Change is underway in the equity markets so far in 2026.  In our year-end 2025 letter we alluded to the potential for a significant leadership change.  We noted the high valuations and speculative excesses notably within the artificial intelligence space.  It was those areas that have narrowly led the market for several years.  Sometimes, when the market gets too top-heavy it rolls over.  At the time, we noted that the best-case scenario would be an orderly transition away from former leadership into new leadership.  That is happening.
 

Broadening of Market Leadership

The first quarter saw continued erosion in prior market leadership, including some of the most prominent growth stocks and industry groups that had dominated over the last several years. At the same time, price strength broadened meaningfully across a wider array of sectors, styles, and market capitalizations. This broadening is consistent with the developing trend we highlighted at year end and suggests a healthier, more diversified market advance rather than one driven simply by a handful of large companies.

Several areas that began to firm up in recent months saw their uptrends strengthen and become more broadly confirmed during the first quarter including:

• Health care, in particular pharmaceuticals, biotechnology, and medical technology companies, has shown improving relative strength after a prolonged period of underperformance.

• Commodity oriented groups, particularly metals and oil related industries, have exhibited notable trend improvement. What began as a quiet basing and recovery phase in prior quarters has evolved into more decisive upside momentum in early 2026.

Part of this acceleration in commodity linked areas reflects renewed focus on geopolitical risk and supply constraints, as well as shifting expectations around growth, inflation, and global trade flows.
 

Impact of “Epic Fury” and Geopolitical Dynamics

The US-led action in the Middle East, referred to as “Epic Fury,” acted as a catalyst for trends that were already developing in commodity sensitive areas. While the underlying forces of supply, demand, and capital discipline in energy and metals markets were in place beforehand, this event sharpened market attention on:    

• The vulnerability of key supply routes and production regions.

• The value of real assets and companies with pricing power in an environment where geopolitical risk can create episodic shocks.

As always, the goal within our process is not to react to headlines themselves, but to observe how such events translate into sustained changes in price behavior and relative strength across sectors, regions, and asset classes.
 

The Federal Reserve and Interest Rates

The Fed is in a wait and see mode, curtailing plans for further rate reductions as inflation remains persistently elevated.  They are stuck as inflation remains high while the economic backdrop is fraught with uncertainty resulting from Epic Fury.   

Epic Fury has triggered a flight to safety in the dollar, pushing oil and other commodities higher, and downward pressure on global equities (international weakness).  Prior to Epic Fury, valuations were a bit stretched but the economic picture was solid with most investors optimistic for rate cuts throughout 2026.  It will likely take a quick, decisive resolution to the conflict with Iran before the Fed makes its next move.   

Where does that leave us as we enter Q2?  We are witnessing a leadership shift that is now accelerating amidst the backdrop of heighted geopolitical uncertainty.  In our opinion, the most prudent path is that of caution.  Sure, a quick resolution to the Iran conflict and some Fed rate cuts could send the market surging higher, but the current price action suggests otherwise.  Relative strength in defensive, value-oriented areas suggests investors should be cautious in the short/intermediate term.  To that end, we have made some important changes in our portfolios in recent months.  Most notably, we swapped exposure within technology, communication services, and financials in exchange for health care, utilities, and energy.  We have shifted gears from growth towards value and reduced our market cap exposure from large cap toward mid cap.        
 

Perspective

For over 50 years, Contravisory has shown a demonstrated track record of outperformance during difficult market conditions.  Not every “difficult” environment is identical, but they tend to share similarities.  Our research and years of experience indicate that this current backdrop warrants a more defensive posture.  That is in no way to suggest that we are entering a bear market, it simply suggests that careful stock picking and risk management is in order.