Feels Like 2022 But Isn’t

The first quarter was a weak one across markets, as both equities and bonds pulled back – the S&P 500 fell -4.35%, US investment grade bonds were off -0.05% and high yield declined -0.50%. The market texture was reminiscent of the first quarter of 2022, when Russia invaded Ukraine, sending oil prices to nearly $130/barrel before returning to more normal levels by the end of that year. The market, however, did not quickly bounce back after that quarter’s decline – rather, rather, it kept going down, putting in a -24% decline from the start of the year to its closing low in October. Investors are naturally wondering whether the current turmoil is likely to result in a similar decline.

Indeed, economists and markets alike noted that growth is likely to slow in conjunction with the tighter oil availability and higher gas prices. The Federal Reserve Bank of Atlanta reduced its first quarter estimate for real economic growth from 3.2% to 1.3% over the span of one month due largely to reduced contributions from personal consumption and residential investment. Bond investors caught a whiff of trouble starting in February, causing the two-to-ten-year yield spread, which investors watch for a forward-looking read on the economy, to flatten to 51 basis points from 73, which was a four-year high; the flattening also reversed all of the curve’s steepening progress on the heels of the Fed’s decision to start expanding its balance sheet again (see “The World’s Biggest Buyer Is Back, and People Don’t Get It”).

While the economy is likely to slow and the bottom may not be in, the rest of the machine appears to be in a more stable position today than it was in 2022. Everything was bouncing back from COVID then, as surging demand collided with pared back supply chains, pushing headline inflation to 7% prior to the oil price shock versus inflation of just 2.7% entering 2026. At around 300 basis points, high-yield spreads were remarkably similar entering each year. While spreads blew out to 578 in 2022, high-yield creditors have so far remained more optimistic this time around, despite all the worry about private credit.

One particular dynamic that we have flagged repeatedly is that big growth continues to appear more vulnerable than smaller cap value, which manifested in a big way in the 2022 pullback and so far this year too. The Russell 2000 Value index advanced 5% in the first quarter, outperforming the Russell 1000 Growth index by nearly 1500 basis points. The S&P 500 information technology sector, which compounded at an impressive 20% annualized between 2009 through 2025, declined -9.1% in the first quarter, among the worst-performing industry groups. People that care about valuation might still find the group unattractive, as it trades at nearly an 8-turn premium to the market on an EV/EBITDA basis, putting it in the 83rd percentile on EV/EBITDA premium over the past thirty years.¹ High relative and absolute valuation along with rising capital intensity and a slowing growth backdrop is generally not a great starting point for sustained future outperformance.

Conversely, low expectations in capital-intensive industries appear attractive now that capital has a cost again. Between 2010 and 2020, bond yields barely exceeded the rate of inflation, providing very little opportunity cost for investing in long-duration assets. Now, industries that generate excess capital and return it to shareholders are more compelling. Many energy stocks after the rally appear to appropriately discount $70-$80 oil but are still failing to appreciate that years of underinvestment and improved capital discipline could imply sustained high returns in a world where AI is hungry for power. Financials, which had a rough first quarter, appear poised to do well in a structurally higher rate regime, with a clear path to earnings growth and compelling valuations. The dividend yield on the market is coming off a five-decade low, which we think is a good dynamic to fade, and financials offer juicy yields too.

As always, we remain the largest investors in our strategies and appreciate your partnership. We are optimistic about the future and welcome any questions or comments.

Bill Miller IV, CFA CMT
April 12, 2026

¹As of 4/10/26

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Basis point is one hundredth of one percent. The S&P 500 Index is a market capitalization-weighted index of 500 widely held common stocks. The Russell 2000® Value Index measures the performance of the smallcap value segment of the US equity universe. The Russell 1000® Growth Index measures the performance of those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values. Enterprise Value to Earnings Before Income, Taxes, Depreciation, and Amortization (EV/EBITDA) is the enterprise multiple and is used to determine the value of a company.

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