It feels very much like a ‘déjà vu 2025’ moment for the stock market in the first quarter as a major new initiative by the U.S. president led to extreme market weakness in March, particularly in the technology sector and negative returns for the first quarter overall.  One big difference last year was that the bond market rallied while stocks fell in the first quarter, since the Trump Tariff threats lead to major ‘growth scares’ which allowed interest rates to fall.  This time around, stocks and bonds both fell since the impetus for the weakness was Trump’s bombing in Iran and the subsequent surge in oil prices that made higher inflation as big a risk as slower growth.  That made the parallels to 2022 even more acute since that selloff was also precipitated by high levels of investor exuberance, excessive stock valuations, rising interest rates and the onset of a new and somewhat unexpected war!  The fact that investors seem a bit paralyzed as to how to react in this environment seems logical since they understand that higher oil prices and ongoing geo-political risks will weigh on corporate earnings, economic growth and therefore stock prices as well.  But most investors also remember early April last year when the selloff was in full force and then Trump suddenly and unexpectedly decided to delay the implementation of the extreme tariffs that had led to the weakness.  The S&P500 immediately rallied over 10% and stocks basically never looked back for the rest of the year as the actual tariff regime ended up far less dire than initially thought.  Unless you’re Canadian!  Now we are back in somewhat the same scenario as investors know that an end to the conflict in the Middle East would lead to an immediate resurgence in stocks and other risk assets as well as a collapse in the price of oil.  Inflation scares would be mitigated and interest rate cuts from the major central banks would be back on the table.  But it seems much less likely that we will see another rally inducing ‘TACO’ moment since the U.S. president cannot act unilaterally in this regard.  He could claim victory and say that the U.S. achieved their goals in Iran by making sure that they will never be able to have a nuclear weapon, but that does not mean the Straits of Hormuz will once again open up to the free ship movement of oil and other major commodities.  In effect, it ‘takes two to TACO’ and Iran does not yet seem willing to re-open the Strait.  What investors should do in this environment is a tougher call.

Our strategy has been to separate out what we see as the shorter-term risks from the longer-term trends and then keep a position in the shorter-term winners while looking to add to weakness in some of the longer-term trends.  Short term that has meant carrying a slight underweight position in both stocks and bonds as well as an elevated level of cash along with a slight increase in the energy sector, with a focus on the oil producers.  The other short-term trade that remains in place is the rally of the U.S. dollar, which has re-asserted itself as the ‘global reserve currency.’  That strength had removed a very strong tailwind for the commodity sectors, particularly the base and precious metals sectors.  We don’t see this strength holding since the U.S. continues to be one of the world’s largest net debtors and remains dependent on foreign investment flows to finance those shortfalls.  Central banks have done what is typical in periods of heightened geo-political risks by increasing their liquidity, which means some have been sellers of gold.  Once the period of peak risk subsides, we expect that central banks will once again continue diversifying their foreign reserves by selling U.S. dollars and adding to their holdings of gold.  The other longer-term trend that we expect to remain in place are the continued massive investments in rolling our large-scale AI models and implementing them within corporations and service providers such as the major hyperscalers.  Also, while bond yields as well as shorter-term interest rates have risen from the prospect of the inflationary effects of higher oil prices, we expect the core disinflationary trends that had allowed central banks to reduce interest rates to re-assert themselves once the war risks moderate.  Those trends and the fact that the greatest area of weakness has been in the growth sectors of the market have made us look for opportunities in the technology, utility and telecom sectors as well as energy infrastructure.  Valuations in those sectors have fallen precipitously, yet we have seen almost no earnings diminution, suggesting that upside opportunities look much brighter and downside risks are more controlled.  Specific names that we have added to recently include big tech stocks such as Meta, Microsoft, Amazon, Salesforce and Constellation Software.  We have also been buyers of gold and copper stocks on their sharp selloffs, including Barrick Mining, Torex Gold, Capstone Mining and Teck Resources.  While we did add to our holdings of oil producers recently, we have not taken the overall sector weight higher.  We basically moved out of some pipeline stocks that have rallied sharply and moved the money into domestic oil producers.  Even if this geo-political conflict is settled relatively soon, we don’t expect oil prices to go back down to the level they were at prior to the conflict, in the US$60-65 range.  Supplies through the Strait will still be hampered for some time and strategic reserves will have to be re-filled, all of which should hold WTI oil above US$70 per barrel, a price which supports most Canadian producers at current levels.

