Between a Rock and a Hard Place
The Federal Reserve and investors alike find themselves caught between a rock and a hard place heading into spring. On one side, inflation is re-accelerating — headline CPI jumped 3.3% year-over-year (Y/Y) in March, driven by a war-fueled energy shock that sent gas prices surging 21%. On the other, economic growth is losing momentum fast, with Q4 GDP revised down to just 0.5% and global business activity softening from the eurozone to emerging markets. Raising rates risks tipping a fragile economy over the edge; holding steady risks letting inflation become entrenched. March’s broad market selloff reflects just how uncomfortable that position has become.
Yet the full picture is more nuanced than the headlines suggest. Beneath the turbulence, the U.S. economy retains genuine pockets of strength. Employers added a better-than-expected 178,000 jobs in March, corporate earnings have now exceeded estimates for twelve consecutive quarters, and U.S. equities — having pulled back to a forward multiple of 20x — offer a more compelling valuation entry point than at any time in recent memory. The technology sector is forecast to grow earnings 45% in 2026, manufacturing activity is expanding, and private credit continues to generate attractive risk-adjusted returns relative to public market alternatives. The underlying foundation, while tested, has not buckled.
Perhaps most importantly, much of what is weighing on markets today traces back to a single source: the conflict in Iran. The war has been responsible for surging energy prices, the spike in global inflation expectations, the selloff in global equities, and the broader cloud of uncertainty that markets have struggled to see through. History reminds us that geopolitical shocks, however severe, are rarely permanent — and the early April ceasefire has already begun to ease energy prices, offering the Fed a potential window to look through the initial inflation surge and refocus on the underlying trajectory of the economy. A sustained resolution to the Iran conflict would not merely remove a headwind — it could act as a powerful catalyst, unlocking a rapid repricing across risk assets that have been discounting worst-case outcomes. In the meantime, diversification remains essential, and we believe investors who stay disciplined through the turbulence will be well-positioned for what comes next.
U.S. jobs market outperforms in March, but how big a risk is stagflation?
- U.S. employers added a better than expected 178,000 new jobs to the economy in March, well ahead of the 59,000 estimate. February’s number was revised down by 41,000 while January was revised up by 34,000 to 160,000, putting the 3-month average around 68,000. The unemployment rate edged lower to 4.3%, though that was largely from a sharp reduction in the labor force (the labor participation rate fell to 61.9%). Wages also rose less than expected, with average hourly earnings up just 0.2% for the month and 3.5% from a year ago. Economists had expected respective readings of 0.3% and 3.7%. As has been the case, health care was responsible for much of the growth, with the sector adding 76,000 jobs. Construction saw an increase of 26,000, while transportation and warehousing posted a gain of 21,000. On the downside, the federal government saw a loss of 18,000, while financial activities lost 15,000. The U6 unemployment rate rose to 8.0%.
- The third and final reading on Q4 economic growth in the U.S. showed further sluggishness. GDP growth was revised down to just 0.5% after surging 4.4% in Q3. Federal government spending and investment fell at a 16.6% annual pace because of the government shutdown that reduced Q4 GDP growth by an estimated 1.2%. Consumer spending expanded by 1.9%, down from both the previous estimate and from Q3’s 3.5% growth. Business investment, excluding housing, increased at a 2.4% pace, likely reflecting money being poured into artificial intelligence, but the increase was down from 3.2% in Q3. For all of 2025, the U.S. economy expanded 2.1%, well in-line with the long-term trend.
- The anticipated March CPI report showed headline inflation spiked 0.9% month-over-month (M/M) or 3.3% year-over-year (Y/Y). Core CPI increased only 0.2% M/M or 2.6% Y/Y. Most of the increase came from the Iran war and the corresponding 21% surge in gas prices. Energy prices have moderated a bit in April with the ceasefire, perhaps allowing the Fed to look through the initial surge in energy costs to focus on the underlying path of inflation that continues to sit above the Fed’s 2% target. Food prices were unchanged for the month and up 2.7% annually, and shelter costs rose 0.3% M/M or 3% annually. The Fed’s preferred inflation gauge, PCE, increased 2.8% Y/Y in February with core PCE rising 3%.
Growth in average hourly earnings in the U.S. | Year-over-year percent change, Jan. 2022–March 2026 | Source: U.S. Bureau of Labor Statistics
Manufacturing activity strengthened but services weakened
The ISM Manufacturing PMI strengthened in March to a reading of 52.7 (up from 52.4 in February). New orders, production, and prices gained ground while employment exhibited weakness. Service sector activity weakened a bit in March with the ISM Services PMI falling from 56.1 in February to 54.0 in March. Production and employment portrayed weakness while prices and new orders strengthened.
