Tepp Wealth Management 2ndQ 2026 Quarterly Outlook

Our first quarter outlook described 2026 as a story of steady growth in the first half, with the potential for inflation to re-emerge later in the year as fiscal stimulus, deregulation, and improving business conditions combined to reignite demand. The Iran conflict, which began on February 28th with coordinated US and Israeli strikes targeting Iranian military infrastructure, compressed and scrambled that sequence.

SOURCES

• - Absolute Strategy Research, “Asset Allocation: Reduce Risk as Iran War Extends,” Zahra Ward-Murphy, March 18, 2026
• - Absolute Strategy Research, “Six Big Investment Issues from Our Global Marketing,” March 25, 2026
• - Absolute Strategy Research, “The High-Flation Regime & Bonds,” written by Ebrahim Rahbari, April 1, 2026
• - Alpine Macro, “Tropic Thunder: War Time Equity Positioning,” Nick Giorgi, April 1, 2026
• - Alpine Macro, “In Brief: Iran — Winner, Winner, TACO Dinner?,” Dan Alamariu, April 1, 2026
• - BCA Research, “Quarterly TAA: Anatomy of a Supply Shock,” Juan Correa, Lucas Laskey et al., April 1, 2026
• - BCA Research, “Geopolitical Strategy: The Shortest Geopolitical Outlook for Q2 2026,” Matt Gertken et al., April 3, 2026
• - GeoFutures, “Sketches of the Middle East After the Iran War”, written by Kamran Bokhari, April 2, 2026
• - Numera Analytics, “Global Asset Allocation: The Fog of War — Should Investors Buy the Dip?,” Joaquin Kritz Lara et al., March 17, 2026
• - Numera Analytics, “US Asset Allocation,” Joaquin Kritz Lara et al., March 19, 2026
• - Oxford Economics, “GAA Equities: US Equities Can Weather the Oil Shock,” Daniel Grosvenor, March 16, 2026
• - Oxford Economics / Alpine Macro, “GAA Cross Asset: Move Closer to Benchmark as We Dial Back Risk,” Ainsworth-Grace, Corominas & Grosvenor, March 12, 2026
• - Oxford Economics / Alpine Macro, “GAA Fixed Income: Central Banks Will Need to Lean Against the Wind,” Javier Corominas, March 13, 2026

Transcript

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TEP Wealth Management, Second Quarter, 2026, Quarterly Outlook. Executive Summary. The US Israel-Iran war and disruption to the Strait of Hormuz have introduced significant near-term market volatility, though we still consider the structural investment case to be intact. Depending on further developments, our base case is that the strait is substantially open by the end of May. After some time, the global economy should begin to recover. We expect inflation will moderate from near-term highs, but is unlikely to return fully to prior lows. We anticipate renewed upward pressure later in the year as the global economy rebounds, the dollar weakens, and the Federal Reserve begins to ease. Stagflation risk persists beyond the conflict itself. The combination of a recovering global economy, a weakening dollar, and Fed rate cuts is a potential catalyst for a second inflationary impulse in the second half of 2026. We believe the technology and AI investment thesis is relevant. The 2026 sell-off is entirely a valuation story, not an earnings story, and potentially represents an attractive entry point for long horizon investors. Energy security has emerged as a defining global investment theme. Nations across the world are accelerating investment in domestic and allied energy infrastructure in direct response to the vulnerability exposed by the strait disruption. The strategic case for real assets, including gold, uranium, industrial metals, and utilities, still appears compelling. In general, fixed income emphasis on low duration and income generation remains appropriate. The case for extending duration has not arrived. Introduction. The Iran conflict, which began on February 28th with coordinated U.S. and Israeli strikes targeting Iranian military infrastructure, compressed and scrambled that sequence. The inflationary risk we anticipated arrived earlier than expected, courtesy of a global energy shock. The Strait of Hormuz, a narrow waterway off the southern coast of Iran, is perhaps the single most consequential choke point in the global energy system. Approximately 20% of the world's oil and liquefied natural gas transits this passage every day, connecting Gulf producers to markets across Asia and Europe. When it effectively closes, the ripple effects are felt within days. Refined product prices surge, transportation costs soar, manufacturers face rising costs, and consumers feel it at the gas pump. The world is now contending with these ripple effects. The near-term disruption is real, and its effects will linger into the second quarter and perhaps beyond. The purpose of this writing is to explain what these circumstances mean for portfolios and how we are thinking about the path ahead. In short, we do not intend to fundamentally alter our strategy. We intend to galvanize it. Three themes organize our view for the second quarter. Together, they explain both the current market environment and the portfolio positioning decisions that follow from it. DT note. The US-Israel-Iran conflict is beginning to extract a heavy toll on all involved. Iran's economy is on the verge of implosion, and this has gone underreported. Recently, the Iranian government released a 10 million real, the Iranian currency note, it is worth roughly seven US dollars. Recent reports indicate that banks are discouraged from issuing more than this amount when consumers need to