Quarterly Review & Market Outlook – 1st Quarter 2026

First Quarter Market and Economic Overview

The first quarter was challenging for investors due to geopolitical risk that has calmed down in early April. Heading into the Iran conflict, there were growing crosswinds around a slowing labor market on one hand and persistently high inflation on the other. Still, markets held up well until the Iran hostilities pushed oil prices higher and central banks turned more cautious.

Consumer spending was robust during the quarter, even as sentiment remained in the doldrums amid affordability concerns and anxiety around AI. Sentiment declined even further when the March spike in oil prices delivered a further blow to real wages. It is important to remember, though, that consumer sentiment has been poor since the pandemic, while actual spending has marched higher. It remains to be seen how this paradox resolves over time.

Business sentiment is difficult to gauge. Hiring plans have pulled back, though the labor market has continued to add jobs on net. Job growth has been erratic – monthly losses were recorded in October and February, offset by upside surprises in other months. The broader slowing trend may also reflect structural forces beyond the business cycle, including tighter immigration policy reducing the available labor supply and the early effects of AI on hiring. Lingering tariff effects make life even more difficult for  a Fed that prefers to move with overwhelming evidence.

The Iran conflict appears to have changed their calculus, at least on the margin. Oil prices have eased from the peak but remain elevated. Commodity prices will likely retain a risk premium unless there is a well-defined plan to permanently reopen the Strait of Hormuz. At least for now, investors expect higher rates than what was expected before the conflict.

For markets, the quarter was defined by geopolitical risk in March that caused a selloff across both equity and fixed income markets. US stocks held up reasonably well through February – but the war-driven shift in inflation and rate expectations triggered a meaningful selloff. The S&P 500 fell as much as 9% before ending the quarter down 4.3% – its worst month in the post-Covid era.

The quarter saw a significant rotation in market leadership. Weakness was concentrated in large-cap growth and the technology sector, while value and small-cap stocks held up considerably better. The equal-weighted S&P 500 outperformed the cap-weighted index by nearly 5%, reflecting the sharp underperformance of the “Magnificent Seven” stocks. These were well in place before Iran, suggesting uncertainty around AI was the dominant concern.

International markets performed better, outpacing US equities during the quarter despite a sharper selloff once the hostilities began. The outbreak of war strengthened the US dollar and weighed on the developed economies that depend heavily on imported oil.

Fixed income provided little protection as investors weighed the implications on inflation and central bank policy. Long-term bonds posted modestly negative returns while short-duration instruments were less impacted. The Bloomberg U.S. Gov’t/Credit Intermediate Index¹ ended the quarter roughly flat. Credit spreads widened in late March before the recent rally back to historically tight levels, leaving investors once again with thin compensation for taking risk.

Commodities were also volatile. Precious metals extended their bull run into January before selling off sharply in February and March as real interest rates rose. Energy then took over, with crude oil prices surging roughly 77% during the quarter before easing slightly on hopes of a resolution. The Bloomberg Commodity Index returned 24% for the quarter – the top-performing public market asset class that is also typically the most volatile.

The first quarter highlights just how quickly market leadership can change as new sources of geopolitical and macro uncertainty emerge, creating conditions in which discipline matters most. It is worth noting that markets have largely recovered in April as steps toward a resolution of the Iran conflict have renewed investor optimism. After this volatile start to the year, we encourage you to look past the near-term discomfort, retain a focus on your long-term goals, and maintain a well-diversified asset allocation in your portfolio.

Written by the Waverly Investment Team

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