A Needed Reset, Not a Reason to Retreat

Over the past several weeks, markets have reminded us, quickly and uncomfortably, that investing does not move in straight lines. The S&P 500 has entered a technical correction, declining more than 10 percent from recent highs. While never pleasant, this type of move is both normal and necessary when investing in risk assets.

Viewed in context, the recent pullback looks far less extraordinary:

2023: +24.23%

2024: +23.31%

2025: +16.39%

2026 year to date: -5.38%

After a three-year stretch of exceptional returns, a pause, or even a step back, should not come as a surprise.

Why This Feels Different

Corrections today tend to feel sharper and more abrupt than in the past. Markets increasingly behave like an elevator down and an escalator up. Declines happen quickly, driven by algorithmic trading, passive flows, and crowded positioning, while recoveries tend to build more gradually as confidence returns.

This dynamic can amplify emotion in the short term, even when the underlying fundamentals are less dramatic than the headlines suggest.

What Is Driving the Volatility

Several factors are contributing to the current environment. First, geopolitical uncertainty remains elevated. The ongoing tensions involving Iran are unlikely to resolve quickly. Markets are grappling with the possibility of a prolonged conflict, including the risk of disruption in critical energy routes such as the Strait of Hormuz. Second, oil and gas prices have risen sharply, which complicates the outlook for inflation and monetary policy. Third, the Federal Reserve now finds itself in a difficult position. It must balance inflation risks against slowing economic momentum. Rate cuts that once seemed likely are now far less certain in the near term. Fourth, corporate spending on artificial intelligence remains very high. The long-term potential is significant, but the near-term return on that investment remains unclear. That is raising new questions about efficiency and capital allocation.

Reasons for Measured Optimism

While the risks are real, so are the opportunities beginning to emerge beneath the surface. Valuations have improved. Many of the largest companies that drove market performance over the past three years have seen meaningful valuation resets. What once looked expensive is now becoming more reasonable and, in some cases, quite compelling. Earnings are also improving across multiple sectors. That provides a healthier and more durable foundation for future returns. Most importantly, this is how markets work. Corrections are not unusual events. They are a normal function of investing. They help reset expectations, reduce excess, and create better opportunities for long term capital. From our perspective, corrections are not just something to manage through, but often a window to upgrade portfolios and invest with greater intention.

What We Are Watching Closely

We are also monitoring the risk that the conflict involving Iran broadens beyond its current scope. Any further spillover across the Middle East, or any prolonged disruption involving the Strait of Hormuz, could have meaningful consequences for global energy supply and investor confidence. Geopolitical shocks are difficult to predict, but they can change market conditions very quickly when they begin to affect trade routes or commodity flows. Also, we remain focused on whether elevated spending on artificial intelligence begins to produce clearer and more measurable business results. Investment in AI may prove to be transformative over time, but markets will eventually demand evidence of productivity gains, margin improvement, and stronger earnings to justify the scale of current spending. In the meantime, we believe it is important to separate long term promise from near term execution risk.

Our Perspective

Periods like this can feel unsettling, especially after a prolonged stretch of strong returns. But it is important to zoom out. Markets have just delivered three consecutive years of above average gains. A 5 to 10 percent pullback is not a breakdown. It is a recalibration.

The discipline required in moments like these is not to react emotionally, but to remain aligned with a long-term strategy built to withstand exactly this type of environment. At Watershed, our focus remains unchanged. We continue to emphasize diversification, thoughtful risk management, and the search for opportunity when others are focused only on discomfort.

Closing Thought

Volatility often feels like a signal that something must be done. More often, it is simply the price of admission for long term investing. Corrections are healthy. They are part of the process.

After outsized returns over the last three years, this pause is not only understandable, it is likely constructive. The future may remain uncertain, particularly with geopolitical risk, energy market volatility, and monetary policy all in focus. But uncertainty alone is not a reason to abandon discipline.

It is a reason to stay grounded, stay selective, and stay invested with purpose.