This quarter’s advocacy work reflects Trillium’s commitment to advancing sustainability, human rights, and corporate accountability across a diverse set of issues.
First, global order: a more unilateral foreign policy posture, stated territorial ambitions in Greenland, the unilateral dismantling of the post-World War II tariff and trade regime, and the pay-to-play diplomacy architecture of the Board of Peace. Taken together, these moves have weakened the willingness of allies to rely on U.S. commitments. Second, the institutions underpinning free-market capitalism: an unprecedented executive branch pressure campaign against the Federal Reserve that tests the boundaries of central-bank independence in ways markets have not previously had to price. Third, democratic norms: a continued pattern of unsupported electoral-fraud claims, harsh immigration enforcement actions, and multiple executive branch attempts to gut legislatively created Cabinet departments, all of which raises questions about the limits of executive authority.
These intentional provocations may deliver near-term results, but they also erode norms and the broader foundation of trust, damage that will likely take years, if not decades, to rebuild. Since January 1, additional military actions have further compounded uncertainty, including the bombing of allegedly drug-carrying boats in the Caribbean, the seizure of Venezuela’s president and his wife, and the ongoing conflict with Iran. The latter represents a categorically different gambit, with more immediate and direct implications for financial markets through its impact on global energy supply chains.
One way to quantify this uncertainty is with the Baker, Bloom, and Davis News-Based Economic Policy Uncertainty Index, which tracks the frequency and intensity of uncertainty-related language in major U.S. publications. The index level typically sits well below 200, with short-lived spikes during events such as the Great Financial Crisis and COVID. Since the current administration returned to office in early 2025, readings have largely remained above 300. This sustained elevation stands out as an extreme historical anomaly.
Prior to the escalation in the Middle East, financial markets appeared resilient to the rise in uncertainty, and economic growth proved durable. Despite fears of AI-driven layoffs, the unemployment rate held steady at 4.3%, even as hiring slowed. Consumer spending also held firm, supported by accumulated household wealth and resilient real-income growth. Manufacturing activity expanded, with the ISM Manufacturing PMI edging up to its highest level since 2022. Inflation has been sticky, but long-term inflation expectations have been well anchored.
Globally, the backdrop was also broadly supportive: the Eurozone composite PMI held up in expansionary territory, China’s domestic consumption and investment rebounded, and India continued to grow at a healthy pace. The effective tariff rate, while at the highest level since 1943, came in below the initial threats at 11.0%, after the Supreme Court invalidated all tariffs imposed pursuant to IEEPA. The Federal Reserve, after cutting rates three times in the second half of 2025, held steady with a range from 3.50% to 3.75%. Looking ahead, we will be closely monitoring economic data for March, when the Iran conflict intensified, for early signs of stress in activity, confidence, and financial conditions.
The first quarter of 2026 proved challenging for global equity markets. Most major benchmarks posted losses as investors grappled with escalating geopolitical tensions, particularly the U.S.-Iran conflict that dominated headlines throughout March. U.S. equity markets bore the brunt of the selloff, led by technology-heavy indices: the Nasdaq Composite fell 7.0% (the weakest performer among major U.S. benchmarks) and the S&P 500 declined 4.3%. Small caps were more resilient, with the Russell 2000 finishing modestly higher at 0.9%. International markets held up, with the MSCI Emerging Markets and MSCI Europe down -0.2% and -2.8%, respectively.
Rising geopolitical risk and shifting growth expectations drove dramatic sector and style rotation during the quarter. More than 40 percentage points separated the best and worst performing sectors in the S&P 500. Energy led the market, surging 38.2% as Middle East tensions disrupted crude-oil flows, while Financials lagged significantly, declining 9.3%. Style and factor performance showed a decisive shift toward value stocks. The Russell 3000 Growth (-9.5%) underperformed the Russell 3000 Value (+2.2%) by more than 11 percentage points. This rotation coincided with a rise in the U.S. 10-year Treasury yield, from an intra-quarter low of 3.94% to 4.43% near quarter-end.
