Recent market movements continue to reflect a mix of steady economic conditions and evolving global risks. While headlines remain focused on inflation, interest rates, and geopolitical tensions, the underlying investment landscape has proven to be surprisingly resilient.
The K-Shaped Economy
Economic statistics look good, though modest, but the average American struggles and has a decidedly negative view of the economy. Why is this?
The answer might be found in the chart below, which illustrates the idea of a K-shaped economy. Which is to say, the economy is working great for some—like high-income earners and those involved in the AI build-out. But for lower-income workers and many small business owners, just keeping up with rising prices for basic items like gasoline, rent, and groceries is proving difficult.
The reason the K-shaped economy may worsen is that inflation in basic goods, like food and gasoline, hurts lower-income households far more than it does high earners. As a result, the economic resilience of the middle and working classes may deteriorate further as wages fail to keep pace with rising prices. This economic pain is real, and it could ultimately lead to overall weakening as consumers are forced to pull back.
As it stands today, this dynamic does not appear to be shifting anytime soon. In fact, it may worsen.
Balancing Inflation and Geopolitical Risk
War is inflationary, and the current conflict in the Middle East is no different. The spike in gasoline prices has been quick and easy to notice. However, fertilizer prices have also spiked along with diesel fuel—two major agricultural inputs. As these higher input costs work through the system, higher food prices are almost certain to follow.
To counter these inflationary headwinds, the Federal Reserve is expected to remain on hold for the next several meetings. As a result, the 10-year Treasury yield is likely to stay within a relatively defined range—approximately 4.0% to 4.5% in the near term.
That range, however, is not without risk. Elevated oil prices and ongoing geopolitical tensions, particularly involving Iran and broader Middle East instability, could place upward pressure on inflation expectations. If that occurs, yields may move above the 4.5% level.
Mortgage rates track closely with the 10-year Treasury yield. In other words, mortgage rates are likely to remain high. As a result, the housing sector, one of the economy’s largest drivers, is unlikely to drive economic growth. And the lack of affordable housing will only further depress consumer confidence.
International Strength
For years, diversifying stock portfolios with international exposure has not led to higher returns. However, this now seems to be changing, as valuations and long-term market cycles are reverting and favoring international and emerging markets.
The chart below illustrates how, over the last six months, international stocks (MSCI EAFE) and emerging markets (MSCI EM) have dramatically outperformed the U.S. market (S&P 500).
The outperformance of international stocks seems to be the result of a confluence of factors. These include:
- Slight weakening of the U.S. dollar.
- Shifting long-term market cycles.
- Favorable valuations. As of April 2026, the MSCI EAFE Index continues to trade at a significant valuation discount compared to the S&P 500, while offering a substantially higher dividend yield.
| MSCI EAFE Index | S&P 500 Index | |
| Forward P/E Ratio | 15 | 20 |
| Dividend Yield | 3% | 1.2% |
Small Caps & Dividends
Similar to the resurgence of international stocks, U.S. small company stocks and dividend-focused stocks have also been outperforming the broader U.S. market. And, like the trend shift in international markets, this shift also seems to be driven by valuations and longer-term cycles.
Indexes tracking small-cap stocks and dividend-focused stocks trade at price-to-earnings (P/E) ratios lower than the S&P 500, meaning an investor gets more in the way of profits for each dollar invested by buying small-company and dividend indexes compared to the S&P 500.
Bottom Line
Markets are navigating a period where interest rates remain elevated, inflation risks are rising, and geopolitical uncertainty is influencing investor sentiment.
In this environment, headlines and unexpected developments will move the markets more than underlying fundamentals. And for this reason, we continue to emphasize a disciplined, diversified approach. Uncertainty is likely to keep markets volatile. However, taking a highly defensive posture and waiting for this storm to pass is likely not the best strategy, as we have seen that positive developments can send markets higher quickly.