HOST: So far in 2026, the economy has been affected by events both big and small. So, how will things shake out in the second quarter? Coming up, we share some thoughts. 

From Thrivent Asset Management, welcome to Advisor’s Market360^TM, a podcast for you, the driven financial advisor. 

Today’s episode is a bit of a departure from the norm. It will feature audio from a recent event about our market outlook for the second quarter. This discussion features three Thrivent Asset Management Experts, Steve Lowe, Chief Investment Strategist; David Spangler, Vice President, Model and Mixed Asset Portfolios; and Kent White, Vice President, Fixed Income Mutual Funds. 

Topics they’ll be discussing include: the U.S. Federal Reserve and interest rates, consumer health and geopolitical risk—and how these factors will affect their overall positioning.  

Let’s hear what they have to say ... 

LOWE: So, I'm going to start off, with what is kind of front and center lately, which is geopolitical events. If you look at geopolitical events historically, they cause volatility, but they don't impact equity markets or other markets over time. The same thing with the economy. It tends to be a fleeting impact. But when they do have a large impact, that is typically when supply chains are disrupted. And in particular, commodities such as we have now with oil or natural gas.

And the other example is when Russia invaded Ukraine in 2022. The situation in the Mideast has de-escalated somewhat, but we expect continued volatility with potential for large market moves still, particularly if oil and natural gas infrastructure are targeted further.

WHITE: Yeah. So, are there some regions or countries that might be impacted more than others from this energy shock?

LOWE: Yeah, absolutely. The U.S. economy is relatively insulated in a way, because it's much less sensitive to oil than in the past. The amount of oil we use, like per GDP unit has gone down significantly. And the U.S. is also the largest producer of oil in the world now. So, higher prices could actually help the economy in a way.

The areas that are very dependent are in Asia, such as China and Korea, because they have no oil there—essentially very little. And then, the European Union imports most of its natural gas and also oil. So, they also are highly dependent on outside oil and natural gas.

WHITE: So, what are some of the larger market impacts that you're expecting to see going forward here?

LOWE: Yeah, it's the, exactly what you would expect from higher oil. Interest rates go up because inflation expectations increase. And then you've seen markets price out central bank rate cuts. Particularly for the Fed. But also for the European Central Bank, which is expected to raise rates, as we speak. And then there's generally a moderate hit to growth depending on the magnitude of the oil disruption.

So, let's, talk about the economy, because obviously, you know, what is going on has a large impact on the economy. But the economy entered this year well and has held up very well so far. What what's driving that and what are your expectations, David?

SPANGLER: Well, as you know, Steve, as we came into the year, we had a lot of fiscal supports from the tax bill back in July of last year and from a lot of government policy such as deregulation. We have lower tax taxes, we have solid better than average tax refunds coming. And in general those have been good fiscal supports to the economy.

We also had a number of rate cuts coming into 2025, as you know, or 2026. So, we were seeing some improvements in areas and industrial production, PMI such as new orders, ISMs and business conditions. But I think the issue that we have, as you've mentioned, is that if this is a shorter type of war, then, you know, it can be very recoverable. But if it's a little bit longer, then there will be higher prices we would expect. And that will come in to slower growth, globally and in the U.S.

You know, input prices have already risen in some areas of the world, Germany and the UK in particular. And so that will, that will be a that will slow to the overall economic growth.

LOWE: Yeah. This is the underlying fundamentals were very strong heading into this year. For, for the economy. You know, the one area of concern, however, was the labor market. You know, how what are your expectations there? And in particular, consumer health, which is very tied to how strong the labor market is.

SPANGLER: So, in general, the labor market is is reasonable, right? So, the broader measures of unemployment have actually improved. And the official rate has actually come up some but is still at a reasonable level and has stabilized. I would say that where we have some fragility is in payrolls. We're really at a stall speed here and that has a lot to do with the reduction in the labor force, but also too, low-higher-, low-fire-type of environment that we've been in.

The issue with a stall speed is it causes fragility because we're essentially zero growth right now in payrolls. And that means that there's no cushion and with no cushion, it presents a potential for a rapid, negative deterioration. Which isn't to say we will have one, but it does set up for a rapid deterioration. If events, you know, end up being, worse in the, in the, in the Gulf.

Claims are also not great. But then again, maybe not a great measure. At this point, because of the low-higher-, low-fire environment that we're in. Duration of employment is something that we're keeping an eye on. It's been increasing for quite a while. And it's a pretty high levels and that's, that's a concern as well.

