Topic Tags: U.S Economy

The “Magnificent One”

Over the last few years, equity markets have been defined by a group of stocks often referred to as the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla). These stocks represent roughly 34% of the S&P 500 Index, leading to meaningful concentration risk and an outsized influence on overall index returns. In fixed income, on the other hand, the Bloomberg U.S. Aggregate Bond Index could be referred to as the “Magnificent One” given the extent to which it serves as a bellwether for the broader asset class. The index is comprised of four sub-indices: Treasuries, Government-Related, Corporates, and Securitized. Like the S&P 500 Index, however, this benchmark is not immune to concentration risk, as issuers that borrow the most maintain the largest weights within the index. More than 80% of the securitized sector, for instance, is comprised of Fannie Mae and Freddie Mac mortgage-backed securities, while Ginnie Mae mortgage-backed securities represent an additional 10% of this sector.

Prior to 2008, securitized bonds were the largest component of the index, fueled by the growth of the mortgage market and the issuance of mortgage-backed securities by Fannie Mae and Freddie Mac. Following the Global Financial Crisis, the U.S. Treasury embarked on a borrowing bonanza, with Treasury issuance surging to $760 billion in the 2008 fiscal year. Net borrowing jumped again in 2018 after the passage of the 2017 Tax Cuts and Jobs Act and continued to rise through the COVID-19 pandemic. The U.S. budget deficit is now expected to widen to more than $3 trillion in the next 10 years, and these dynamics have impacted the constitution of the Bloomberg U.S. Aggregate Bond Index. While not all Treasuries are eligible for index inclusion, the overall weight of Treasuries in the benchmark has grown from roughly 25% to 46% over the last two decades and could climb higher in the years ahead. Treasuries are not the only source of U.S. government risk in the Bloomberg U.S. Aggregate Bond Index. As noted above, the securitized sector is heavily exposed to bonds issued by government-sponsored entities (e.g., Ginnie Mae, Fannie Mae, and Freddie Mac). Ginnie Mae mortgage-backed securities are supported by the full faith and credit of the U.S. government, while securities issued by Fannie Mae and Freddie Mac have an effective government guarantee since the entities were placed under conservatorship in the wake of the Global Financial Crisis. Taken together, securities issued or guaranteed in some way by the U.S. government currently exceed 70% of the Bloomberg U.S. Aggregate Bond Index. While a default by the U.S. government is highly unlikely, prices of government-related securities can move adversely in response to persistent deficits, rising debt levels, higher interest costs, inflationary pressures, and geopolitical developments.

Concentration risk within the fixed income space can be reduced via active management, as actively managed strategies have greater flexibility in terms of sector positioning and diversification. To that point, a common trade among bond managers with an active focus is to strategically underweight Treasuries and Agency mortgage-backed securities in favor of corporate and structured credit exposures. This approach reduces investor exposure to the U.S. government and increases yield due to higher spread risk relative to a passive portfolio. Additional sources of diversification that active strategies can provide include non-dollar exposures (e.g., developed and emerging markets) and below-investment-grade credit.

A Renewed Focus on Renewables

In addition to the humanitarian toll of the conflict in Iran, the world is currently confronting the impact that trade disruptions in the Strait of Hormuz are having on energy markets. To this point, oil importing nations in Asia are bearing the brunt of these disruptions, with many of these countries instituting measures like school and work closures, transportation restrictions, and manufacturing cutbacks in order to save on fuel costs. These dynamics underscore the strategic importance of energy independence and could ultimately result in meaningful shifts in how various countries power their economies.

While the conflict may lead governments to see the value of diversifying energy sources in a new light, the search for alternatives to fossil fuels is not new. Along with environmental concerns, reliance on finite resources imposes limitations on power generation capacity. Those limits are at odds with groundbreaking technological advancements in artificial intelligence, which are propelled by infrastructure that requires vast amounts of energy to operate. As illustrated in the chart above, more than half of newly installed energy capacity in the last five years has come from renewable sources like solar and wind, and that share is still increasing. Countries like China and Brazil are leaders on this front, with 58% and 87% of their energy capacity additions coming from renewables last year, respectively. Opportunities for investment should continue to emerge as countries around the world commit capital to expanding renewable energy infrastructure, making this a trend worth monitoring for investors going forward.

