Q1 2026 Market Commentary

Inflation in a Rapidly Changing World

Even beyond the current headline spike in oil prices and the current cost of living, we are looking further ahead toward 2027–2028. The relevant question for investors is no longer whether inflation persists, but how it manifests. Inflation, in our view, is not going away - it is shifting in character.

The next inflation regime, if it takes hold, is unlikely to resemble the post-COVID surge driven by supply chain breakdowns and stimulus-fueled demand. Instead, inflation may increasingly reflect relative price shifts:

Upward pressure from a world in which nations, corporations, and households are intentionally paying more for security, resilience, and control.
Offset by downward pressure, or at least cost compression, in technology and certain services.

This distinction matters. Inflation driven by strategic choice behaves very differently than inflation driven by temporary dislocation and understanding that difference is critical for portfolio positioning.

From Efficiency to Resilience: A Structural Reset

For decades, the global economy was optimized for efficiency. Supply chains were long and cost-minimized. Energy sourcing prioritized the lowest marginal barrel. Food systems emphasized scale and yield. Data flowed freely across borders. That era is ending.

Recent geopolitical instability, including renewed tensions in the Middle East, underscores a broader and longer-running shift: globalization is being reengineered rather than reversed. Governments are now prioritizing energy security, supply chain independence, food reliability, data sovereignty, and national defense as explicit economic objectives.

This transition can be described as the Securitization of Everything.

Supply chains are shortened, duplicated, or repatriated.
Energy systems are diversified for reliability rather than price alone.
Food production emphasizes redundancy and domestic capability.
Data infrastructure is localized and hardened.
Defense, cybersecurity, and critical infrastructure investment rise structurally.

These are not cyclical responses. They are policy choices, and they carry lasting economic implications.

As resilience becomes a strategic objective, real assets return to the center of capital allocation decisions, not as relics of an older economy, but as foundational inputs to national and economic security. Energy, infrastructure, industrial materials, food systems, and physical networks may cost more upfront, but they reduce systemic fragility. Increasingly, governments and corporations are willing to pay that price.

Inflation as Relative Pressure, Not Uniform Pricing

Inflation is not a single force. It is the net result of dozens of moving components, each responding differently to this new environment.

We believe it is plausible that:

Food prices remain structurally elevated due to supply/demand dynamics, labor constraints, and redundancy- driven cost structures.
Energy and electricity costs face ongoing pressure as nations invest in diversified, secure systems amid rising demand from electrification and AI.
Insurance, logistics, and compliance-intensive services remain sticky as risk premiums increase.
Technology and certain services experience cost compression as AI improves productivity and automates routine functions.

The result may be a CPI reading that appears moderate (perhaps in the 3–4% range) while households continue to feel pressure in the most essential and visible categories.

This is not contradictory. It reflects a relative price adjustment economy, not a uniformly inflationary one.

AI: Productivity Engine Before Price Relief

AI is often framed as inherently deflationary. That assumption deserves nuance.

AI lowers unit costs, improves productivity, and reduces labor intensity across many industries. However, cost reduction does not automatically translate into consumer price declines.

Whether savings are passed through depends heavily on the competitive structure:

In highly competitive markets, some savings may appear as price relief.
In concentrated industries with platform dominance, switching costs, or network effects, savings are more likely to first appear as margin expansion.

History supports this view. The productivity gains of the late 1990s lifted corporate profitability and equity returns long before they materially restrained inflation.

In an environment still characterized by firm nominal demand, ongoing fiscal commitments, and heightened geopolitical uncertainty, AI’s early impact is more likely to be earnings expansion than broad-based deflation.

Real Assets, Energy, and the Cost of Security

Energy highlights the new inflation dynamic, but it is best understood as part of a broader real asset framework, not as a standalone variable.

Modern inflation risk does not require a 1970s-style oil shock. Instead, it reflects persistent geopolitical risk premiums embedded into real assets that underpin economic activity, even in the absence of acute shortages.

Electricity demand continues to accelerate due to:

AI-driven data centers,
Electrification initiatives,
Domestic manufacturing incentives,
Grid hardening and resilience investments.

While generation capacity can scale, transmission infrastructure, permitting, and physical build-out remain long-lead investments. At the same time, geopolitical realities push nations to favor secure, diversified, and domestically aligned systems, often at a higher cost.

Energy, in this context, is emblematic of a broader trend in which real assets - including energy, rare earth minerals, infrastructure, industrial materials, food systems, and logistics networks - command durable structural premiums. These assets are no longer optimized for lowest price, but for reliability, sovereignty, and strategic redundancy.

Their direct weight in CPI may appear modest. Their indirect influence is substantial, flowing through housing, manufacturing inputs, transportation, food costs, and public spending.

Food, Necessities, and the Psychology of Inflation

Food occupies a unique role in both inflation statistics and household perception.

As a system dependent on land, energy, labor, and logistics, food prices reflect rising costs across multiple physical inputs. Prices that reset higher rarely reverse; they stabilize, then grow from a higher base.

Even if headline inflation moderates, continued pressure in groceries, utilities, and insurance reinforces the lived experience of inflation. This divergence between official measures and household reality influences consumer behavior, policy decisions, and political outcomes - all of which matter for markets.

What This Means for Markets

If inflation settles into a selective 3–4% regime shaped by security-driven investment and AI-enabled productivity, the market implications are clear:

Margin Leaders Win: Companies that capture productivity gains without surrendering pricing power should see durable earnings expansion.
Real Assets Matter - Broadly Defined: Energy is central, but not alone. Infrastructure, grid assets, industrial materials, food systems, and other hard assets benefit from sustained investment tied to security, resilience, and redundancy.
Pricing Power Is Paramount: Brands, platforms, and essential service providers retain the ability to pass through higher costs.
Low-Moat Businesses Face Pressure: Labor-intensive, commoditized industries struggle to absorb higher necessity costs.
Duration Sensitivity Persists: A structurally higher inflation floor complicates long-duration asset valuations.

The Base Case

We do not forecast runaway inflation. Nor do we expect AI-driven deflation to overwhelm structural forces.

Our base case is an environment characterized by:

Moderately elevated but uneven inflation
Margin resilience among dominant firms
Sector dispersion rather than uniform economic outcomes
Increasing advantages to asset ownership over wage dependency
Continued nominal growth

In such a world, quality franchises, durable pricing power, and exposure to real assets become more valuable, not less.

Final Thought

Inflation is evolving - not disappearing.

The global economy is transitioning from maximum efficiency toward strategic resilience. That transition carries costs, but it also creates durable investment opportunities. Real assets - energy, infrastructure, food systems, and physical networks - anchor this shift, even as AI reshapes cost structures across the digital economy.

The next cycle is unlikely to be defined by inflation versus deflation. Instead, it will be defined by who bears the cost of resilience, and who owns the assets that make it possible.

Our portfolio strategy is aligned accordingly - emphasizing durable pricing power, structural demand tailwinds, and disciplined exposure to real assets in a world where inflation is no longer uniform, but selective.

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