MARKET UPDATE [APRIL 2026]

A. MARKET OUTLOOK

Our market outlook remained consistent throughout the reporting period and was further reinforced over the course of the month. We continue to identify four primary risks that could contribute to a re-acceleration of inflation. These include expansionary fiscal policy such as tax cuts, the Federal Reserve’s projected rate cut path, ongoing oil supply shocks driven by geopolitical tensions, and the impact of tariffs.

Among these factors, oil shocks have emerged as the most significant driver in recent weeks. Brent crude prices reached as high as $115 per barrel during the month, reflecting severe supply disruptions tied to escalating geopolitical conflict. Although policymakers have attempted to stabilize markets through measures such as coordinated strategic reserve releases and diplomatic efforts led by the United States, these initiatives have had limited success. Continued resistance from Iranian officials and broader market skepticism have led investors to largely discount these interventions.

Despite the uncertainty surrounding geopolitical developments, we remain constructive on our core market positioning for two main reasons.

First, while elevated oil prices introduce broader systemic risks, they do not directly impair the underlying business models of the companies we hold. At the same time, we acknowledge the increased macroeconomic uncertainty and have responded by tightening our downside risk parameters. In the event of further market weakness, we would view market dislocations as potential opportunities to increase our ownership in high-conviction businesses that we believe can generate significant long-term shareholder value. This approach, however, remains dependent on the trajectory of Federal Reserve policy.

Second, historical comparisons provide useful context for current market conditions. The present environment shows similarities to past periods of stress, including the inflation driven downturn of 1987 and the period leading up to the early 2000s technology bubble. In both cases, major market corrections followed a shift in Federal Reserve policy from easing toward tightening. As a result, monetary policy remains a central factor in our outlook.

We are closely monitoring the effective federal funds rate, with particular attention to the 4.33 percent level established in 2025. If rates return to or exceed this level, it would signal a meaningful shift in policy. In that scenario, we are prepared to reduce equity exposure and reallocate capital toward assets that are better positioned to perform during a broader market correction. Identifying such opportunities will remain a key focus of our research in the months ahead.

B. Key Changes to Fundamental Determinants of Market Growth and Risk.

• S&P500 Market Cap (February → March): 62.226 trillion → 58.185 trillion

• Analyst Consensus Earnings Forecasts (2026): 310.0 → unchanged

• Model Earnings CAGR:  9.90% → 10.07 %

• S&P500 Aggregate Earnings (TTM) latest quarter (in $ Billions):  541.59→ unchanged.

• 09/30/2025 Preliminary Earnings (in $ Billions): 617.34→ unchanged.

• S&P500 Aggregate Dividends (TTM) latest quarter (in $ Billions): 165.16→ unchanged.

• 09/30/2025 Preliminary Dividends (in $ Billions): 168.08 → unchanged.

• S&P500 Aggregate Buybacks (TTM) latest quarter (in $ Billions): 234.57 → 249.00.

• 09/30/2025 Preliminary Buybacks (in $ Billions): 249.00→ unchanged.

• Model Payout Ratio: 77.85% → unchanged.

            Most inputs influencing the primary drivers of market growth and risk have remained largely unchanged since last month. The most notable adjustments are reflected in the discount rate and terminal growth rate within the valuation model, driven by a roughly 40 basis point increase in long-term U.S. yields over the past month.

C.  Implied Equity Risk Premium

The implied equity risk premium (IERP) represents the excess return investors demand for holding equities instead of risk-free government bond. As it is not directly observable, the IERP is estimated by discounting expected future cashflows, primarily aggregating dividends and share repurchases. At Baoro Research, we calculate the IERP each month at the market index level, utilizing it as an indicator of valuation conditions, investor sentiment, and consequently, potential market direction. As of March 2026, our estimate for the IERP stands at 4.38%, which remains notably below both the historical average of approximately 5.36% and the recessionary threshold of 6.16%.

D. Market Valuations

With an average equity risk premium of 5.36%, the adjusted implied fair value for the S&P 500 stands at 5209.49, reflecting a decrease from prior month reading of 5223.82. This downward adjustment is attributed to the recent increase in 10-year bond yields observed over the past month. Consequently, based on long-term averages, the market appears to be overvalued by 18.67%.

S&P500 Value (IERP 6.16%)

An IERP of 6.16% is commonly observed during periods of economic downturns, which for value investors can indicate a suitable moment to reintroduce equity risk into portfolios. Should the current market narrative lead to challenging economic conditions, S&P500 valuations suggest prices could decrease to 4519.98, a 29.35% decline from current levels. Despite the extent of this potential overvaluation, this remains the base case model, with the intention to reintroduce equity exposure if such a scenario unfolds.

S&P500 Value (IERP 6.91%)

An IERP of 6.91% is typically observed during periods of substantial market decline, such as at the height of the global financial crisis. Should a similar scenario arise, the index could experience further depreciation, with the S&P 500 potentially reaching 4018.88, which would be a decline of approximately 32%. While this extent of price decrease may appear improbable, it remains within the realm of possibility based on historical precedents. For instance, equity markets dropped 89% from peak to trough during the Great Depression (1929 to 1932), while during the dotcom bust and subsequent financial crisis, the Nasdaq Composite fell roughly 78% from its March 2000 high to its October 2002 low. Similarly, the S&P 500 and Dow Jones Industrial Average both declined by approximately 50 to 57% during the 2007 to 2009 financial crisis.

Multiples Lens

Due to variability in the inputs and outputs associated with the IERP model, a multiples-based valuation is also conducted. In this approach, cash flows are represented by the sum of aggregate S&P500 firms’ dividends and buybacks on a trailing twelve-month basis.

Data from our model indicates that the S&P 500 historically has an average price to cash flow ratio of 23.4. The multiples at plus or minus one standard deviation are 28.4 and 18.4, while the values at plus or minus two standard deviations are 33.4 and 13.3. Using the most recent trailing twelve months aggregation of firm dividends and buybacks, the following valuations are derived across these key multiples.

Valuation Summary