withdraw cash. The price of consumer staples is soaring due to supply chain difficulties, and it is extremely challenging for Iranians to generate more income. Meanwhile, as noted above, the Iranian stranglehold on the Strait of Hormuz is having global economic repercussions. There are also reports that both the U.S. and Israel are beginning to run low on offensive and defensive munitions. In the coming weeks, all sides will have reached the point of mutual exhaustion. A ceasefire that reopens the strait is in the interest of all involved. Theme 1. The economy. Critically, U.S. corporate profit margins entering this conflict are near historic highs, giving companies a meaningful buffer to absorb rising input costs without resorting to mass layoffs. The mechanism that typically turns an energy shock into a recession. The manufacturing sector was accelerating, entering the conflict, not decelerating. A notable distinction from prior episodes where shocks hit economies that were already softening. As a result, the Federal Reserve faces a genuinely difficult situation. The war has temporarily pushed inflation higher at a time when the central bank had been preparing to lower interest rates. Our expectation is that the Fed holds through most of the second quarter before beginning a measured easing cycle in the second half of the year. Rate hike expectations that markets briefly priced in early March are, in our view, overstated since the Fed is unlikely to tighten monetary policy into what is fundamentally a supply-side shock it cannot resolve. Our base case is that the strait should be substantially open by the end of May. The diplomatic channels are active, the economic pressure on all parties is intense, and the political calculus in Washington, particularly with midterm elections on the horizon, creates real incentives for resolution. A mutual stand down that allows all sides to claim some form of victory is the most likely outcome. But the resolution of the conflict does not mean the inflation issue is resolved. Even after the strait reopens, oil prices are likely to remain elevated for some period. Gulf producers have throttled output significantly, and it takes time to restart production at scale. More importantly, the global economic recovery that follows a ceasefire could itself generate inflationary pressure. If the Federal Reserve begins to cut rates mid-year while the global economy rebounds, and if the U.S. dollar retraces to pre-war levels, the conditions for a second inflationary impulse in the second half of 2026 are entirely plausible. This is our base case for the second half of 2026, and it is the primary reason real assets and low duration fixed income are permanent features of the portfolio rather than temporary wartime hedges. Europe and emerging Asia tell different stories. Europe is one of the most vulnerable regions in the current environment. Its dependence on Middle Eastern energy, depleted gas reserves, and an already stressed growth trajectory compel us to avoid European equity exposure. Alternatively, among Asian economies, the picture is more nuanced. China holds substantial strategic petroleum reserves and has diversified its energy supply meaningfully over the past decade. Japan's corporate reform story is intact, and its earnings momentum is among the strongest of any major market. Emerging Markets, EM Asia broadly, with its exposure to semiconductor demand and AI infrastructure supply chains, is likely better positioned than the headline emerging market story might suggest. Accordingly, we maintain selective evasion equities. Theme 2: Technology and AI, the price has moved. The thesis has not. Overall technology stocks have given back a meaningful portion of their 2025 gains. The sector has been the single worst performer since the war began, trailing energy by more than 50 percentage points in the first quarter. The sell-off in technology is a valuation story, not an earnings story. Forward earnings estimates for the sector have continued to rise throughout 2026, even as stock prices declined. The AI infrastructure buildout, including the hyperscaler capital expenditure programs at Microsoft, Amazon, Alphabet, Meta, and others, has shown no signs of slowing. GPU rental prices are rising, which is a real-time market signal that actual hardware demand is accelerating, not stalling. The companies building and selling this infrastructure are not reconsidering their investment plans because of a Middle East conflict. Apparently, the strategic imperative is too large, the return on invested capital too visible, and the competitive stakes, including the parallel AI build-out underway in China, too consequential to pause. The war has actually reinforced one element of the technology thesis that is sometimes overlooked. The demand for energy independent computing infrastructure. Data centers require an enormous and reliable flow of power. The vulnerability exposed by the Hormuz disruption has accelerated every government's commitment to energy independence and grid modernization. The investment required to build that infrastructure flows directly through the sectors we currently favor, including semiconductors, utilities, and defense technology. One notable risk is if a prolonged slowdown pressures cash flows at the enterprise companies most actively adopting AI, banks, manufacturers, and media, demand for AI services