But in general, the unemployment rate is reasonable and it's stable, but there's some fragility.

WHITE: Yeah. I do agree that risks are probably skewed to the downside. We entered the year kind of in labor looking a little bit soft already. So, any prolonged energy shock is likely to make businesses hold off on any future hiring plans and, and probably quicker to let people go too.

LOWE: I think that's a good point, David, on fragility, because you look historically at unemployment, it kind of holds up and it can accelerate very quickly and fall, you know, fall significantly. It's a non-linear function. In other words, as people start laying people off, that begets more layoffs at other firms that depend on that firm, and it kind of snowballs quickly.

Inflation has been front and center, too. That's another topic along with labor and part of the Fed's mandate. So, I think it's worth talking about a little bit. And I want to dive in there. There's been very significant progress, if you look at it from the high in 2022, when inflation peaked, but it's stalled out recently.

And if you look at the Fed's favorite measure, which is, something called PCE—personal consumption expenditures—the core measure of that is around 3% and the target is 2%. And it's been that way for about two years. And yeah, I think the reasons for that are partly goods prices. There's a little bit of tariff impact there. And also supply disruptions now, but also services. And that's very beholden to wage growth. And that's the largest part of the economy.

People are still spending money, they, are particularly on experiences, you know, or going out to dining. And that's holding up relatively well, particularly in the upper income areas.

WHITE: So, what do you think some of the other impacts of higher inflation might be on the economy?

LOWE: Yeah, I think if you look at kind of the middle to lower tiers, it impacts consumer spending because those tend to be fixed budgets. You know, higher prices, you've got to take, you know, away something else and slow spending elsewhere. And if you look at the level of prices, which is really the main complaint of consumers, it's about 30% higher for the whole economy, versus pre-pandemic.

And the other impact is that, you know, higher inflation essentially keeps the Fed on hold. They don't know the impact of this—is going to be long? Is it going to be short? And it kind of feeds into the more hawkish elements who don't want to cut rates. And that's a big contingent in the Fed.

WHITE: Right. How about any specific impacts of the like an energy shock or high oil prices on the economy?

LOWE: Yeah. It fuels inflation. Yeah. So, you get higher gas prices. But more importantly, oil is a really important import into a lot of different products. You know, like fertilizer and natural gas—prices have a big impact on fertilizers, which feed into food prices. You know, but generally, you know, you don't get sustained inflation from oil, that's because of oil and gas prices rise enough, it dampens demand and weakens the economy. And then consumer spending slows down and oil prices start falling. You know, and I think the other impact is, as you mentioned, I think the Fed is on hold for now, but it is a stress point for consumers.

WHITE: Yeah.

LOWE: So, we talked a little bit about the Fed and particularly with inflation. The Fed has two mandates given into it by Congress. One is maximum employment which is the labor market. And the other is price stability, which is inflation.

WHITE: Right. Yeah. So, these dueling mandates, they've been a hallmark of policy uncertainty over the last year or so. And currently the committee has been split on which should be weighted more, you know, the softness in the labor market that we're just talking about or inflation, that you just spoke to, that's still above target.

So, for now, the Fed appears to be more focused on inflation, obviously. And they would like to see goods and services prices retreat sustainably before cutting the policy rate further. But, there's also a lot of uncertainty around the duration of the energy shock and the pass through of inflation into other parts of the economy. So, an example of that is just transportation costs is another flow through that we need to watch and transportation costs with higher shipping. Fuel costs, it flows into virtually everything that is shipped around the world.

LOWE: Trucking impacts so much.

WHITE: Right. Everything. Rail. You know, we're going to see it in airfares as well, too. But it impacts everything from food costs to clothing and anything that travels by rail, truck or air.

LOWE: So, what are your expectations for the Fed?

WHITE: Currently the market as priced out any easing for the rest of the year. And there's actually even some probability of a hike that's being priced in. But our baseline right now is a Fed on hold for the next 3 to 6 months. And we continue to see more cuts as probably more likely than a hike beyond that time period.

LOWE: Yeah, I agree that they likely hold and they just need more information before making a decision, you know, particularly the impact of the mid is mid East situation.

The other topic that's come up a lot over the past year is just political pressure on the Fed. Where are we with that?

WHITE: It's kind of been out of the news a little bit for now, obviously. But I think we're likely to see more political pressure to lower rates going forward, especially now that rates have kind of ratcheted up quite a bit. So, I think we'll continue to see that pressure from the administration. And we also have some of the other political, developments that are going on as well.