Against the backdrop of negative headline returns and sharp factor rotations, global equity valuations compressed meaningfully during the first quarter, though not to distressed levels. The selloff in growth-heavy markets, particularly the U.S., was driven more by multiple contraction than by deteriorating earnings expectations. The S&P 500’s 12-month forward price to earnings ratio declined from 22.1x entering the year to 19.4x by quarter-end, while the Nasdaq Composite saw an even steeper
de-rating, falling from 27.1x to 22.7x. Broader benchmarks followed a similar pattern: the all-cap Russell 3000 de-rated from 21.7x to 19.3x, while the small/mid-cap Russell 2500 compressed more modestly, from 18.6x to 17.7x. Outside the U.S., where valuations began the year at more restrained levels, multiples remained relatively stable, with MSCI Europe edging down to 14.6x and MSCI Emerging Markets to 11.3x.
Over a longer horizon, this quarter’s valuation shift looks more corrective than extreme. On a 10-year basis, the S&P 500 ended modestly above its historical average, the Russell 3000 finished near its long-run norm, and the Nasdaq Composite now appears modestly inexpensive relative to its own history. Small- and mid-cap stocks and emerging markets also closed below historical valuation norms (though less sharply), while Europe remained modestly above average due to lower exposure to heavily repriced growth segments. Notably, this repricing occurred even as forward earnings expectations rose across major benchmarks, mechanically pushing forward P/E ratios lower and indicating that multiple compression reflected both weaker prices and stronger earnings.
The trajectory of the Iran conflict remains the single most consequential variable for the economic outlook. Its intensity and duration will determine whether what follows is a manageable inflationary episode or something more damaging. What distinguishes
this conflict from prior Middle East disruptions is the breadth and severity of damage to energy infrastructure itself. The International Energy Agency (IEA) has described the current disruption as the largest supply disruption in the history of the global oil market. The repair timeline for much of the damage is likely to be measured in months, or even years, not weeks, which helps explain why forward energy markets are not signaling a swift normalization.
While the energy shock has pushed near-term inflation higher, broader macro data still points to slower growth rather than contraction. Real GDP growth for 2026 is now projected at 2.3%, slightly below a month ago but still above late-2025 expectations. Consumer spending has softened modestly, likely reflecting higher energy costs and some pullback in discretionary demand, while private investment has held up better, supported by corporate profitability and longer-cycle capital spending. Importantly, unemployment projections remain consistent with cooling rather than material deterioration.
Globally, 2026 growth expectations remain near 3.0% despite higher energy prices. Rising inflation projections near 3.6% suggest the shock is working mainly through prices rather than a broad slowdown in activity.
Taken together, the projections suggest an economy adjusting to a higher-cost environment. Growth slows, inflation runs somewhat higher than policymakers would prefer, and confidence is more fragile, but the fundamental demand engine appears intact. For markets, the distinction matters. Events that reinforce the expectation of setbacks tend to produce higher volatility, wider dispersion, and temporary risk-off behavior. As long as earnings continue to grow, labor market conditions remain broadly stable, and financial conditions avoid disorderly tightening, the current environment is more likely to resemble a pause with frictions than the start of a durable downcycle.
The outlook remains highly conditional on geopolitics. The longer the war in Iran continues, the greater the disruption in energy markets and the higher the risk that persistent inflation erodes demand and confidence. Unfortunately, the relationship is unlikely to be linear: each additional week of conflict can deepen and entangle energy and industrial supply chains. If the conflict can be rapidly de-escalated, the data suggests caution rather than pessimism. For now, the outlook is best described as a setback, not a decline.
In this rapidly changing policy environment, where uncertainty appears to be a feature rather than an unwanted bug, we continue to favor quality in our holdings. We look for companies with the financial flexibility to adapt to a complex and rapidly changing economic environment. We seek companies with demonstrated profitability, steady revenue flows, and significant competitive advantages which we believe position them to navigate volatility and deliver strong long-term returns.