For the record, the damage to stocks was severe in the first quarter with losses accelerating in March ending a dismal three-month stretch for the major indexes, which had their worst quarter since 2022 when rising interest rates and the initiation of the war in Ukraine dominated the headlines.  As I write this on the final trading day of the quarter, U.S. stocks are down around 5% so far in 2026, although that number is incredibly volatile and can quickly change direction on any headline news or social media comment about the war.  Tech stocks lead the U.S. decline, with Nasdaq currently showing an 8% quarterly loss.  Stock weakness was a global affair as well, with Asian and European stocks closer to the actual conflict seeing the worst returns.  Indian stocks dropped by over 15% in the quarter while South Korea gave up a good chunk of its gains over the first two months of the year by falling 19% in March.  In Germany, their reluctance to support the U.S. efforts in Iran increased worries about potential U.S. trade retribution and lead to the main stock index losing over 7%.  Canadian stocks, as a more resource-oriented economy, did somewhat better than their global peers as rising oil prices lead to a 42% rise in the Energy sector which helped the TSX keep its head above water with a 1.2% quarterly gain despite losses in almost all the other sectors of the index.  The U.S. actions in Iran are clearly a binary event for stock market investors going forward.  Any lessening of tensions and perhaps freer movement of oil through the Strait of Hormuz would lead to an immediate surge in stock prices.  On the other hand, a continuation of the current standoff will weigh even more heavily on oil prices since such a great volume of the physical trade in oil takes place in The Strait.  That would eventually push inflation much higher, raise the prospect of interest rate increases and undoubtedly cause a recession in the U.S. and perhaps globally.  That would push stock prices much lower, particularly since valuations are still relatively high and individual stock ownership is near record levels.

What’s the ‘off ramp’ for the U.S. in this conflict?  Given that the U.S. and Israel initiated this action with their bombings in Iran, this is still effectively ‘their war.’  Regime change is clearly not happening to any degree in Iran and their reciprocal bombings in neighbouring Arab nations are doing more damage than expected.  Trump might just unilaterally end the bombings and declare ‘job completed’ and say that have destroyed Iran’s ability to build a nuclear weapon in the foreseeable future.  That won’t necessarily open the Straits of Hormuz again to the free movement of oil, but it would allow other nations that have not been part of the invasion to begin dealing directly with Iran for safe passage of their ships.  In the end, the U.S. may have miscalculated the Iranian response and relied too heavily on seeing similar results to what they saw last June with their bombing of the suspected Iranian nuclear sites or the successful extraction and capture of Venezuelan president Maduro in January.  This operation has proven to be much less simple.  Last week’s Economist magazine has been proven prescient with its declaration that “A month of bombing has achieved nothing” on its front cover. 

 

One of our new top stock picks in technology has been Oracle, which has had a rough ride over the past six months.  Shares of the software provider trade over 55% below the record high they hit in late September.  But in its latest earnings report the company, which has a market value of $440 billion, showed there is light at the end of the tunnel.  The stock looks cheap—too cheap.  Oracle not only has a legacy business that can survive artificial intelligence, but the company is integral to the AI revolution. As a core supplier to the pioneering AI application developers—ChatGPT’s OpenAI and Claude’s Anthropic, among others—Oracle can sustain high sales growth, put its large capital expenditures behind it, and grow earnings aggressively. Oracle predicted that the AI data centre boom will power its revenue above Wall Street estimates well into 2027.  The results help to allay investor concerns that Oracle’s costly multi-billion-dollar push into AI computing would not generate profits quickly enough.  Remaining performance obligations (RPO), a key indicator of future contracted revenue, grew 325% year-over-year to US$553 billion. Most of the increase in RPO in the quarter is related to large-scale AI contracts where Oracle “does not expect to have to raise any incremental funds,” the company said in a statement.  The company also raised its revenue forecast for fiscal 2027 to US$90 billion, above analyst estimates.  As the most debt-exposed major player in AI infrastructure, Oracle has been viewed as the ‘canary in the coal mine’ for tech spending, which was responsible for the weakness in the stock over the past six months.  But those fears appear to be fading with recent earnings results and the noted need for less financing.  Long known for its database software and enterprise applications for finance, Oracle in recent years has repositioned itself as a cloud computing infrastructure competitor after recruiting key executives from rivals.  The company’s strategy to build out data centres is helping it capture a slice of the booming AI market. Oracle has been aggressively spending to expand its cloud infrastructure to support generative AI workloads, competing for customers against hyperscalers such as Amazon’s AWS and Microsoft’s Azure. Oracle’s recent fiscal-third-quarter earnings show this starting to play out. Sales beat analyst forecasts across all segments to total $17.2 billion, growing 22% year over year, an acceleration from the previous quarter’s 14%. Driving the growth was cloud infrastructure revenue, which rose 84% to $4.9 billion.  So far, there’s no indication the company is experiencing disruption from the “SaaS-pocalypse” —referring to “software as a service”—or the fear that AI tools will take market share from software providers, even as Oracle’s engineers themselves adopt AI tools. Co-CEO Michael Sicilia said on the earnings call that Oracle is embedding AI features into its products, making customers’ businesses more efficient.  We had sold the stock last October on worries about the high valuation and the expected negative free cash flow expectations for the next four years.  Now, with the stock down over 50% and the earnings and cash flow outlook somewhat more secure, we feel comfortable in coming back to buy the stock.

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