would eventually be affected, though we see no evidence of this today. At present, there is scant evidence of it materializing, but it remains on our radar. Theme three, energy security and real assets. The world just changed its mind. Prior to February 28th, energy security was a policy priority. Now it is a global urgency. Every government is now asking, how do we make sure this cannot happen to us again? The answer to that question likely does not flow through the Persian Gulf. It runs through energy infrastructure that is domestically controlled, geographically distributed, and resilient to geopolitical disruption. That means upgrading electricity grids, investing in nuclear power, and possibly alternative clean energy. It means the utilities and infrastructure companies that build, operate, and finance the physical systems that make energy independence possible. These are the investments we hold in the energy and thematic sleeves of the portfolio, and their strategic rationale has never been clearer. Energy infrastructure and utilities. Demand for reliable, domestically controlled electricity was already growing before the war, driven by AI data centers, manufacturing reshoring, and electrification. Utilities are now considered growth businesses operating at the intersection of AI infrastructure, energy transition, and national security. Their earnings profiles have improved, and the political environment, once a risk for the sector, as rate increases, drew public criticism, has shifted as energy security moves to the front of every policy agenda. Nuclear energy. Nuclear's moment has arrived and the war has accelerated it. Nuclear provides baseload power that runs continuously, produces no carbon, and does not depend on imported fuel. The economics have improved dramatically as power demand has surged. The policy environment, already shifting before the war, is now decisively supportive across the US, Europe, and Asia. Our nuclear exposure reflects a long-term conviction that predates the conflict. Gold. When the conflict began, gold sold off alongside other risk assets as the dollar surged and retail investors rushed to raise cash. However, the long-term drivers of gold's appreciation remain. Central banks in emerging economies continuing to diversify away from dollar-denominated reserves, elevated geopolitical uncertainty, and the emerging question of U.S. strategic credibility. As the dollar retraces from its war-driven highs, which we expect as the conflict resolves, gold's underlying upward trend should resume. We remain bullish and view the recent pullback as consistent with the playbook rather than as a signal to reduce exposure. A note on private credit. Private credit has been a topic of considerable concern in recent months, and we want to address it directly. The stress in this space is real, but it is not uniform. The issues are concentrated in specific fund structures that entail more semi-liquid vehicles, which creates a structural mismatch between investor expectations and the underlying asset liquidity. When redemption requests exceeded fund limits, the resulting headlines created the appearance of a broader crisis that does not fully reflect the underlying credit quality of the assets. The larger, more established private equity and credit managers have the resources, the diversification, and the balance sheet strength to navigate this environment. Clients with exposure to private credit through well-resourced institutional managers should understand that the risk is real but is not systemic, and that manager selection matters enormously in this environment. We continue to monitor developments closely. Investment strategy, expressing these views. The three themes above translate directly into how portfolios are positioned. Our investment approach is organized around three complementary sleeves, core, tactical, and thematic, each designed to serve a distinct purpose. Together, they are structured to participate in long-term growth while managing the risks that are most elevated in the current environment. Core. Broad, U.S. equity exposure remains the foundation of the portfolio. At the moment, the U.S. has the best earnings momentum, is a net energy exporter, retains the deepest capital markets, and has the greatest direct exposure to the AI productivity cycle. Large cap growth and large cap value exposures are maintained in relative balance, reflecting both the technology conviction and the broadening of earnings leadership into more capital-intensive sectors. We remain cautious on small cap equities, which carry more sensitivity to higher rates and greater vulnerability to an economic slowdown. International equity exposure is maintained selectively. We avoid Europe, which faces the highest structural risk from the energy shock of any major region. We maintain exposure to Japan, which has the strongest earnings upgrade momentum of any developed market and is benefiting from a genuine corporate governance transformation. Emerging market exposure is focused on Asia, where semiconductor supply chains, AI infrastructure demand, and favorable valuations make the risk reward more compelling than the headlines suggest. Fixed income continues to emphasize low duration and income generation. Extending duration into an environment where inflation risks are elevated and the stock bond correlation has turned positive would