The Fed Tackles Succession Planning

The leadership structure of the Federal Reserve is intentionally designed to promote continuity, independence, and institutional stability across political cycles. Specifically, the seven members of the central bank’s Board of Governors serve staggered 14-year terms, while the Chair is appointed to a renewable four-year term by the president and confirmed by the Senate. In this context, the nomination of Kevin Warsh by the Trump administration earlier this year to lead the Fed marks a potential inflection point for U.S. monetary policy leadership. Warsh brings a combination of public- and private-sector experience, having served as a Federal Reserve governor during the Global Financial Crisis, worked in mergers and acquisitions at Morgan Stanley, and later advised policymakers and investors as a fellow at the Hoover Institution and lecturer at Stanford. Warsh’s nomination, first announced in late January and now nearing final Senate confirmation, comes as Jerome Powell is set to end his term as Chair in the coming days, concluding a tenure defined by extraordinary economic shocks and aggressive policy responses. Recent developments have effectively cleared the path for this transition, with Warsh expected to assume the role shortly after Powell’s term expires, even as Powell has indicated he intends to remain on the Board of Governors through 2028 in a move aimed at preserving institutional continuity. Against this backdrop, Warsh is in position to take the helm of a Federal Reserve that has recently undergone a historic tightening cycle and is now navigating the late stages of the inflation fight, setting the stage for what is likely to be an evolution (rather than a reset) of policy direction.

This Too Shall Reconstitute

Rooted in medieval Persian Sufi thought, the adage “this too shall pass” speaks to the fleeting and impermanent nature of the human condition. For investors, this aphorism can serve as a useful framework for understanding the constantly evolving composition of the upper end of the U.S. equity market. As this week’s chart shows, the top 10 constituents of the S&P 500 Index have changed dramatically over the last 40 years, with each new decade seeing both additions to and subtractions from this basket of companies.

In 1985, the top of the S&P 500 Index was heavily weighted toward industrial conglomerates, energy producers, and legacy financial and telecommunications firms such as IBM, Exxon, AT&T, and General Electric. This composition reflected an economy still anchored in manufacturing, physical infrastructure, and regulated industries with durable but relatively slow-moving competitive dynamics. Capital intensity, domestic scale, and regulatory barriers to entry helped entrench incumbents, allowing a small set of diversified conglomerates and commodity-linked businesses to dominate equity indices. As can be observed in this week’s chart, the top 10 constituents represented roughly 21% of the S&P 500 Index in 1985. In contrast, the top 10 constituents at the end of last year represented more than 40% of the benchmark, with technology-oriented companies like NVIDIA, Apple, Microsoft, Alphabet, Amazon, and Meta topping the benchmark and accounting for an outsized share of index earnings and returns in recent years.

The transition between these two regimes did not occur abruptly but rather through decades of structural changes, including the rise of the digital economy, the decline in manufacturing’s share of GDP, and the increasing importance of intangible assets such as software, data, and intellectual property. Indeed, the 1990s and early 2000s saw the rise and consolidation of the internet economy, which led to the reshaping of information, communication, and commerce. The years following the Global Financial Crisis further accelerated the dominance of scalable, asset-light business models, while low interest rates and abundant liquidity disproportionately benefited high-growth technology firms. At the same time, several former index leaders either stagnated, were disrupted, or lost relative economic relevance, leading to a gradual but persistent turnover at the top of the index.

Against this backdrop, the current composition of the S&P 500 Index should not be viewed as fixed, but rather as a snapshot of a specific moment in time. If history is any indication, the next decade will likely bring another reshuffling of top index constituents as new technologies, industries, and business models emerge. For investors, this suggests that maintaining broadly diversified equity exposure while remaining disciplined around rebalancing is prudent, as market leadership, however dominant it appears at a given time, has historically been transient rather than permanent.

Let’s Hear It for Latin America

Latin American equity markets have shown remarkable strength in 2026. After a strong start to the year, the MSCI Emerging Markets Latin America Index corrected by only 4% in March amid a broad, more pronounced market pullback due in large part to the conflict in Iran. Brazil, which represents the largest economy in Latin America, was uniquely positioned to handle commodity market disruptions given its status as a net exporter of crude oil and a world leader in renewable energy utilization. Indeed, almost 90% of Brazilian electricity is generated via hydropower, wind, and solar sources, so the nation has been able to withstand recent energy shocks better than many other Western nations. The Central Bank of Brazil also cut interest rates for the first time in two years in March, though additional rate cuts that were anticipated at the start of this year are now more uncertain. Investors have also looked on Latin American financial institutions with favor in recent time, as banks across the region (e.g., Creditcorp in Peru, Itaú in Brazil, and Grupo Financiero Banorte in Mexico) are outperforming their global peers on a year-to-date basis due to attractive earnings projections. Additionally, significant foreign investment in the Brazilian economy has led to higher volumes and earnings for B3, the Brazilian stock exchange.

