What Has Changed and What Hasn’t Amid Ongoing Uncertainty 

with Adam Phillips, Managing Director, Investments 

As the conflict in the Middle East continues to evolve, many investors are asking how it should impact their outlook and portfolios. While the situation remains uncertain, it is important to step back and focus on what has actually changed and, just as importantly, what has not.

Coming into the year, portfolios were positioned with a neutral allocation to equities. This reflected a market that had experienced three strong years and where valuations had become more elevated. It also reflected the reality of entering a midterm election year, which has historically been associated with increased volatility. In fact, the S&P 500 has historically experienced an average drawdown of around 19% during midterm years.

While we expected some level of volatility, the specific catalyst was unknown. The current geopolitical conflict has introduced that uncertainty, but portfolios were already positioned with this type of environment in mind.

At the start of the year, several key factors were supporting markets. These included expectations for Federal Reserve rate cuts, a resilient economy, continued investment in artificial intelligence, fiscal support from recently passed legislation, and strong corporate earnings growth.

The key shift over the past month has been the change in expectations around interest rates.

Rising energy prices and renewed inflation concerns have led markets to reassess the path of monetary policy. Expectations for multiple rate cuts this year have largely been removed, and some investors have even begun to consider the possibility of rate increases. While we view that as unlikely, it is clear that the outlook for interest rates has shifted.

Beyond that, however, many of the underlying supports for the market remain intact.

The broader economic backdrop continues to show resilience.

While higher gas prices are placing additional pressure on households, particularly lower-income consumers, we are not yet seeing signs of broader economic deterioration. One of the key indicators we monitor is initial jobless claims, which provide insight into layoffs. At this point, jobless claims remain low, suggesting that the labor market is still holding up well.

Corporate earnings are another important factor. Despite recent uncertainty, earnings growth expectations for both 2026 and 2027 have actually increased across sectors. That may seem surprising, but it helps explain why markets have not declined more significantly.

Looking ahead, earnings season will provide additional clarity as companies begin to report results and offer updates on how current conditions are affecting their outlook.

From a portfolio perspective, the current environment reinforces the importance of maintaining discipline. While geopolitical events can create short-term uncertainty, reacting to headlines can lead to decisions that are not aligned with long-term objectives.

Portfolios remain positioned with a neutral allocation to equities, supported by diversification and a focus on quality. While the range of potential outcomes remains wide, the underlying fundamentals continue to support a steady approach.

In periods like this, it is important to stay focused on what can be measured and monitored, rather than reacting to rapidly changing headlines. We will continue to watch developments closely and make adjustments as needed based on data and long-term trends.

As always, if you have questions about how current events may affect your portfolio, please reach out to your financial advisor. We look forward to connecting again in the coming weeks.

 Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA^®), a CERTIFIED FINANCIAL PLANNER™ (CFP^®), and has been included on the Forbes NextGen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio. 

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Video Transcript: 

Adam Phillips:

Welcome to this week's market update. I will be traveling over the next couple of weeks, so we won't be putting out an update, but I do want to leave you with some information in the meantime. I think right now we are looking at a situation that continues to evolve in the Middle East. Unfortunately, we can't pretend to know how or when the war will ultimately be resolved, and that's uncomfortable, but I think it's really important to understand.

What has changed, and what hasn't, during this conflict? So let's rewind the clock and think about our positioning and outlook at the beginning of the year. We came into this year with a neutral allocation to equities. That means that in a typical portfolio that might allocate. 50% to stocks or equities.

We were right at 50%. That was our that was a reflection of a market whose valuations had reached elevated levels after three really strong years. And our own understanding and acknowledgement that we were starting a midterm election year, where generally, policy uncertainty can create additional volatility.

In fact, in the average midterm election year, we see the S&P experience a drawdown of about 19%. So we were prepared for volatility. We, we understood it was possible. We certainly, I can't take credit for knowing what the catalyst would be for this downside risk, but ultimately, we were positioned appropriately for it.

Now what's, what, what was the reason for not pulling back even further and de-risking portfolios even further? And the answer is really that we saw a few primary catalysts for the market at the beginning of this year. The first was that we expected the Fed to cut rates. We also looked at an economy that continued to be on solid footing.

Sure, there were areas of weakness in the economy, but we were also, we were also seeing AI or capital expenditures across artificial intelligence continue to increase, which is certainly providing support for the economy. We also saw fiscal support in the form of the One Big Beautiful Bill Act, which was passed last year and was going to provide a lot of support to households in the form of tax refunds as well as corporations.

And then finally, we were looking at earnings projections, which were showing that profitability among corporations, specifically within the S&P 500. So the large cap space was continuing to climb. So these were really primary supports heading into this year, and one of the reasons that we didn't want to take too much risk off the table.

So what's changed? Well, really, the only thing that's changed so far is that first one, the fact that we are no longer. Experiencing the expectation of the Federal Reserve to cut rates multiple times this year. We know that inflationary pressures have picked up, and we've seen the bond market price out expectations for the next Fed rate cut.

Actually, some are expecting the Fed to increase interest rates. We don't think that's necessarily going to happen. We think that would be a stretch, but we do think that the odds of a Fed rate cut have been greatly reduced as a result of the developments over the last month. What hasn't changed?

Let's, let's focus on that second point. I brought up that second catalyst, the fact that the economy was on solid footing, and it still is for the most part. Now, I'll acknowledge that higher gas prices are putting additional stress on households, particularly those in the lower income tiers that are already really feeling a lot of pain in what we've been calling this khap economy.

But I will also acknowledge the fact that if we were looking for areas of weakness, one of the things that I'd be looking at is our layoffs increasing as a result of the stress over the last month. And right now, we are not seeing that. We're fortunate to have access to initial jobless claims data.

This is data that comes out every week, and this tells us how this is a great read into our layoffs. Increasing. Are they spiking? Because these are, this is a reflection of whether individuals are filing for first-time unemployment benefits. So if you see a spike in layoffs, you're going to see initial jobless claims increase.

We are not seeing that yet. It actually remains very, very low. So that's a great sign for us so far. Finally, I will acknowledge that earnings growth continues to look very strong, both for 2026 and for 2027. We've actually seen earnings growth expectations increase for all sectors of the economy over the last few months.

The month, which is kind of surprising, but it does explain why the market has not fallen further. Sure, we've seen some pullback, and I think that's to be expected in this period of geopolitical uncertainty. But when we are asking ourselves, is this something that should really cause us to alter portfolios or position differently?

We're looking at these catalysts to help determine and inform our decisions, and it tells us that we are still good. We'll be keeping an eye on these things certainly in the weeks to come. I think the earnings part is going to be big, really starting in a couple of weeks when we start the first quarter earnings season.

We'll get to hear from these companies, hear about how. The war in the Middle East is impacting their outlook for their own businesses, but right now, earnings growth is expected to continue and remain very, very healthy for 2026 and even 2027. For that reason, we are comfortable with our positioning.

As I said, we'll continue to watch this as things progress. Here we are, we don't like being in the fog of war just like everyone else, but I think right now being disciplined is very, very important, that you don't join in the panic. I will leave it there for now. I'll look forward to seeing you all in a couple of weeks, but if you have any questions, as always, please don't hesitate to reach out to your advisor.