Though well off its early-year peak, the Russell 2000 Index managed to hold a 0.9% gain for the first quarter, easily outpacing the 4.3% decline of the S&P 500 Index. The Russell 2500 Index was even more resilient through the quarter’s turmoil, posting a 2.0% advance.¹ While heartened by the recent relative strength of smaller stocks, we’re girding for a long race ahead, as longer-term performance trends remain significantly skewed toward large growth names.²

Meanwhile, aggressive capex by large companies could provide an offset to the potential impact of higher energy prices. We believe smaller tech companies supporting the AI-infrastructure build are positioned to flourish—with very little need for additional spending on research and development. Additionally, semiconductor and semiconductor capital equipment companies are finally reaping the rewards of a long-awaited upturn in the cycle.⁴

While the valuation gap between smaller and larger company stocks could persist for some time, we believe that solid fundamentals—underpinned by earnings—will ultimately prevail. At the same time, the higher market volatility that has emerged alongside the start of the Iran war may bring opportunities to acquire attractive businesses at distorted valuations.

"Never let us be elated by the fatal hope of the war being quickly ended by a devastation of their lands,” warned Thucydides in his recounting of the Peloponnesian War, a conflict that lasted for 27 years.¹

April has seen a number of equity indexes bounce off their wartime lows as markets took advantage of less-bad news to rotate back into risk assets; notably, the tech-heavy Nasdaq Composite Index has posted consecutive positive trading days.² Considering the wisdom of Thucydides, however, we’d be wary of a quick declaration of victory and a return to normal macroeconomic and market conditions.

The war with Iran has prompted what appears to be the largest-ever physical supply disruption to world oil markets and has sent a stagflationary impulse to the global economy that, the longer it persists, is likely to weigh on economic growth while adding to inflationary pressures. The rebound in risk assets seems to reflect expectations that the disruption of energy flows through the Strait of Hormuz could be short lived, but we’re leaning toward the possibility that the inflationary impacts of the conflict could linger.³

Uncertainty around this link in the global supply chain remains high. While oil and liquified natural gas prices eased with the April 8 announcement of a two-week ceasefire, the Strait remains virtually closed to traffic thanks to the subsequent US naval blockade.⁴ Meanwhile, damage to energy infrastructure in the Gulf suggests disruptions could be longer than widely appreciated even were hostilities to end, and Iran’s ability to weaponize the Strait at a moment’s notice may result in a persistent price premium for commodities dependent upon this shipping route.