Global markets have stabilized in April, with the S&P 500 Index now trading near calendar year highs and developed international equities also exhibiting renewed strength. At the same time, Latin American equities have continued their upward trajectory, with the MSCI Emerging Markets Latin America Index now up more than 20% since the start of 2026. Following strong performance in 2025 and after having avoided a major drawdown in the wake of the Iran conflict, investors may want to keep a close eye on Latin American stocks as the year progresses.

We’ve Seen This Before

Diversify. Rebalance. Stay invested. Every one of these letters has concluded with that same advice in some shape or form. It’s not particularly shiny and new, but the best documented path to a successful long-term investment program. The last eight weeks are another data point in support of these practices.

In this edition:

  • Impact of U.S.–Iran conflict on oil prices, interest rates, and equity markets
  • Volatility and drawdowns in the market cycle
  • Equity market rotation
  • Magnificent 7 detraction and increased market breadth
  • Slowdown in non-U.S. equities

The Sorrows of Young Workers

Entry-level jobs have traditionally served as the primary bridge between education and stable employment, offering young workers a foothold from which to build skills and careers. That bridge now appears to be in a precarious position, however, as data points show that unemployment among recent college graduates has risen meaningfully in just a few years (even as headline labor market indicators remain relatively stable). Indeed, the unemployment rate for recent college graduates was 5.6% at the end of last year, compared to a more moderate figure of 4.2% for the entire United States.

Several factors could explain this situation. First, the nature of entry-level work is changing, as positions that once required little experience increasingly demand that applicants possess prior skills, internships, or even several years of relevant work. This dynamic leaves many new graduates caught in a paradox: unable to gain experience because they lack it. Hiring trends reinforce this challenge. Employer demand for early-career talent has flattened, and companies appear more reluctant to invest in training, instead favoring candidates who can contribute immediately. The result is a bottleneck at the bottom of the labor market, where supply continues to grow but opportunities do not keep pace. Broader economic forces are compounding these pressures. Technological change, particularly the increasing adoption of automation and artificial intelligence, is reshaping the types of tasks firms are willing to assign to junior workers. In many cases, routine or entry-level responsibilities are being automated or consolidated into higher-skill roles. At the same time, hiring has become more selective and uneven across industries, with growth concentrated in sectors that are less accessible to many recent graduates. Research from regional Federal Reserve banks underscores that these trends are not merely cyclical but may reflect longer-term shifts in how labor markets function. When entry-level hiring weakens, career progression slows, wage growth is delayed, and workforce participation may decline as discouraged workers step back from job searches. Over time, this can erode productivity and limit economic dynamism, as fewer workers gain the early-career experience needed to move into more advanced roles. The implications extend beyond individual job seekers to the broader economy, which depends on a steady pipeline of talent development.

Taken together, these dynamics point to a labor market that is still strong on the surface but potentially fragile beneath it. A robust economy is not defined solely by low unemployment or steady job creation, but also by the accessibility of opportunity across all stages of a worker’s career. Ensuring a sufficient supply of true entry-level roles (i.e., positions that offer training, mobility, and a pathway forward) may therefore be critical not just for today’s graduates, but for sustaining long-term economic growth.

Liberation Day: One Year Later

On April 2, 2025, President Donald Trump announced a sweeping set of tariffs on imports into the United States. Dubbed “Liberation Day,” the announcement marked one of the most significant shifts in U.S. trade policy in decades and initiated a period of heightened uncertainty across global supply chains and financial markets. One year later, it is useful to examine how markets and economic participants have navigated the resulting trade environment.

A key distinction when assessing the impact of tariffs is the difference between the policy tariff rate and the effective tariff rate (ETR). While the headline policy rate often attracts the most attention, the ETR provides a more accurate measure of economic impact. The ETR reflects the ratio of duties actually collected relative to the total value of imports entering the country. Because it incorporates supply-chain adjustments, exemptions, and technical exclusions, the effective rate tends to have a closer relationship with market outcomes than the stated policy rate.

Following Liberation Day, the monthly ETR rose sharply (from roughly 3% in March 2025 to approximately 7% in April 2025) before continuing higher and reaching a peak near 10.9% in October. By the end of February 2026, the rate had moderated but remained elevated at slightly above 8%. Over that period, the U.S. Treasury reported that the government collected approximately $295 billion in net customs duties. The administration highlighted a decline in the U.S. trade deficit of roughly 24% during the same time frame.

Another important concept is the tariff pass-through rate, which measures the extent to which higher tariffs translate into higher prices paid by businesses and consumers. Although tariff costs are shared across the global supply chain, they are not distributed evenly. Research from the Federal Reserve Bank of New York suggests that the majority of the tariff burden has fallen on U.S. importers, with estimates indicating that more than 85% of the incidence was borne domestically. Similar findings have been reported by the European Central Bank, which estimated that the pass-through to U.S. consumer prices reached roughly one-third in 2025 and could rise further if elevated tariff levels persist.

