Q1 2026 U.S. Market Commentary: Geopolitical Shocks, Energy Volatility, and the Case for Staying the Course

Overview

U.S. equity markets closed out the first quarter of 2026 in negative territory, marking the worst quarter since Q2 2022. After coming off three consecutive years of double-digit annual gains, we’ve cautioned that it’s rare to have four double-digit gain years in a row. Markets began 2026 with cautious optimism before geopolitical developments dramatically shifted the landscape. The outbreak of conflict involving Iran in late February, and the subsequent disruption to the Strait of Hormuz, introduced an energy shock not seen since 2022, sending oil prices surging past $115 per barrel, reigniting inflation fears, and complicating the Federal Reserve’s path on rate policy. Despite the difficult quarter, corporate earnings fundamentals remained resilient, and history strongly supports staying disciplined and invested through geopolitical volatility.

Q1 2026 Performance Snapshot

S&P 500: +2.4% (Q4) | +16.4% (Full Year)
NASDAQ Composite: +6.4% (Q4) | +20.4% (Full Year)
Dow Jones Industrial Average: +0.9% (Q4) | +13.0% (Full Year)
Late December saw stocks pull back slightly as investors booked gains and positioned for 2026.

The energy sector was the notable standout, gaining over 33% year-to-date as oil prices surged.

What Drove Markets in Q1 2026

The Iran Conflict & Energy Shock

The dominant story of Q1 2026 was the outbreak of conflict involving Iran in late February and the resulting disruption to global energy markets. The Strait of Hormuz, through which roughly 20% of the world’s seaborne oil passes, was effectively closed, causing Brent crude to surge above $100 per barrel by early March, a move comparable in speed and magnitude to the Ukraine energy shock of 2022. Gasoline prices at the pump rose over $1 per gallon in just a few weeks, topping $4 nationally for the first time since 2022. This energy shock created an immediate stagflation concern: rising prices at a time of softening economic data.

Monetary Policy & Interest Rates

The Federal Reserve, which had cut rates three times in late 2025, held rates steady throughout Q1 2026. The Iran-driven energy shock complicated the Fed’s calculus significantly. Where markets began the year expecting additional rate cuts, the surge in oil prices reignited inflation expectations, with the University of Michigan 1-year inflation expectations rising to 3.8% in March. The 10-year Treasury yield spiked from below 4% to nearly 4.5%, as bond investors priced in higher-for-longer rates. By quarter end, markets had priced out most rate cut expectations for the year, with the first potential cut pushed to Q3 2026 at the earliest.

Economic Signals: Growth, Inflation & Labor

Economic data deteriorated meaningfully during the quarter. Q4 2025 GDP growth was revised down sharply to 0.7% from an initial 1.7% estimate. The labor market showed signs of stress, with the U.S. economy losing 92,000 jobs in February against expectations of a 55,000 gain. The hiring rate fell to 3.1%, its lowest since April 2020. Consumer sentiment fell to its lowest levels since late 2025, with broad-based weakness across demographics.

AI, Technology & Sector Trends

Technology stocks, which led markets higher to start the year, were among the hardest hit during the quarter’s selloff, with the sector down roughly 7% year-to-date by quarter end. Early 2026 investor concerns centered on whether AI capital expenditure was sustainable, and which companies would emerge as winners. Following the conflict’s onset, investor focus shifted almost entirely to energy and geopolitical dynamics. The energy sector, by contrast, surged over 33% on higher oil prices. Defense-related stocks and aerospace holdings also saw meaningful appreciation as military spending outlooks improved.

Key Takeaways from the Quarter

Geopolitical Shock, Not Fundamental Breakdown: The quarter’s decline was driven by an external energy shock, not a deterioration in corporate fundamentals. Q1 2026 earnings are still projected to grow roughly 13% year-over-year, marking a sixth consecutive quarter of double-digit gains.
History Favors Staying Invested: Across 40 major geopolitical events since 1939, the S&P 500 averaged only a 0.9% loss in the first month and rose 3.4% over the subsequent six months. Selling into a shock has historically been the wrong move.
Stagflation Risk Is Real but Manageable: Higher oil prices complicate the Fed’s path and pose a risk to growth. However, the U.S. is now the world’s largest oil producer, providing meaningful insulation from shocks compared to prior decades.
Diversification Worked: Portfolios with exposure to energy and value stocks held up far better than concentrated domestic growth portfolios. This is exactly why we build portfolios the way we do.

Looking Ahead: What Tom’s Watching in Q2 2026

Iran Conflict Resolution: The single most important near-term market catalyst. History shows markets rebound quickly when the trajectory of a conflict becomes clear. We are watching diplomatic developments and oil price movements closely and looking through to the end of the war.
Federal Reserve Policy: With inflation expectations rising and economic data softening, the Fed faces a difficult balancing act. Rate decisions, FOMC minutes, and Fed guidance will remain critical market drivers. The first rate cut is now expected no earlier than Q3 2026.
Q1 Earnings Season: Corporate earnings reports begin in April and will be the next major test for markets. With 13%+ earnings growth still projected, strong results could be a meaningful catalyst for recovery if geopolitical uncertainty eases.
Energy Prices & Inflation Data: PCE and CPI readings in Q2 will show whether energy prices are passing through into broader core inflation. Contained pass-through would be bullish for rate cut expectations; broadening inflation could sustain elevated yields.
AI Investment Thesis: Despite the noise, companies continue to invest heavily in AI and automation. As market leadership potentially broadens beyond mega-cap tech, we will be watching for opportunities in sectors benefiting from AI-driven productivity gains.
Defense & Energy Sector Opportunities: Elevated government defense spending and higher energy prices may create durable tailwinds for select sectors. We continue to evaluate exposures as the situation evolves.

Bottom Line

Q1 2026 was a challenging quarter driven by an unexpected geopolitical shock, not a breakdown in economic or corporate fundamentals. While the Iran conflict and resulting energy disruption created real headwinds for markets, history offers a clear lesson: geopolitical volatility is typically temporary, and investors who sell into fear have consistently missed the recovery. Corporate earnings remain on track for double-digit growth, valuations have reset modestly from prior highs, and the underlying U.S. economy, while softer, has not broken down. We remain confident in our disciplined, diversified approach and continue to advocate for long-term positioning over short-term reaction.

Our Ongoing Guidance

Stay Invested: Long-term outcomes are driven by time in the market, not timing the market. Geopolitical shocks historically resolve, and markets recover. Stay invested and trust your plan. See the famous chart below: missing just the 10 best stock market days in a 20 year cycle, nearly cuts your total return in half. Stay Invested.
Diversify Broadly: Q1 2026 demonstrated the real value of diversification. Balance across large & small companies, growth & value/dividend equities, fixed income, energy, real assets, and alternatives where risk-appropriate helps manage volatility and capture opportunities.
Focus on Fundamentals, Not the Noise: Geopolitical headlines drive short-term fear. Corporate earnings, monetary policy, and economic fundamentals drive long-term returns. Keep your focus where it matters.
Rebalance Thoughtfully: Market dislocations like Q1 2026 create opportunities to rebalance back to target allocations, buying what is relatively undervalued and trimming what has outperformed. Discipline in volatility is a long-term advantage.