear or technological enthusiasm push portfolios into simplistic conclusions.
Louis Tucci; Partner | Senior Investment Advisor
Paulo Aguilar, CFA, CAIA; Partner | Senior Investment Advisor
Mark H. Tucker, CFA; Chief Investment Officer
Chuck Bettinger; Portfolio Manager
Securities offered through Arkadios Capital. Member FINRA/SIPC. Advisory services through Arkadios Wealth.
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