Most relevant is the DOJ investigation into Chairman Powell. So, I don't think we're going to see any movement on a new Fed chair until that is resolved. And Chairman Powell has said that he's going to stay on the Fed until his replacement is approved. So, I think that's just going to be an element of the Fed in this political pressure.

LOWE: Yeah. Well, they've been under pressure from certain areas. Congress has been very steadfast in the support of Fed independence.

WHITE: Yes. That's really important to see.

LOWE: So, looking, you know, the Fed controls the short part of the curve. Generally, Fed funds is a very short term, kind of money market type of rate. What are your expectations for longer rates, Treasury rates? You know, a 10-year or a 30-year and, and also, you know, 2-year rates, which are important.

WHITE:  Yeah. No. So, the Treasury yield curve has reacted to the events in Iran and the oil shock, pretty much as you'd expect it to. Higher rates across the curve due to the inflationary, inflationary impact. And we've also seen the curve, Treasury curve flatten, which is where the, the front end of the curve, 2-years to 5-year maturities, they move higher, than the back end of the curve. So, it tends to 30s. So that's called a flattening. And that really happened as Fed rate cuts were priced out of the market.

LOWE: Because like, a 2-year rate is much more sensitive to the Fed funds rate than a 30-year rate which are of totally different metrics.

WHITE: Right. So, following this repricing, though, we believe the risks to rates are probably going to be skewed to the downside over the intermediate term. And it might take a little while for that to play out. But that's what our expectation would be.

LOWE: So, what do you expect to be the drivers of rate moves this year? I mean inflation obviously is a factor. Risk premiums you know, which tie into like deficits and also just growth, you know, tax rates.

WHITE: Yeah, all three of those are going to be really important. Risk. Risk premiums for one is there's a lot of uncertainty in the market. And then inflation and growth are the primary other drivers of, of the yield curve. So, basically what we're seeing is inflation, inflation hitting the inflation shock hitting yields first. The market remains focused on elevated inflation here in the near term. And then behind that inflation driven push is a likely growth slowdown as inflation and these higher rates start impacting spending and employment levels. And the more protracted the energy disruption is and the longer the higher rates persist, the more ripple effects we're going to begin to see in the economy. And that will begin to weigh on growth.

So, then the next stage, as the economy begins to soften and Fed rate cuts begin to get price backed into the yield curve. So, this would favor what we call a bull steepener, which is the reverse of what we just saw, with the curve flattening. And that's where front end rates decline more than the back end. And that is, again, because of what you mentioned earlier, the high correlation of the front end of the curve, particularly the 2-year to Fed policy expectations.

LOWE: And the market tends to price in facts very quickly. And, you know, it's your, you know, act and ask questions later and then kind of correct.

WHITE: Yeah. We're seeing that day-to-day with every little news headline that, the curve is whipping all over the place. So, there's a lot more volatility.

LOWE: So, turning to equities. They've held up very well through this recent volatility. Markets are down but not substantially. You know why is that? And you know what are your expectations going forward for the rest of the year?

SPANGLER: Yeah, they they indeed have had a relatively modest, reaction to the, to the war thus far, not down a whole lot. Earnings estimates have been strong, record levels and pretty resilient. That I think is holding up the market. We, we're seeing a broadening out which is into value and then small as well. And that help actually takes some of the pressure off of the concentration in the market in large cap tech. But it's strength in the overall market as a result.

So far the market I think is looking at this as pretty contained. And temporary. And therefore it hasn't sold off more. And there's a strong buy the dip reflex that is still in the market as well. So, buyers come in and as the market sells off even just a bit.

LOWE: And that's been around for a while recently, you know, and particularly with retail investors, you know, buy the dip.

SPANGLER: Yeah, absolutely. And we're not we're not seeing other areas calling for stresses like, you know, of credit markets aren't signaling, a lot of stress at this point. Financial conditions are still reasonably accommodative. And I think those are all supports to the overall market.

One other thing is I think it's kind of important, though, is that we've talked about how energy is not nearly, as impactful to the overall economy as it has been in years past. And that's true. However, on the other hand, the equity markets are far larger portion of the overall economy. Now, in terms of household wealth. So, household wealth now is as much as 40% as in equities. And in years past, let's say in the 2000s, it was 20%. In the 1990s was like 10%. So, as long as the equity markets are holding up and they have, then the wealth effect is not affected, so to speak.

LOWE: But people still feel good and they'll spend money.

