The first quarter of 2026 (Q1) ended with a surge in stock and bond prices, which was a nice change after a string of down days that seemed to stretch on and on. In a way, the market’s positive about-face to close Q1 was fitting. Abrupt price swings dominated throughout most of the quarter, although the impacts were uneven across sectors and industries and the catalysts were categorically different. The quarter began with continued concerns about how fast the AI industry was growing and ended with war in the Middle East, a wide and divergent spectrum.
Here's a summary of how major market indexes have performed so far this year.
· US Large Cap Stocks: down 4.4%
· US Small Cap Stocks: up 1%
· US Core Bonds: about flat
· Developed Foreign Markets: up 1.2%
· Emerging Markets: up 3.8%
Superficially, these returns would appear quite boring if you only looked at performance at the end of Q1. If you followed along with the details, however, you would have seen large divergences across countries, sectors, and industries. Early in the quarter, AI-related concerns around structural changes to the economy and potential job losses caused major indexes to whipsaw within a relatively tight range. Those concerns spiked in late January when new services were announced by AI-leader, Anthropic, that scared investors away from software stocks like Microsoft and cloud-based service providers like Salesforce, which were down 23% and 29% for Q1, respectively. Those declines were fast but uneven across the Technology sector with market darlings like Nvidia only down about 5% and Apple down about 6% for the quarter. Meta declined by about 13%. This ultimately helped Tech average out to an 8% loss for Q1. The Financials and Consumer Discretionary sectors were the worst performers, dropping by about 9.5% and 8.5%, respectively. Healthcare stocks also dropped a bit, but the seven other market sectors rose during the quarter. The standout performer was Energy, up nearly 38% and just shy of a record in a quarter that mostly ended up revolving around the price of oil.
At the end of February our government, in a joint operation with Israel, launched a barrage of airstrikes on targets in Iran. This led to weeks of counterstrikes by Iran and subsequent strikes by the US and Israel. All this quickly destabilized commercial shipping traffic through the Strait of Hormuz, which sees roughly 20% of global crude oil pass through daily and is essentially under Iranian control. Nearly overnight the price of oil rose from around $70 per barrel before Operation Epic Fury launched on February 28th to nearly $100 before ending Q1 at about $110. The global economy now had to contend with fuel shortages and a geopolitical landscape that seemed to shift daily, even hourly. Among other things, that led to a 25% increase in the price of gasoline and an over 50% increase in diesel. The national average gas price closed Q1 at $4.12 (and over $6 throughout much of California) and $5.90 for diesel.
These rapid price increases sent shockwaves through global markets that were still reverberating as Q1 closed. Specific foreign stock markets dropped more than the US during Q1 depending on how much Middle East oil they normally consume. India’s stock market dropped over 13%, China’s dropped 6% and so did Germany’s main index. Markets in Brazil and Mexico rose for the opposite reason, up 21% and 9%, respectively. Israel rose about 5%. Interestingly, the typical broad foreign market indexes still finished the quarter positive because of better performance earlier in the year, helping to emphasize the lopsided returns seen around the world during Q1.
There was also a lot of volatility within typical hedging strategies. The price of gold had risen to nearly $5,400 per troy ounce in late January before dropping by about $1,000 but gold still had a positive Q1. Bitcoin followed a similar trajectory from an early high of about $98,000 to around $67,000 as Q1 ended and lost about 22% for the quarter.
Expectations for inflation and Federal Reserve policy changed along with the price of oil. As the year began, investors expected the Fed to lower its short-term interest rate benchmark twice. This quickly flipped to the markets pricing in essentially no chance of a rate reduction this year, perhaps even an increase later this year. This rapidly evolving outlook caused volatility in the bond market, but investment-grade bonds across the maturity spectrum were about flat for the quarter. At issue is potential inflation caused by the spike in oil prices. The national average inflation rate was a benign 2.4% before the war began in February. However, analysts mostly agree there will be an inflation spike caused by oil and gas prices but disagree about its severity and duration. Obviously, this depends on outcomes from the Iran War so only time will tell.
Unfortunately, we’ve entered the new quarter with essentially zero resolution of these issues. Rapid growth in AI continues, with its long list of potential economic and market impacts that will be disruptive as they take time to play out. And there’s talk of a ceasefire in Iran as I type, but headlines have been fickle during this conflict. Regardless, we’ll continue to focus on controlling what we can control: owning high-quality diversified investments in appropriate amounts while tweaking at the edges as needed. This isn’t a simple task under the best of circumstances so show yourself some grace as you try to remain steadfast during challenging times.
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