Federal Reserve officials have also acknowledged the inflationary implications of tariffs. During the FOMC press conference last month, Chair Jerome Powell noted that tariffs associated with Liberation Day had contributed to modestly higher inflation and that the full price effects could take additional time to materialize.

The policy landscape has continued to evolve. In February 2026, the U.S. Supreme Court ruled that the broad Liberation Day tariffs exceeded the administration’s authority under emergency powers, forcing the rollback of some measures and raising questions about potential tariff refunds. Nevertheless, the administration has since explored alternative legal pathways to maintain certain tariffs, underscoring that trade policy remains fluid.

As the economic effects of the original tariffs continue to unfold and as new trade measures are considered, global markets remain attentive to the evolving policy environment. One year after Liberation Day, tariffs continue to serve as a reminder that shifts in trade policy can carry meaningful economic consequences for businesses, consumers, and investors alike.

Fiduciary Duties in Selecting Designated Investment Alternatives

On March 30, 2026, the Department of Labor (DOL) issued its proposed regulation: Fiduciary Duties in Selecting Designated Investment Alternatives. This comes after the executive order released by the Trump Administration last August which asked the DOL to clarify its position on alternative assets as well as provide guidance to plan sponsors on fiduciary processes for incorporating alternative investments into DC plans. Marquette’s first DC Perspectives paper on this topic can be found here.

The key takeaways from this newly proposed regulation for fiduciaries selecting designated investment alternatives (DIAs) in participant-directed defined contribution plans include:

  • Process matters most: Fiduciary decisions will continue to be evaluated based on a prudent and well‑documented process, focused solely on participants’ best interests.
  • Asset‑neutral framework: The DOL does not require or prohibit any particular asset class, including alternative investments.
  • Clear evaluation factors: To qualify for safe harbor protection, fiduciaries should evaluate DIAs across six areas — performance, fees, liquidity, valuation, benchmarking, and complexity.
  • No immediate changes required: The proposal does not require plans to add new investment options or alter current menus; changes occur only if a fiduciary chooses to act.

Regulation Abdication?

The Basel capital framework was created to ensure that banks maintain sufficient capital to absorb losses and reduce the risk of systemic financial instability, thereby strengthening the resilience of the global banking system. Basel I established minimum capital requirements for banks based primarily on credit risk to strengthen the stability of the international banking system, while Basel II refined the framework by introducing more risk-sensitive capital requirements and supervisory oversight to better align bank capital with the actual risks banks take. In response to the Global Financial Crisis, during which Basel II ultimately proved insufficient, Basel III significantly increased capital, liquidity, and stress‑testing requirements. While these reforms improved financial stability, they also raised the cost of holding corporate loans on bank balance sheets, contributing to a sustained decline in corporate lending as a share of total bank credit after 2008. This dynamic can be observed in the chart above. As bank balance sheet capacity for corporate lending became more constrained, non-bank lenders increasingly stepped in to provide direct financing to companies, helping to fuel the growth of the private credit asset class. A proposed Basel III “Endgame” overhaul in 2023 would have further increased capital requirements, but this overhaul was ultimately shelved amid industry pushback and concerns that new rules would have been onerous.

Last month, U.S. regulators unveiled a proposed update to bank capital rules, marking a notable recalibration of the post‑crisis regulatory framework. The proposal would ease several elements of the existing framework, including aspects of Basel III implementation, the Global Systemically Important Bank (G‑SIB) surcharge, leverage requirements, and stress‑testing assumptions. Policymakers acknowledged that earlier rounds of post‑crisis regulation, while successful in strengthening the financial system, may have unintentionally constrained banks in terms of their ability to intermediate credit (particularly to businesses) and encouraged lending activity to migrate outside the regulated banking network. New proposals seek to preserve a robust capital framework while helping banks better support corporate lending on their balance sheets and compete more effectively with non-bank lenders.

Easing capital constraints could allow banks to re‑enter certain segments of the corporate lending market, particularly lower‑risk or relationship‑driven spaces, which may help stabilize or modestly increase the share of bank balance sheets allocated to corporate loans. However, private lenders retain structural advantages, including speed of execution, flexibility in deal structuring, and a greater willingness to finance bespoke or higher‑risk situations (areas banks are unlikely to fully re‑enter even with modest capital relief). As a result, competition may increase at the margin for more standardized corporate credit, potentially tightening spreads and slowing incremental share gains for private credit. Overall, the proposed changes may reduce the pace of disintermediation, but they do not undo the long‑term structural shift away from bank‑dominated corporate lending highlighted in this week’s chart.