SPANGLER: They still will spend money right now will still hold the economy up and growth up. But if we see more of a protracted war and if the equity markets sell off to a greater extent, and it even doesn't take as much now as it did in the past, that will affect the wealth effect, it will affect consumer spending, and it will affect growth.

LOWE: Equity markets have made an attempt at broadening, you know, away from tech and away from the AI leaders and more into value, small-cap, cyclicals. You know why was that? And what are your expectations?

SPANGLER: Yeah. Well, as we know, large-cap tech has performed very well over the last, let's say three years. In 2023, it performed very, very well. ‘24 it outperformed not as much. And in ‘25 it outperformed, you know, actually substantially from the bottom of the of the tariffs in April of last year. So, is it really going to do a fourth year in a row of leading the market? Valuations have gotten, pretty rich. The concentration was at unprecedented levels, much higher than it has in, in, really in any history.

So, we started to see a rotation, and a rotation into mids- and smalls- and then to value, but also international as well. And a lot of that has to do with the fact that global growth was, was, improving, and growth in the United States was improving. And also, that we had a lot of fiscal supports as well. So, it took a little bit off of the valuations. And overall, broadening of the market is actually relatively healthy for the market overall.

You know, I think though, if the war is, a little bit shorter, then we can see a resumption of that. Of the value, small-, mid-. But if the war is a little bit longer and growth is, you know, is is hurt and prices rise, then we're going to really come in more of the defensives and the defensives are actually in the large- and in the tech.

LOWE: Flight to quality and tech is quality. Yeah. In a way. And you know, speaking of rotation, it really doesn't take a lot of money to move out of these, you know, top ten names impact other, you know, parts of the market like small-caps or even, you know, industrials because their market caps are so large.

SPANGLER: Yeah. Just a little bit of money in the small-caps can really move the entire index.

LOWE: Yeah I think the statistic is 3% of the S&P 500® is equal to the whole Russell 2000® index. Yeah. So we've talked about this a little bit already. But markets remain very concentrated particularly in the AI leaders. But the earnings of these you know, leaders are very, very strong. They're growing at very rapid rates. How sustainable is this? And, you know, any concern, that that will tap out eventually?

SPANGLER: Well, really for the overall market, the earnings have been driven predominantly by large-cap tech. But those earnings remain strong. And those companies remain very strong. And it is you know, so overall the market earnings remain relatively, strong and resilient. I think part of the issue is that, over time, these companies had gotten their lofty valuations from being asset light and very strong cash flow generators and cash flow, high castle margin, companies.

And it's less so now with the enormous amount of capital spending that these companies are, are showing now, they become more asset heavy, and less cash flow generative. And in some cases, in fact, they're actually negative cash flow at this point and tapping into the, the debt markets. So that calls into question a little bit their valuations, and it can have an impact for the overall market.

But on a positive side, all of this large, large spending on CapEx is flowing through the rest of the economy and the rest of the market. So, in the mids-, in the smalls- there's a lot of derivatives to the overall capital spending. One of the things that I think is important to note, though, is that capital spending is sort of a negative indicator, if you will, for overall market performance.

Typically, when companies spend large sums on capital spending, the returns don't come.

LOWE: That that's what happened in the tech bubble. Yeah. You know and that's the classic example of that. But at 2.2, it's also supporting the economy because when you build out these data centers, you're hiring construction crews. You know, you got to lay wire and, and that is stimulative.

SPANGLER: Yeah. So, definitely.

LOWE: So, we also talked about the, the debt levels of these. And a lot of these companies are issuing debt and they're—I've seen a chart recently where the asset intensity, the capital intensity of these is like an industrial firm, you know, that's how much they have raised debt. Any concerns, Kent?

WHITE: Yes. At the supply increase in the investment grade market especially has been pretty dramatic. CapEx from these hyperscalers is estimated to be nearly $750 billion just this year alone. So, we're seeing a lot more of that CapEx being funded in the investment grade credit market. Historically, they've funded almost all of their CapEx just through free cash flow because, as David mentioned, they generate a ton of free cash flow.

That's not the case right now. It's almost entirely being funded through the debt markets. So, despite a still strong demand for investment grade credit issuance in our market, this supply has definitely put some pressure on credit spreads, particularly in the technology sector. And so even more so in the longer dated part of the credit markets, 30-year especially, they're issuing a lot of 30- or 40- or 50-year debt and even longer in Europe.

I think one of the, one of these hyperscalers issued a 100-year corporate credit issue. So, they're definitely putting some pressure on the long end of the corporate market. So, at the at this time, we're not overly concerned about the issuance. For the most part, these issuers have very strong single A and double A rated balance sheets. And even if they were to continue issuance at this pace, they're able to maintain these ratings.