Even amid economic and political uncertainty, we continue to modestly favor stocks over bonds as a baseline strategic allocation for individual portfolios. Over longer investment horizons, equities provide substantial protection against rising prices that bonds do not. In addition, the valuation compression that occurred over the past quarter has improved the relative attractiveness of equities. Bonds still provide diversification benefits, and the rise in bond yields over the quarter has also modestly increased their appeal.
As the Trump administration sows chaos, flouts international law, rolls back environmental protections, and pursues aggressive deportation tactics, we believe our role is to continue to raise our voice. We believe that how companies address climate change, workplace satisfaction, and diversity directly affects costs, assets, and operational stability. Companies that effectively manage environmental, social, and governance (ESG) risks are better positioned for long-term financial performance, and responsible corporate leadership on these issues is essential to sustaining performance and long-term credibility.
Trillium Asset Management, LLC (Trillium) offers investment strategies and services that advance humankind towards a global sustainable economy, a just society, and a better world. For over 40 years, the firm has been at the forefront of ESG thought leadership and draws from decades of experience focused exclusively on responsible investing. Trillium uses a holistic, fully integrated fundamental investment process to uncover compelling long-term investment opportunities. Devoted to aligning stakeholders’ values and objectives, Trillium combines impactful investment solutions with active ownership. The firm delivers equity, fixed income, and alternative investments to institutions, intermediaries, high net worth individuals, and other charitable and non- profit organizations with the goal to provide positive impact, long-term value, and ‘social dividends™.’
Important Information
There is no assurance that impact or investment objectives will be achieved. This is not a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. The specific securities were selected on an objective basis and do not represent all of the securities purchased, sold or recommended for advisory clients.
Information and opinions expressed are those of the author and may not reflect the opinions of other investment teams within Trillium Asset Management. Information is current as of the date appearing in this material only and subject to change without notice. This material may include estimates, outlooks, projections, and other forward- looking statements. Due to a variety of factors, actual events may differ significantly from those presented.
First, global order: a more unilateral foreign policy posture, stated territorial ambitions in Greenland, the unilateral dismantling of the post-World War II tariff and trade regime, and the pay-to-play diplomacy architecture of the Board of Peace. Taken together, these moves have weakened the willingness of allies to rely on U.S. commitments. Second, the institutions underpinning free-market capitalism: an unprecedented executive branch pressure campaign against the Federal Reserve that tests the boundaries of central-bank independence in ways markets have not previously had to price. Third, democratic norms: a continued pattern of unsupported electoral-fraud claims, harsh immigration enforcement actions, and multiple executive branch attempts to gut legislatively created Cabinet departments, all of which raises questions about the limits of executive authority.
These intentional provocations may deliver near-term results, but they also erode norms and the broader foundation of trust, damage that will likely take years, if not decades, to rebuild. Since January 1, additional military actions have further compounded uncertainty, including the bombing of allegedly drug-carrying boats in the Caribbean, the seizure of Venezuela’s president and his wife, and the ongoing conflict with Iran. The latter represents a categorically different gambit, with more immediate and direct implications for financial markets through its impact on global energy supply chains.
One way to quantify this uncertainty is with the Baker, Bloom, and Davis News-Based Economic Policy Uncertainty Index, which tracks the frequency and intensity of uncertainty-related language in major U.S. publications. The index level typically sits well below 200, with short-lived spikes during events such as the Great Financial Crisis and COVID. Since the current administration returned to office in early 2025, readings have largely remained above 300. This sustained elevation stands out as an extreme historical anomaly.
Prior to the escalation in the Middle East, financial markets appeared resilient to the rise in uncertainty, and economic growth proved durable. Despite fears of AI-driven layoffs, the unemployment rate held steady at 4.3%, even as hiring slowed. Consumer spending also held firm, supported by accumulated household wealth and resilient real-income growth. Manufacturing activity expanded, with the ISM Manufacturing PMI edging up to its highest level since 2022. Inflation has been sticky, but long-term inflation expectations have been well anchored.