Tech stocks set to drive strong Q1 earnings!
In the very early innings of the Q1 earnings season, the S&P 500 has delivered 12.6% Y/Y growth, slightly behind the 12.8% estimate at the start of the quarter. Earnings have exceeded estimates for 12 straight quarters and we expect a similar trend to continue moving forward, highlighting our thesis that U.S. companies are excellent at managing earnings expectations and guidance. For 2026, the analyst community expects 17.6% earnings growth with 16.4% growth expected in 2027. Technology, materials, and financials are projected to report the highest levels of EPS growth, led by technology which is forecast to increase earnings 45%. The combination of strong Y/Y earnings growth and the March drawdown has created a more compelling valuation backdrop for U.S. equities now trading at a forward multiple of 20x.
S&P 500 P/E Still Elevated, but no Longer Top Decile vs. 30-year History | Blended forward 12-month rolling P/E, as of March 24, 2026 | Source: Bloomberg, MSIM
Eurozone business activity softens in March
Business activity in the eurozone softened to a nine-month low in March, perhaps showing the initial impact from the war in Iran. The service sector was the primary source of weakness in March while the manufacturing sector remained in solid shape. Spain and Ireland registered an acceleration in activity while France and Italy recorded contractions. After seeing encouraging signs of growth earlier in the year, the March PMI data suggest broader weakness from the Iran war, market volatility, and surging energy prices. Eurozone growth has likely stalled and economists expect GDP growth of just 0.2% in Q1.
China’s PMIs remain weak; Brazil continues to face a tough battle against inflation!
- China’s manufacturing sector rebounded in March, posting its fastest pace of activity in more than a year. The official manufacturing PMI increased from 49.0 in February to 50.4 in March. The report showed that production and new orders expanded while the measures on raw materials inventory, employment, and delivery time remained in contraction territory. In the first two months of this year, China’s exports surged 21.8% Y/Y, sharply beating expectations, as robust demand from southeast Asia and Europe more than offset the slump in U.S.-bound shipments. The official non-manufacturing PMI rose to 50.1 in March from 49.5 in the prior month.
- Brazil’s battle against inflation finally paid off in February with headline inflation falling to 3.8% (down from 4.4%). The decline was driven primarily by base effects in housing and electricity, where Y/Y increases fell sharply from 10.0% to 5.7%. However, the monthly reading tells a different story with consumer prices rising 0.7% in February, which is the largest M/M increase in a year. The conflict in Iran and Brent crude above $110 introduce yet another inflationary shock that could plague countries across the globe.
Private credit — noise or real stress?
Redemption requests in private credit continue to make headlines as investors seek liquidity from private BDCs, interval funds, and other quarterly liquidity vehicles. Barclays estimates that only 20% of the direct lending market resides in these more liquid quarterly redemption vehicles. All of the recent noise around private credit has occurred within corporate direct lending markets that have seen massive capital inflows over the past decade. Private credit spreads have tightened, particularly in the larger segments of the market. The middle market continues to look the most attractive due to its ability to command a spread premium.
Select Private BDC / Interval Funds — % of shares repurchased requests | Source: SEC Filings, SMBC, Barclays
Payment-In-Kind (PIK) income is another indicator of market stress, rising during periods of economic strain and falling during periods of economic growth. PIK peaked during the COVID crisis at 12% in September 2020, but has remained elevated in the 7-8% range since. PIK income is less desirable than cash interest income and high proportions of PIK can indicate a deterioration in loan quality. According to JP Morgan data over the past 21 years, the Cliffwater Direct Lending (CDLI) Index has experienced a 1% credit loss rate, which compares to 0.93% in leveraged loans and 1.39% for HY bonds. The CDLI Index (9.66%) continues to offer a ~300 basis point yield premium over leveraged loans (6.70%) and HY bonds (6.73%).
Exhibit 25: CDLI PIK Income as % of Total Income (Sep 2005 to Dec 2025) | Source: Cliffwater
The charts and information in this presentation are for illustrative purposes only, and are based upon sources of information that Sunpointe, LLC generally considers reliable, however we cannot guarantee, nor have we verified, the accuracy of such independent market information. The charts and information, and the sources utilized in the compilation thereof, are subjective in nature and open to interpretation. FOR USE WITH INSTITUTIONAL INVESTORS AND INVESTMENT PROFESSIONALS ONLY. NOT FOR PUBLIC DISTRIBUTION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