Now, the question remains is how much of this supply can the investment grade credit market continue to fund? So, that'll be something we're definitely watching.

LOWE: Yeah. Because at some point, they’ll be pushed back from the market or at least to demand, you know, higher yields and spreads. You know, outside of the issue of like the AI related issuance, how are you feeling about credit right now? You know, corporate credit, high yield investment grade credit and leveraged loans.

WHITE: Yeah. At the moment we're still constructive on investment grade and high yield credit. And that's again from an all-in yield perspective. All-in yields are still at levels that we haven't seen very frequently over the last 15 years. So, from an all-in yield perspective we do find that attractive, still.

Fundamentals are still solid. And because of these absolute yield levels that we've got, there is still ample demand, which helps the technical picture. So, that's really important part of that picture. We're much less constructive on the leveraged loan and private credit markets right now. We've seen a lot of the weaker high yield issuers gravitate to the average loan market in the private credit markets, and there's a lot less, I'm sorry, there's a lot more concentration risk in both of these markets, especially in the tech and software space.

LOWE: And you mentioned the support for yield. There are a lot of institutional buyers that are really more yield buyers and less spread buyers, like life insurance companies, pension funds that that is kind of a steady support for the market.

WHITE: Yes, it's still there. And overseas buyers too. It's still coming to the, the U.S. for these yields.

LOWE: And you also mentioned, private credit, you know, that's been in the news a lot lately and issues with loans. What's your take on that?

WHITE: Yeah. So it's definitely something we've been concerned about and we've been watching. Right now, most of that stress has been showing up in the business development companies (BDCs). We've seen a lot in the news recently about, these BDCs gating or limiting redemptions from their funds. So, the primary concern there is, again, the exposure to the software sector, which makes up sometimes 20 to 30% of the lending in these BDCs.

And there's concerns about defaults within that sector. And the concern there is that many of these business models might be at risk due to AI disruption. So definitely something we're keeping an eye on. BDCs are very small part of the investment grade credit market, but there there's always ripple effects of some of these situations.

LOWE: Well, thank you both for your insights on markets. Let's move to how you're actually positioned.

SPANGLER: Yeah. So, within equities, Steve, we are remain overweight equities modestly on public and on private. Within equity, we're overweight domestic, underweight international. But we're a little less underweight international than we were at the beginning of the year. In the beginning of the year, we came in with a larger underweight, and as we saw the markets moving to a more cyclical stance, we decreased our underweight to international to a level that is consistent with long term strategic underweights. But we're able to deploy that in the more cyclical areas within the domestic here, markets. So we're overweight large-caps, about neutral/a little overweight mid-caps and a little underweight public equity and in small-caps.

LOWE: How about private equity? I know we have a little bit and we're overweight that right?

SPANGLER: Yeah. Private equities actually performed well since the beginning of the war. And that's what we would expect.

LOWE: Right. And you, we view that more as, a small-cap allocation?

SPANGLER: Yeah. We it's more small-cap. It’s really a proxy for the small-cap. So, we've taken some off of our small-cap public equity and put it into private, private equity, which we consider to be more small-cap. Through, you know, January or February 27th. It was relatively about benchmark even. And then from February 27th forward, the private equity has performed well on a relative basis. That's what we would expect. It's a lower volatility equity.

LOWE: How about in fixed income, Kent?

WHITE: Yeah. So, in fixed income, we're, the current geopolitical uncertainty and or where credit market valuations are, that those two things are really driving our positioning. Credit valuations still seem very rich to us. So, we remain up in quality, somewhat defensive. And we're really just waiting for a more attractive entry point before adding any risk in a meaningful way.

LOWE: Yeah. And if you look at the very kind of high level view of our positioning, we’re overweight equity and underweight fixed income. Equity tends to outperform over time. And that's really kind of the strategic long-term positioning generally.

HOST: That wraps up our second quarter outlook. Once again, we would like to thank Steve Lowe, David Spangler and Kent White for their insights. What did you think of this episode? Email us at podcast@thriventfunds.com with your feedback or questions for our experts. Want more episodes of Advisors Market360 and other market and investing insights? Visit us at thriventfunds.com, where you can learn how we can partner with you, the driven financial advisor. Bye for now. 

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The Institute for Supply Management Purchasing Managers Index (PMI) measures the month-over-month change in economic activity within the manufacturing sector.

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