Globally, the backdrop was also broadly supportive: the Eurozone composite PMI held up in expansionary territory, China’s domestic consumption and investment rebounded, and India continued to grow at a healthy pace. The effective tariff rate, while at the highest level since 1943, came in below the initial threats at 11.0%, after the Supreme Court invalidated all tariffs imposed pursuant to IEEPA. The Federal Reserve, after cutting rates three times in the second half of 2025, held steady with a range from 3.50% to 3.75%. Looking ahead, we will be closely monitoring economic data for March, when the Iran conflict intensified, for early signs of stress in activity, confidence, and financial conditions.
The first quarter of 2026 proved challenging for global equity markets. Most major benchmarks posted losses as investors grappled with escalating geopolitical tensions, particularly the U.S.-Iran conflict that dominated headlines throughout March. U.S. equity markets bore the brunt of the selloff, led by technology-heavy indices: the Nasdaq Composite fell 7.0% (the weakest performer among major U.S. benchmarks) and the S&P 500 declined 4.3%. Small caps were more resilient, with the Russell 2000 finishing modestly higher at 0.9%. International markets held up, with the MSCI Emerging Markets and MSCI Europe down -0.2% and -2.8%, respectively.
Rising geopolitical risk and shifting growth expectations drove dramatic sector and style rotation during the quarter. More than 40 percentage points separated the best and worst performing sectors in the S&P 500. Energy led the market, surging 38.2% as Middle East tensions disrupted crude-oil flows, while Financials lagged significantly, declining 9.3%. Style and factor performance showed a decisive shift toward value stocks. The Russell 3000 Growth (-9.5%) underperformed the Russell 3000 Value (+2.2%) by more than 11 percentage points. This rotation coincided with a rise in the U.S. 10-year Treasury yield, from an intra-quarter low of 3.94% to 4.43% near quarter-end.
Against the backdrop of negative headline returns and sharp factor rotations, global equity valuations compressed meaningfully during the first quarter, though not to distressed levels. The selloff in growth-heavy markets, particularly the U.S., was driven more by multiple contraction than by deteriorating earnings expectations. The S&P 500’s 12-month forward price to earnings ratio declined from 22.1x entering the year to 19.4x by quarter-end, while the Nasdaq Composite saw an even steeper
de-rating, falling from 27.1x to 22.7x. Broader benchmarks followed a similar pattern: the all-cap Russell 3000 de-rated from 21.7x to 19.3x, while the small/mid-cap Russell 2500 compressed more modestly, from 18.6x to 17.7x. Outside the U.S., where valuations began the year at more restrained levels, multiples remained relatively stable, with MSCI Europe edging down to 14.6x and MSCI Emerging Markets to 11.3x.
Over a longer horizon, this quarter’s valuation shift looks more corrective than extreme. On a 10-year basis, the S&P 500 ended modestly above its historical average, the Russell 3000 finished near its long-run norm, and the Nasdaq Composite now appears modestly inexpensive relative to its own history. Small- and mid-cap stocks and emerging markets also closed below historical valuation norms (though less sharply), while Europe remained modestly above average due to lower exposure to heavily repriced growth segments. Notably, this repricing occurred even as forward earnings expectations rose across major benchmarks, mechanically pushing forward P/E ratios lower and indicating that multiple compression reflected both weaker prices and stronger earnings.
The trajectory of the Iran conflict remains the single most consequential variable for the economic outlook. Its intensity and duration will determine whether what follows is a manageable inflationary episode or something more damaging. What distinguishes
this conflict from prior Middle East disruptions is the breadth and severity of damage to energy infrastructure itself. The International Energy Agency (IEA) has described the current disruption as the largest supply disruption in the history of the global oil market. The repair timeline for much of the damage is likely to be measured in months, or even years, not weeks, which helps explain why forward energy markets are not signaling a swift normalization.
