Markets In Focus: Navigating Complexity with a Measured Plan

Markets are likely to remain headline-driven in the near term, but a still-resilient economic backdrop, ongoing AI investment, and widening dispersion reinforce the case for discipline, diversification, and staying aligned to long-term goals.

After several years of strong market returns, investors enter the second quarter of 2026 facing a more complicated environment. Headlines have become harder to ignore. The conversation is no longer only focused only on artificial intelligence, corporate earnings, and whether more stocks beyond the biggest technology companies can help lead the market. It is also being shaped by rising geopolitical tensions, pressure in energy markets, and uncertainty around where inflation and interest rates may go next.

That can make the current environment feel uncomfortable. It can also make investors feel like every new headline requires a response. We do not think that is the right takeaway. Our view is that markets may remain sensitive to the news in the near term, but the broader backdrop still supports a disciplined, long-term approach. In other words, uncertainty is not a reason to abandon a plan.

That principle matters even more when markets are under pressure. After several years of strong equity returns, equity markets have been more volatile in early 2026, with rising energy prices and policy uncertainty pressuring sentiment. That can make investors question whether they should change course. In environments like this one, the most important decision may be to refrain from reacting at all. It may simply be making sure the portfolio still reflects the investor's long-term goals, time horizon, and comfort with risk.

With that in mind, we see three themes shaping the Q2 market conversation, three risks worth watching closely, and three actions investors can take to stay focused.

Three Themes Shaping Q2 

1) Geopolitics are now market drivers, not just a background risk

Geopolitics are always part of the investing picture, but they do not always move markets in a meaningful way. In March 2026, that changed. The escalating conflict involving the U.S., Iran, and the broader Middle East led to Iran closing the Strait of Hormuz, which caused a sharp spike in oil and natural gas prices.¹ By the end of March, Brent crude prices had risen roughly 70% year-to-date. The disruption has added to inflation uncertainty and created a more difficult backdrop for central banks. In fact, the Federal Reserve's own March statement acknowledged that "the implications of developments in the Middle East for the U.S. economy are uncertain."²

Why does that matter to investors? Because events like these can affect markets in several ways at once. They affect energy prices and shipping costs, which could trickle into higher inflation. They can also create more day-to-day market swings, even before the full economic impact is clear.

The point for investors is not that every geopolitical event requires action in your portfolio. Markets may remain sensitive to global developments for a while, which makes diversification and discipline especially important.

Key Risk: Broader geopolitical escalation

The risk here is that geopolitical tensions widen further or spill into additional channels that matter economically, especially energy, trade, and broad investor confidence. Geopolitics is now one of the key variables shaping investor expectations in 2026.

This is a difficult category of risk because the timing and market effects are hard to predict. Some geopolitical events fade quickly. Others have more lasting economic consequences. The point for investors is not to chase every development, but to recognize that geopolitical risk can increase market sensitivity and create sharp short-term swings, even if the longer-term fundamentals are less affected.

2) Inflation and the Fed remain a key macro link

Even when the story begins with geopolitics or energy, inflation is often what matters most for markets. February CPI came in at 2.4% year-over-year, and the most recent PCE reading sits around 2.8%, which is still above the Fed's 2% target.^{3 4} As a result, the Fed held rates steady at its March meeting, keeping the target range at 3.50%–3.75%, while continuing to monitor how inflation and the broader economy evolve.^{2 5} Rate cuts remain possible later in the year, but they are not happening now.

At the same time, there is another side to the story. The labor market has softened from the very strong levels of the past few years. February payrolls declined and the unemployment rate edged up to 4.4%, though the data does not yet suggest a severe labor-market downturn.⁶ If that gradual softening continues, it could eventually support lower interest rates, especially if slower hiring begins to weigh more on the broader economy.

That is why investors need to keep watching the full picture. Inflation data still matters, especially if energy prices stay under pressure. But labor-market data matters too (the FED has a dual mandate, to maximize employment while keeping prices stable). Jobs data will help show whether the economy is simply cooling or weakening more meaningfully. If employment deteriorates while inflation concerns remain elevated, the FED could face difficult rate decisions ahead. That becomes even more uncertain when Kevin Warsh takes over as the next Fed Chairman in May.

Key Risk: Inflation reacceleration

Inflation has moderated meaningfully from its peak, but the risk of renewed pressure is still present. In the current environment, the most obvious channel is energy. If conflict-related supply concerns keep commodity prices elevated, that could push inflation expectations higher and complicate the policy outlook.

The goal is not to predict a specific inflation outcome. It is to watch the factors most likely to influence sentiment and policy. We are paying particular attention to CPI and PCE trends, consumer spending, and labor-market conditions. Those indicators will help show whether inflation pressure is proving sticky, whether demand remains firm, and whether the economy is cooling gradually or more sharply than expected.

For markets, the key question is which side becomes more important in the months ahead: inflation that keeps rates elevated, or a softer economy that brings lower rates back into focus.