work against the portfolio's objectives. Tactical. The tactical sleeve is where we express shorter to intermediate term opportunities, and the current environment has sharpened several of these convictions considerably. Semiconductors and technology infrastructure remain a core overweight. Defense is a clear beneficiary of the war environment and its aftermath. Global rearmament and energy security spending are typically multi-year government commitments that seldom reverse. Infrastructure and utilities have moved from cyclical positions to near conviction holdings, given the energy security dynamic described above. Nuclear energy and uranium continue to be high conviction themes, strengthened materially by the war's impact on energy security priorities globally. Additionally, financials remain part of the tactical mix, as banks and capital markets firms benefit from trading activity, loan growth, and the improving corporate activity that follows economic stabilization. We are deliberately underweight consumer sectors since both consumer discretionary and consumer staples face structural headwinds from input cost pressure and limited pricing power. Thematic. The thematic sleeve holds long-term structural positions that are largely independent of the quarterly economic cycle. Robotics and automation reflect the ongoing productivity imperative at the intersection of labor scarcity and AI-driven efficiency. Water infrastructure remains a multi-decade investment theme driven by resource constraints, aging infrastructure, and regulatory investment requirements around the world. We have also added clean energy as a new thematic position this quarter, reflecting the structural acceleration in renewable infrastructure investment that the Hormuz disruption has made an urgent national priority across the developed world. These positions are sized modestly and managed with long-term horizons. They are not intended to respond to quarterly market movements, but to compound quietly over years. All positions are reviewed continuously. As the conflict evolves, as economic data updates our understanding of the inflation trajectory, and as earnings reports in April and July clarify the corporate picture, allocations will be adjusted accordingly. Risks and what we are monitoring. Strait of Hormuz disruption extending beyond May, which would increase pressure on global growth and accelerate EPS estimate revisions. Late year inflation reacceleration, driven by the combination of global economic recovery, Federal Reserve Easing, and dollar weakening, our most closely watched medium-term risk. Federal Reserve policy error, either tightening into a demand slowdown or easing prematurely into an inflation environment that has not fully normalized. AI enterprise adoption slowing if a prolonged economic softening reduces cash flow availability among the corporate buyers of AI services. U.S. fiscal deterioration accelerating as war costs compound an already elevated deficit trajectory, putting upward pressure on long-term treasury yields. Dollar credibility and petrodollar dynamics in the event that a negotiated resolution leaves Iran with lasting leverage over straight traffic, a medium-term structural risk, not a near-term portfolio action. Private credit stress spreading beyond structurally vulnerable fund types into broader credit markets, which would affect financial conditions and spread pricing. We are monitoring labor market trends, corporate earnings guidance, oil price trajectory, Federal Reserve communications, and dollar behavior as the primary indicators that will inform portfolio adjustments in the coming weeks. Update April 8, 2026. As this outlook was being finalized, the United States and Iran agreed to a two-week ceasefire, pausing active hostilities. We view this development with measured optimism. The willingness of both sides to step back suggests neither has a strong incentive to allow the conflict to escalate indefinitely, raising the possibility that a more durable resolution may be within reach. That said, we are not altering our current positioning or our broader assessment of the risk environment. The ceasefire remains fragile, and early signals are not encouraging. Iran has already tested U.S. resolve by launching an attack on a Saudi pipeline and has taken additional steps to consolidate its grip on the Strait of Hormuz. Accordingly, we are not yet prepared to conclude that hostilities have ended in any meaningful sense. Our base case, that the strait will be substantially open by some time in May, remains unchanged, and the portfolio continues to be structured accordingly. Conclusion. The question that matters for investors at this moment is the duration of the conflict. We believe this disruption will be temporary. The structural forces that drove the investment thesis entering 2026, including AI-driven productivity, the capital investment supercycle, energy security and transition, U.S. economic resilience, remain intact and possibly even strengthened by the conflict itself. A world newly focused on energy independence, supply chain sovereignty, and technological competition, is a world that will spend trillions of dollars on exactly the infrastructure, technology, and energy systems that the portfolio is designed to capture. We remain disciplined, engaged, and fully aligned with your long term goals. As always, we welcome your questions.