While the energy shock has pushed near-term inflation higher, broader macro data still points to slower growth rather than contraction. Real GDP growth for 2026 is now projected at 2.3%, slightly below a month ago but still above late-2025 expectations. Consumer spending has softened modestly, likely reflecting higher energy costs and some pullback in discretionary demand, while private investment has held up better, supported by corporate profitability and longer-cycle capital spending. Importantly, unemployment projections remain consistent with cooling rather than material deterioration.
Globally, 2026 growth expectations remain near 3.0% despite higher energy prices. Rising inflation projections near 3.6% suggest the shock is working mainly through prices rather than a broad slowdown in activity.
Taken together, the projections suggest an economy adjusting to a higher-cost environment. Growth slows, inflation runs somewhat higher than policymakers would prefer, and confidence is more fragile, but the fundamental demand engine appears intact. For markets, the distinction matters. Events that reinforce the expectation of setbacks tend to produce higher volatility, wider dispersion, and temporary risk-off behavior. As long as earnings continue to grow, labor market conditions remain broadly stable, and financial conditions avoid disorderly tightening, the current environment is more likely to resemble a pause with frictions than the start of a durable downcycle.
The outlook remains highly conditional on geopolitics. The longer the war in Iran continues, the greater the disruption in energy markets and the higher the risk that persistent inflation erodes demand and confidence. Unfortunately, the relationship is unlikely to be linear: each additional week of conflict can deepen and entangle energy and industrial supply chains. If the conflict can be rapidly de-escalated, the data suggests caution rather than pessimism. For now, the outlook is best described as a setback, not a decline.
In this rapidly changing policy environment, where uncertainty appears to be a feature rather than an unwanted bug, we continue to favor quality in our holdings. We look for companies with the financial flexibility to adapt to a complex and rapidly changing economic environment. We seek companies with demonstrated profitability, steady revenue flows, and significant competitive advantages which we believe position them to navigate volatility and deliver strong long-term returns.
Even amid economic and political uncertainty, we continue to modestly favor stocks over bonds as a baseline strategic allocation for individual portfolios. Over longer investment horizons, equities provide substantial protection against rising prices that bonds do not. In addition, the valuation compression that occurred over the past quarter has improved the relative attractiveness of equities. Bonds still provide diversification benefits, and the rise in bond yields over the quarter has also modestly increased their appeal.
As the Trump administration sows chaos, flouts international law, rolls back environmental protections, and pursues aggressive deportation tactics, we believe our role is to continue to raise our voice. We believe that how companies address climate change, workplace satisfaction, and diversity directly affects costs, assets, and operational stability. Companies that effectively manage environmental, social, and governance (ESG) risks are better positioned for long-term financial performance, and responsible corporate leadership on these issues is essential to sustaining performance and long-term credibility.
Trillium Asset Management, LLC (Trillium) offers investment strategies and services that advance humankind towards a global sustainable economy, a just society, and a better world. For over 40 years, the firm has been at the forefront of ESG thought leadership and draws from decades of experience focused exclusively on responsible investing. Trillium uses a holistic, fully integrated fundamental investment process to uncover compelling long-term investment opportunities. Devoted to aligning stakeholders’ values and objectives, Trillium combines impactful investment solutions with active ownership. The firm delivers equity, fixed income, and alternative investments to institutions, intermediaries, high net worth individuals, and other charitable and non- profit organizations with the goal to provide positive impact, long-term value, and ‘social dividends™.’
Important Information
There is no assurance that impact or investment objectives will be achieved. This is not a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. The specific securities were selected on an objective basis and do not represent all of the securities purchased, sold or recommended for advisory clients.
Information and opinions expressed are those of the author and may not reflect the opinions of other investment teams within Trillium Asset Management. Information is current as of the date appearing in this material only and subject to change without notice. This material may include estimates, outlooks, projections, and other forward- looking statements. Due to a variety of factors, actual events may differ significantly from those presented.
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