First Quarter 2026 Market Update

I hope all of you are well and made it through tax season in one piece. The wild news cycle in the first quarter (and the first few weeks of the 2^nd quarter) has made this a tough market update to get out! Every time I was ready to hit “send” a significant update on the Iran War or Private Credit would cause me to hold back. The month is halfway over, so it is time to get this out whether I like it or not.

Market Overview: A Modest and Expected Pullback

The S&P 500 finished the first quarter down approximately 4.3%. While any decline can feel uncomfortable, this modest pullback aligns with long-term historical patterns. The U.S. equity market experiences at least one notable correction or pullback in most calendar years.

Importantly, 2026 is a midterm election year. These years have historically delivered weaker average returns and higher volatility. However, the data is remarkably consistent on what happens next: every meaningful pullback during a midterm election year has been followed by positive S&P 500 returns over the subsequent 12 months: a 100% hit rate since 1946. This is due in part to the fact that the year following midterms has been the strongest performing years in the four-year presidential cycle, with average one-year post-midterm returns in the 15–16% range.

Attractive Opportunities in Beaten-Down Sectors

The software and broader technology sectors were among the hardest hit in Q1, with many high-quality companies experiencing declines far in excess of the overall market. This “SaaSpocalypse” (SaaS = Software as a Service), driven by investor concerns around agentic AI and potential disruption to traditional software models, led to meaningful valuation compression.

At BrightHaven, we view this as a classic buying opportunity in fundamentally strong businesses. We have been selectively adding to positions in standout companies that exemplify this theme.

Monetary Policy Tailwinds Ahead

We expect the Federal Reserve to deliver three or four rate cuts in 2026. This view is driven by sustained pressure from the White House for easier policy, the powerful deflationary effects of AI-driven productivity gains, and a relatively flat jobs market. We align with respected investor Kyle Bass in believing the neutral federal funds rate should be closer to 2.75% than where it sits today. Lower interest rates should provide a meaningful tailwind for equity valuations.

In light of this, we have been “greedily” deploying some of the dry powder we had been holding in portfolios while many others remain fearful. History shows that periods of market nervousness are often the best times to own great businesses at reasonable prices.

Corporate Earnings Remain Resilient

Despite geopolitical uncertainty, including the back and forth negotiations with Iran, S&P 500 companies have not backed off their forward earnings guidance. Analysts continue to forecast strong double-digit earnings growth for the full year 2026 (currently in the mid-to-high teens range). Corporate America’s resilience reinforces our constructive long-term outlook.

Our Portfolio Positioning

Our portfolios remain well-diversified and aligned with our disciplined, long-term investment process. We continue to favor high-quality businesses with strong balance sheets, pricing power, and secular tailwinds. The recent volatility has allowed us to deploy capital into discounted software leaders while maintaining appropriate risk controls.

We do not attempt to time the market or chase short-term rebounds. Instead, we methodically take advantage of the dislocation to improve the overall quality and expected return profile of client accounts.

Looking Ahead

While Q1 reminded us that markets do not move in straight lines, the underlying fundamentals of the U.S. economy and many of our core holdings remain resilient. The combination of growing corporate earnings, attractive valuations in key growth sectors, and expected monetary easing positions us well for the remainder of 2026 and beyond. The AI productivity revolution is still in its early innings and provides a powerful long-term tailwind for most sectors of our economy.

If you have questions about your portfolio, the opportunities we are pursuing, or anything else on your mind, please reach out. My team and I are always here to help.

Thank you for your continued trust and partnership.