3) AI remains important, but the market is becoming more selective

Artificial intelligence remains one of the most important themes in the market. That has not changed. What is changing is how investors evaluate it. The conversation is increasingly shifting toward monetization, productivity gains, and evidence of durable returns; in other words, which companies can turn AI spending into measurable earnings power, and which ones are still working to justify heavy capital investment.

That matters because many of the companies at the center of the AI buildout are also carrying high expectations. If earnings continue to support those valuations, leadership could remain concentrated. But if revenue growth, margins, or returns on heavy capital spending fall short of what investors expect, markets may become less forgiving. This is not a negative view on AI, but a more measured one that involves separating a strong long-term theme from near-term expectations that may be harder to meet.

At the same time, some investors and analysts have raised questions about whether AI agents and workflow automation could put pressure on companies that focus on enterprise software suites. If AI can perform a lot of the tasks that are managed through expensive software, then companies may be able to stop paying for expensive software. This is causing investors to be more selective about which technology companies they want to own. A more selective market can also create opportunities: we could see more companies capture market share if they innovate faster, giving diversification has more room to work.

Key Risk: Market Concentration and Valuations

The risk here is that market leadership remains narrow while expectations stay high. In that environment, even solid results may not be enough if investors were expecting something even stronger. As noted, questions have arisen about whether AI tools could begin to affect portions of large enterprise software markets over time, which is a risk worth watching, even if the ultimate impact remains uncertain.

This is not a call to avoid large-cap technology. It is a reminder that concentration changes the character of broad-market exposure. If a handful of companies continue to drive a large share of returns, the market can become more vulnerable to earnings misses, changing rate expectations, or shifts in sentiment around AI-related spending.

Which leads us to some of the actions that investors can focus on moving forward.

Three Actions Investors Can Take

Stay Diversified

In a market shaped by geopolitics, inflation concerns, and uneven performance across sectors, diversification remains one of the most practical tools investors have. That usually means avoiding too much exposure to any one company, sector, theme, or part of the market, even when one area has recently led returns. A diversified portfolio does not guarantee gains or prevent losses, but it can help reduce the risk that one narrow market view has too much influence on long-term results. Whether leadership broadens or remains concentrated, diversification helps investors avoid relying too heavily on a single outcome.

Avoid Emotional Decisions

Headline-driven environments can create a false sense of urgency, making it feel like every market move requires a response. In practice, avoiding emotional decisions often means pausing before making changes, revisiting the original purpose of the portfolio, and asking whether a proposed move is based on long-term goals or short-term discomfort. It can also mean leaning on a rebalancing plan, a target allocation, or an advisor relationship instead of reacting to fear or frustration in the moment. A sound long-term plan should be built to handle periods of uncertainty, not just periods when markets feel calm and easy.

Consider Rebalance to Target Weights. 

Rebalancing is not a market-timing decision. It is a way to keep the portfolio aligned with the risk profile originally chosen. That matters both after long runs of gains and during periods of increased volatility.

The Approach

The Q2 backdrop is more complicated than the one investors faced coming into the year. Geopolitics has become a more immediate market driver. Inflation expectations are once again sensitive to energy and supply developments. And AI remains an important source of long-term optimism, even as concentration and valuation questions grow more relevant.

Even so, the right response is not to make dramatic portfolio changes based on the latest headline. A more useful response is to stay disciplined, review whether allocations still reflect intended risk levels, and remember that volatility is part of investing, not evidence that the plan has failed.

OneDigital advisors are supported by a dedicated team of investment professionals focused on manager oversight, due diligence, and ongoing monitoring. That structure allows advisors to stay focused on what matters most: helping clients clarify goals, align portfolios to risk tolerance, and stay disciplined through changing market conditions.

If you are unsure whether your current allocation still matches your intended risk level, now is a good time to review it with your advisor.

Want to read more about current happenings in the retirement space? Check out this blog post, “DOL Proposes 401(k) Investment Selection Framework, Clarifies Path for Alternatives”

Investment advice offered through OneDigital Investment Advisors LLC. The materials and the information provided are not designed or intended to be applicable to any person's individual circumstances. These statements do not constitute an offer or solicitation in any jurisdiction. Any reference to a specific company is not a recommendation to buy, sell, or hold any security. Any economic forecasts in this commentary are merely opinion, and any referenced performance data is historical. Past performance is no guarantee of future results. All investment involved risk of loss. Some information has been obtained by sources we believe to be reliable. OneDigital Investment Advisors LLC makes no representations as to the accuracy or validity of this information. Additionally, OneDigital Investment Advisors does not have any obligation to provide revised investment commentary in the event of changed circumstances. Views and Opinions expressed herein are provided as of April 2, 2026. Market Data provided by FactSet as of 3/31/2026.ID: 00535533

Sources:

1. Reuters, “Oil and Energy Price Surge (March 2026)”
2. Federal Reserve, “March 2026 FOMC Statement”
3. Bureau of Labor Statistics, “February 2026 CPI Report”
4. Federal Reserve / BEA, “January 2026 PCE Report”
5. Federal Reserve, “March 2026 Rate Decision Implementation Note”
6. Bureau of Labor Statistics, “February 2026 Employment Situation”