Quarterly Investment Update Q1 2026

The beginning of 2026 looks like it’s going to be just as momentous as 2025 if not more. In this newsletter we’ll discuss the ongoing military action against Iran, inflation, and recession odds. Finally, the shadow of Artificial Intelligence will always be part of any discussion of future economic trends but we’re not going to make wild predictions or succumb to the ‘doomsday’ scenarios. What we will briefly talk about are some of the ways that we here at Pacific Leader Financial have used AI platforms in our business and ways we’ve found to enhance our service to you.

Q1 Re-Cap

The U.S. economy showed some resilience despite challenges like a change in the White House, tariffs, government shutdown, and substantial policy shifts. There was strong growth overall opposed in part by a weakening labor market and persistent inflation.

• While the actual Q1 GDP numbers are not available as of writing, the consensus expectation was a moderate increase from 2.2% in 2025 to 2.4% for 2026. Considering those expectations were made prior to the war with Iran, there’s much anticipation for that number on April 30th.

• Headline CPI inflation year-over-year rose sharply 0.9% to 3.3% as of March, driven primarily by energy/fuel price spikes.

• The unemployment rate remained unchanged for the first quarter at 4.3%. As advisors, we’re having difficulty believing the fidelity of those numbers as we’ve seen so many significant revisions after the official reports.

• Considering the inflationary pressures surrounding energy prices, mostly due to the war with Iran, it’s extremely unlikely the Federal Reserve will cut rates in the near future. They are understandably wary of when inflation spiked to 9% back in 2022.

• As in 2025, the first quarter of the major indices saw some significant volatility. Despite this, markets posted positive gains in the first quarter of 2026. The S&P rose 2.9%, the NASDAQ was up 3.8%, and the DJI gained around 2.5%.

Confounding most market predictors, the markets keep climbing despite the uncertainty and geopolitical headwinds.

Mideast War

Beginning around February 28 with strikes on key scientific and military sites, the

U.S. and Israel escalated the standoff over Iran’s nuclear ambitions and murderous suppression of its own citizens. Iran responded by closing the Strait of Hormuz by attacking oil tankers and other transport vessels. This is a critical chokepoint for around 20% of global oil flows. Crude oil prices to surged dramatically rising over 70% in Q1 overall, with a sharp spike in March pushing prices to their highest levels since mid-2022, briefly exceeding $100 a barrel in some reports. Energy stocks surged more than 30%, outperforming the broader market, while contributing to upward pressure on inflation expectations and consumer costs (e.g., gasoline prices).

The longer the conflict goes, the greater the economy is bound to suffer. We expect to see some degree of inflation. Increased fuel prices are inevitable and as such will weigh on all the other things that we buy. As of this writing, there is a state of cease-fire but even if it holds indefinitely, the damage to oil infrastructure will take months if not years to repair.

Inflation Outlook

Core CPI (a commonly used metric to measure inflation) was steady in the first quarter at around 2.53% year on year. Last year’s number (Q1 2025) started at 3.3% but cooled around 2.79% by the end of March. It may not feel like it, especially with the shock of much higher fuel costs, but it is lower than this time last year. The ripple effect will start to see increases in all the other categories as inventories start to get replenished and shipping and production cost increases are factored in at the retail level.

From a portfolio perspective, inflation-sensitive assets like commodities, real estate, energy and natural resources will generally rise during inflationary periods. What we learned during 2022 is that even when inflation was the worst in 30 years, GDP still grew 2.5% and corporate profits grew by 6.6%. So, even during an inflation surge, there are still opportunities in the market and wise portfolio managers will take advantage of those opportunities.

Recession Odds

The odds of a recession between now and December 31 are roughly 25% to 35% as calculated by a consensus of forecasters. This sounds relatively high but keep in mind that the odds of a recession in any year are about 15% to 20%. It is higher than the base line because of some significant economic headwinds.

Factors that increase recession odds include prolonged geopolitical conflicts as the war in Iran, tariff effects, and weaker consumer confidence. These factors, as well as a few other minor concerns, such as the ever narrowing of the stock market (look at our previous commentary for a more in-depth discussion) will always cast a shadow over

AI

The state of AI, as it is now, is not perfect and there are numerous examples

of organizations running into trouble when it comes to relying entirely on AI generated work products. Recently, the law firm of Sullivan & Cromwell in New York were recently caught using AI to generate legal briefs that were tainted with AI “hallucinations” which are fabricated case citations, misquoting the law and using inaccurate legal sources. Ironically, the same firm represents AI companies and were considered experts in the field. Several years ago the vaunted accounting firm of Deloitte was caught using AI-generated citations in an audit report commissioned by an Australian government finance department. Again, erroneous citations and

made-up parts of the draft but insisted that the core data in the audit were sound.

Security remains a critical concern when it comes to using AI platforms, especially in fields handling sensitive or proprietary information. Many of these platforms have not been thoroughly vetted with respect to how they protect the data that is loaded onto them. When software developers or financial professionals upload confidential or client-specific information, it is important to remember that these AI systems operate on external servers—essentially, someone else’s infrastructure.

In the absence of universally accepted security standards or protocols, many organizations are responding by negotiating contracts that specifically include provisions and assurances to maintain secrecy and confidentiality. These legal agreements are designed to protect sensitive data and ensure that proper safeguards are in place when utilizing AI technologies.

The majority of AI use is still confined to research, summarization, and ‘knowledge’ work. Parts of this letter were researched by AI tools, not WRITTEN. Citations are confirmed. So far, AI is far from being a perfect substitute for a trained professional. Factors such as compliance, style, brevity, and all the other subjective factors are required to produce a good letter. AI just isn’t there yet.

Conclusion

In short, we don’t expect much change in the macro-economic environment for the second quarter. As of writing, the S&P 500 has had 7 weeks closing positive and 10 weeks closing down. Yet, year to date the market has reached new heights. We do predict a positive second quarter. Things could always be better, but when we add it all up, we do expect a modestly growing economy and modest market growth.

We here at Pacific Leader wish you and your family a wonderful Spring!

If you have any questions, please reach out to us via our new website at: www.pacificleaderfinancial.com

You can always call our office at: (888) 797-5881 x7720 You can also call or text me directly at: (408) 471-4081 Sincerely,

Matthew Dennis, CPA, AIF

These views are those of the author, not of the broker-dealer or its affiliates. This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. All investments involve risk, including loss of principal. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

The Gross Domestic Product (GDP) is a comprehensive measure of U.S. economic activity. GDP measures the value of the final goods and services produced in the United States (without double counting the intermediate goods and services used up to produce them). Changes in GDP are the most popular indicator of the nation's overall economic health.

The Consumer Price Indexes (CPI) program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services (Source: U.S. Department of Labor).

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.

The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.

All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. You cannot invest directly in an index. Consult your financial professional before making any investment decision.

The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.