Equity Markets in the Eye of the Storm

Matt Freund, CFA, Michael Kassab, CFA, Jake Hyatt

Summary Points:

We believe:

• Despite the geopolitical headwinds, the backdrop for US growth equities and the US economy remains strong overall.
• Although we take the risk of prolonged disruption and stagflation seriously, our base case is that the Middle East conflict resolves within months and energy prices retreat.
• We maintain a quality bias in Calamos Growth Fund (CGRIX) and Calamos Select Fund (CVAIX) and have used the recent pullback to selectively add to positions where valuations have improved.

Entering 2026, the equity backdrop was encouraging. Corporate earnings were expected to grow almost 10%, nominal GDP was positive and expected to accelerate, fiscal stimulus from the One Big Beautiful Bill Act was working its way through the economy, and the Federal Reserve, which cut rates in December, was expected to lower rates further.

Tariffs and trade policy remained a headwind, but markets were growing more confident that disruptions would be manageable. Equity valuations reflected that optimism, and growth opportunities were expected to broaden. As a result, the market continued to rotate from higher-priced growth sectors (which underperformed) and toward cyclicals and small-capitalization stocks. Then the US and Israel attacked Iranian nuclear and military infrastructure, and the narrative quickly shifted.

On Wall Street, there is a saying that “sentiment follows price.” This change in sentiment was clearly seen in March. The strikes on Iran and the subsequent disruption to the Strait of Hormuz sent oil prices surging past $100 per barrel. The secondary impacts on other markets quickly followed as fertilizer, helium, and other Gulf-sourced commodities soared in price. While the US remains in a strong supply position, shortages and rationing are appearing in Europe and emerging markets. It remains to be seen how these energy-constrained economies will adjust, which sectors of manufacturing will be curtailed, and what disruptions will mean for US supply chains. This uncertainty, along with the wide range of possible negative outcomes, weighed on markets broadly: interest rates rose, and equity markets fell across the globe. The generally positive equity backdrop has now been replaced by fears of recession, a Federal Reserve with limited room to act, and uncertainty over earnings amid shortages and higher material costs that are pressuring corporate profits.

Growth stocks, and technology in particular, absorbed a disproportionate share of the market damage, driven by questions about whether widespread AI adoption will prove a boon or a threat to the earnings power of established technology franchises (especially in software). These asset-light, knowledge-based business models are inherently more prone to AI disruption. Unlike traditional cyclicals, where near-term cash flows account for a larger part of a company’s valuation, growth stocks are highly dependent on the terminal value assigned to more distant cash flows. For this reason, recent quarterly earnings “beats” that haven’t come with a credible AI monetization/defensibility narrative have been discounted by the market. Value-oriented sectors told a different story. Asset-heavy companies in transportation, energy, materials, and industrials, among others, are likely to be AI beneficiaries as AI finds new ways to reduce costs and increase productivity. Even so, traditionally defensive sectors still ended the quarter well off their highs in the March correction.

Looking Ahead

We believe that dramatic headlines and heightened uncertainty are drawing the market’s attention away from the slow and steady progress of a resilient US economy. Nominal GDP is positive, and a US recession remains unlikely. The US is energy-independent and a net exporter of oil and natural gas. The fiscal impulse from the One Big Beautiful Bill Act has not evaporated. The Federal Reserve, while unlikely to cut rates in the near term, has not abandoned an easing posture. Most importantly for stocks, corporate earnings are still growing. These are not trivial tailwinds, and they have not disappeared.

Our base case assumes the conflict ends within several months, allowing Hormuz traffic to resume and energy prices to retreat from their peaks. It’s worth remembering that equities have navigated similar shocks before. In 1990–91, the S&P 500 fell sharply in the months following Iraq's invasion of Kuwait, only to recover fully and push to new highs once the conflict was resolved. The underlying economy and corporate sector were not permanently impaired; neither was investor wealth, for long-term investors who stayed the course. The risk scenario—a prolonged Strait closure, oil sustained above $150, and stagflation taking hold—is a more difficult one for equities, particularly growth equities. Higher discount rates and downward earnings revisions would create meaningful headwinds for stocks. We take this scenario seriously, even as it remains outside our base case.

Positioning Implications

We are maintaining a quality bias across our holdings, with an emphasis on companies that have earnings power and financial strength to weather an uncertain period. In technology, we are carefully distinguishing between companies positioned to benefit from the maturing AI landscape and those more exposed to disruption risk. Elsewhere in the market, valuations have improved enough in select areas to warrant additions. While the wall of worry is real, history has shown that short-term geopolitical disruptions are better entry points than exits for long-term investors.