Déjà Vu All Over Again? Navigating the Q1 2026 Market
Echoes of 2025: Same Pattern, Different Outcome?
January was smooth sailing for investors, but conditions deteriorated in February, with March marked by pronounced volatility. This sentence could have opened our Q1 2025 newsletter - but instead it opens our 2026 edition. While diversified portfolios generally experienced positive performance through the end of February, every major asset class declined in the final month of the quarter—in some cases by double digits—dragging overall portfolio performance down to its weakest since Q1 of last year.
Interestingly, early 2026 has seemed to echo early 2025, not only in monthly equity market returns but the qualitative aspects driving them. For example, in the recently completed quarter, Q1 2026, the S&P 500 lost 4.3%, matching the loss in Q1 2025. In both years, solid January performance (+1.5% this year, +2.8% last year) reflected investor optimism before new challenges emerged in February (this year -0.8%, last year -1.3%). March in both years was sharply negative (Mar ’26 -5%, Mar ’25 -5.6%) as geopolitical developments dragged investor sentiment lower (reciprocal tariffs in 2025, Iran conflict in 2026).
As we write this newsletter, one encouraging difference from last year is that the stock market moves in 2026 have been less extreme. The S&P 500’s peak-to-trough decline has been -9% so far this year, compared to -19% in 2025. And as of mid-April, the S&P 500 has rallied back to flat YTD.
Another key difference this year is that the geopolitical impact on profits is expected to be lower. In fact, the outlook for 2026 earnings growth, a crucial element for stock performance, has improved in the past month rather than deteriorated. Prior to the Iran conflict, S&P 500 earnings were expected to grow 15% in 2026, and throughout the month of March, that figure increased to +17%. Why? Companies that reported results throughout the month generally exceeded expectations, and the companies themselves provided investors guidance on how Iran and higher energy costs could impact them in 2026. Expectations are not always perfect, but the key takeaway was that businesses are still seeing strong demand and manageable cost increases in 2026.
Wall Street has many colloquialisms, but one that may apply to early 2026 is “stock prices wander in the short-term, but track fundamentals in the long-term,”—a nice way of saying that sometimes investors overreact. If that is indeed the case, it is encouraging to know that valuations of stocks are at multi-year lows due to the overreaction. While not a guarantee, lower-than-average valuations (as measured by forward price-to-earnings) tend to be correlated with better-than-average forward-looking returns.
ASSET CLASS PERFORMANCE
Stock Performance
As discussed in the opening paragraph, the S&P 500 opened the year on a solid footing, gaining 1.5% in January. Sentiment turned negative in February, causing the S&P 500 to lose 0.8%, followed by a deterioration in March, which saw the S&P 500 decline by 5%.
Volatility in the NASDAQ was more pronounced. The tech-heavy index gained only 1% in January but lost 3.3% in February and another 4.7% in March as sentiment turned. For the full quarter, the NASDAQ lost 7%.
International stocks, a 2025 standout, outperformed US stocks again in the first quarter, but experienced extreme swings in March as energy prices disproportionately impacted economies dependent on oil imports. Developed international stocks only declined 1.2% in Q1, but the monthly swings were notable: +5.2% in January, +4.6%, and -10.3% in March. Similarly, Emerging Market stocks gained 8.9% in January, 5.5% in February, and lost 13% in March—a dramatic way to lose only 0.2% in the quarter.
Notable outperformers in the quarter were mid-cap and small-cap stocks, as each managed to post small gains in Q1 despite the sharply negative sentiment. The midcap stock index (S&P 400 Midcap) gained 2% while the small-cap index (Russell 2000) gained +0.9%. However, it should be noted that, like international equities, both indices suffered sharp declines in March
Bond Performance
Bonds experienced a modest decline in Q1. The Bloomberg US Bond AGG index initially gained 0.1% and 1.6% in January and February, respectively, but lost 1.8% in March as hopes of a rate cut faded and yields rose. In Q1, total return for the index was a very slight -0.05%.
High-Yield Corporate bonds underperformed higher-quality fixed income as high-yield investors demanded more compensation for below investment-grade corporate credit. The Bloomberg US Corporate High Yield index lost 0.5% in the quarter. Municipal bonds also declined in the quarter, with the Bloomberg Municipal Bond index edging 0.5% lower.
A CLOSER LOOK AT ENERGY
In any given year, financial markets tend to experience a ‘narrative change’, where what was assumed to be true at the beginning of the year gets turned upside down. So far in 2026, oil has been that narrative change.
In recent years, the price of oil drifted downward to the mid-$50 per barrel range, reflecting the slow and steady increase of global oil supply. It was expected that 2026 would see a continuation of the same trend, with annual supply forecasts topping 108 million barrels, an all-time record for global oil production. Adding modestly to the forecast early in the year was the (possible) additional supply from Venezuela following political developments earlier in the year.
This expected “supply versus demand” balance was upended by the Iran conflict, as investors grappled with a disruption to 20% of world oil supply that flows through the Strait of Hormuz. Since the beginning of March, supply uncertainty has caused oil prices to spike to approximately $100 per barrel, a level not seen since 2022. Comparisons to the 1970s oil crises have been made, but it is important to note the ways that the 2026 oil spike is much different than the ones experienced roughly 50 years ago. The first is the scale of the price shock in actual percentage terms. In 1973, oil quadrupled in price. In 1979, oil tripled in price. That would be equivalent to oil spiking to $180-240 per barrel today. So far, oil has risen ~50-70% ($60 per barrel before the conflict, $90-$100 today). Since 2010, oil has averaged $72 per barrel, so we are currently 30% above average.
Additionally, the price of oil is less important to the world economy than it was in the 1970s. The chart below (Fig 1) shows how much less reliant global economic output (GDP) is on energy today versus past decades, no doubt aided by the fact that the share of energy costs in household budgets has declined (Fig 2). It is still true that higher oil prices could still slow economic growth, but the impact is less versus prior decades.
(Fig 1) (Fig 2)
Furthermore, the rise of “fracking” has enabled the US to become the world’s largest oil producer, and we have become a net oil exporter—something unthinkable in the 1970s (Fig 3). As a result of increased non-traditional oil extraction—such as fracking in the United States and oil sands production in Canada—the global oil supply has become more fragmented and competitive, and far less dependent on OPEC. This shift implies that global oil supply is now more responsive to price signals than in previous decades. As with any healthy economic good, higher prices encourage more drilling, leading to greater supply, which should help us avoid 1970-level price spikes.
(Fig 3)
In closing, the market appears to be balancing two competing dynamics - sentiment and fundamentals. On one hand, investor sentiment, particularly during midterm election years, can act as a near-term headwind for equities. The added uncertainty surrounding the Iran conflict has only reinforced this cautious tone. On the other hand, the fundamental backdrop remains constructive. As discussed, corporate earnings are expected to grow at a strong pace following a solid 2025. While sentiment can influence markets in the short term, fundamentals have historically proven to be the more durable driver of returns. With earnings season underway, investors are likely to shift their focus from near-term uncertainty toward the underlying strength in corporate performance.