The initial quarter of 2026 presented a dynamic landscape for U.S. equities, with markets experiencing significant shifts driven by geopolitical tensions and evolving investment paradigms. While the Federal Reserve's accommodative stance and robust corporate earnings initially propelled equity values, underlying market dynamics became increasingly complex. Challenges emerged from tariff uncertainties, a growing scrutiny of AI-driven growth sustainability, and nascent concerns within private credit. However, the escalation of conflict in the Middle East ultimately became the predominant factor shaping market performance, leading to elevated volatility and the weakest quarterly returns in nearly four years.

Amidst this backdrop, Mar Vista's U.S. Quality Premier strategy navigated a challenging environment, returning -10.17% net-of-fees. The market witnessed a notable transition towards a more fundamentally-driven environment, emphasizing earnings durability, free cash flow generation, and capital discipline. Despite persistent near-term volatility stemming from geopolitical risks and policy uncertainties, this environment is expected to favor high-quality businesses with enduring competitive advantages, reinforcing the importance of strategic portfolio management.

Market Dynamics and Geopolitical Impact

The first quarter of 2026 began with continued upward momentum in U.S. equities, yet underlying market trends quickly diversified. Initial support came from the Federal Reserve's dovish bias and resilient corporate profits. However, the market soon faced new pressures including trade tariff uncertainties, growing skepticism about the long-term viability of AI-fueled growth, and rising concerns in the private credit sector. These factors were ultimately overshadowed by significant geopolitical developments, which became the primary determinants of market direction and investor sentiment.

A critical turning point occurred in late February with the intensification of conflict in the Middle East. This event triggered a sharp increase in oil prices, exceeding 50% during the quarter, as disruptions around the Strait of Hormuz created ripple effects across global markets. The resulting energy shock significantly altered inflation expectations and prompted a considerable reevaluation of interest rate forecasts. Initially, the market anticipated multiple rate cuts, but the focus rapidly shifted to concerns about an extended period of restrictive monetary policy, tightening financial conditions, and increased pressure on various risk assets, amplifying market volatility.

Strategic Investment Shifts and Outlook

In response to these turbulent market conditions, U.S. equities experienced heightened volatility, resulting in their weakest quarterly performance in almost four years. Both the S&P 500^® Index and the Nasdaq Composite saw declines, with the latter entering correction territory by March. Interestingly, smaller capitalization equities demonstrated greater resilience, though market participation remained selective rather than broadly distributed. This period also marked a more disciplined approach to the AI investment cycle, shifting investor focus from the sheer volume of investment to the actual returns generated, particularly favoring companies that convert AI investments into tangible revenue and cash flow growth.

Within this evolving landscape, Mar Vista's U.S. Quality Premier strategy recorded a -10.17% net-of-fees return in the first quarter of 2026. The strategy's performance was notably impacted by stock selection in materials, which provided a positive contribution, while holdings in industrials and information technology were the largest detractors. Major contributors included Johnson & Johnson, Taiwan Semiconductor, and Analog Devices, whereas Microsoft, SAP, and Meta Platforms negatively affected performance. The portfolio also saw new investments in Ecolab, GE Vernova, and QXO Inc, alongside the divestment of positions in Salesforce and SAP ADR, reflecting a strategic reallocation of capital towards opportunities with more favorable risk-reward profiles, underscoring a commitment to fundamentally strong businesses capable of generating long-term value amidst persistent market uncertainty.