Q1 2026 Market Update: Navigating Geopolitical Tensions, Oil Shocks, and Market Volatility

The opening quarter of 2026 underscores just how essential preparation is in financial planning and investing. Following robust gains in 2025, markets have confronted a mix of geopolitical disruptions, elevated oil prices, and renewed economic uncertainty. The conflict in Iran, which erupted at the end of February, emerged as the defining market narrative, sending oil prices sharply upward and triggering the year's first notable market pullback. By the close of March, however, reports of a potential ceasefire surfaced, and the situation continues to develop.

Stepping back for a broader view, markets have still delivered impressive returns over the past twelve months. Beneath the headline numbers, several market segments have helped support portfolios, including energy and defensive sectors. New market questions will inevitably arise in the months ahead, among them a leadership transition at the Federal Reserve and the midterm election later this year.

For long-term investors, the first quarter serves as a timely reminder that markets seldom move in a straight line, and that the principles of sound investing carry the most weight precisely when uncertainty is greatest.

Key Market and Economic Drivers

• The S&P 500 experienced a total return of -4.3% in Q1, the Nasdaq -7.0%, and the Dow Jones Industrial Average -3.2%.

• The Bloomberg U.S. Aggregate Bond Index was flat for the first quarter of 2026. The 10-year Treasury yield ended the quarter at 4.3% after falling as low as 3.9% at the end of February.

• Developed market international stocks (MSCI EAFE) were down -1.1% and emerging market stocks (MSCI EM) declined -0.1% over the quarter, both on a total return basis in U.S. dollar terms.

• Oil prices spiked with Brent crude reaching $118 per barrel at the end of March after beginning the year under $61. WTI ended the quarter at $101 per barrel.

• Gold ended the quarter at $4,668 per ounce after climbing as high as $5,417 in January. The U.S. Dollar Index (DXY) strengthened slightly to 99.96 over the same period.

• February inflation showed headline CPI rising 2.4% year-over-year and core CPI climbing 2.5%. The core PCE price index, the Fed's preferred measure, rose 3.1% year-over-year in January.

• The Federal Reserve kept rates unchanged within a range of 3.50% to 3.75% at both meetings during the first quarter.

The year's first market pullback arrives in Q1

It is natural to draw comparisons between the start of this year and the beginning of 2025, as both periods were shaped by global concerns. Notably, both first quarters saw the S&P 500 pull back by exactly 4.3%. While last year's volatility stemmed from tariffs and this year's from the conflict in the Middle East, the effect on investor sentiment has been strikingly similar. When uncertainty rises, markets tend to experience short-term swings in reaction to headlines.

The past offers no guarantees about the future, but taking a wider view can help clarify how markets have historically responded. Despite the turbulence of the first quarter of 2025, stocks went on to post strong gains for the remainder of the year, including dozens of record highs across major indices. The point is not that markets always bounce back quickly, but rather that market commentary tends to focus disproportionately on negative developments. As a result, when recoveries do occur, they often catch investors off guard.

Perhaps the most useful perspective is the recognition that pullbacks are a normal and unavoidable feature of investing. Since 1980, the S&P 500 has experienced an average intra-year drawdown of around 15%, even as markets have delivered positive returns in more than two-thirds of years. In a typical year, investors can expect four or five pullbacks of five percent or more. Last year saw six such pullbacks, yet the S&P 500 still finished the year with an 18% total return.

For investors, the key takeaway is that short-term market swings — particularly those driven by headline risk — are simply part of the investing landscape. Portfolios aligned with long-term financial goals are specifically designed to navigate these periods. This perspective may be especially relevant as the midterm election approaches and fiscal concerns reemerge later in the year.

Geopolitical tensions and oil prices drive market uncertainty

The most consequential market development of the first quarter was the escalating Middle East conflict, which pushed oil prices significantly higher. Disruptions to the Strait of Hormuz, a critical passage carrying roughly 20% of global oil from the Persian Gulf to international markets prompted production cuts among major oil-producing nations in the region. Brent crude closed the quarter at $118 per barrel, up over 94% year-to-date, while WTI crude surpassed $100, the highest levels since the war in Ukraine began in 2022. Oil prices will continue to respond to geopolitical developments, including any progress toward a potential ceasefire.

Higher fuel costs affect consumers directly through gasoline prices and indirectly by raising the cost of goods and services throughout the broader economy. The national average price of gasoline reached $4 at the end of March, and diesel prices have also risen considerably.

While these developments do weigh on household budgets, economists generally treat such “supply-side shocks” as temporary when assessing the overall health of the economy. Oil prices have historically improved once the underlying geopolitical situation has stabilized — as was the case in 2022, when gasoline prices peaked near $5 before retreating within months. While conditions are certainly challenging, significant financial hardship for the average American household is not expected at current gasoline price levels.

History also demonstrates that geopolitical events, despite creating short-term instability, have rarely derailed markets over the long term. This includes the U.S. operation in Venezuela in January, which surprised markets but had little lasting effect on investments. While the current situation continues to evolve and the humanitarian consequences are profound, investors who made dramatic portfolio changes in response to past events often did so at an inopportune time.

Economic growth is moderating but remains on solid footing

Volatile energy prices are just one element of a broader economic picture. Other indicators suggest an economy that has cooled over the past year while remaining fundamentally sound — this after a prolonged stretch during which investors and economists repeatedly anticipated recessions that never arrived.

The labor market is perhaps the most closely monitored area, and the latest data show that February job gains fell by 92,000 while the unemployment rate edged up to 4.4%. Notably, job seekers now outnumber job openings for the first time in years. As recently as 2022, there were two job openings for every unemployed individual, reflecting an exceptionally tight labor market. That dynamic has now shifted.

Context matters here, however. Fewer workers are entering the labor force due to lower immigration levels and an aging population. In other words, both the supply and demand sides of the labor market are softening simultaneously, which has helped keep the unemployment rate near historically healthy levels. Investors monitor jobs data closely because employment directly influences household income, consumer confidence, and spending. Consumer spending accounts for more than two-thirds of GDP and has proven stronger than many anticipated over the past several quarters.

Sector-level performance reveals significant divergence

Even as the overall S&P 500 faces a pullback, performance across individual sectors has varied widely. Six of the eleven S&P 500 sectors are in positive territory for the year, and the gap between the best and worst performing sectors widened to nearly 50 percentage points during the first quarter.

The Energy sector has been the standout leader, gaining nearly 40% through the end of March, as higher oil prices are expected to boost revenues and attract further investment. Other sectors posting gains include Consumer Staples, Utilities, Materials, and Industrials, all of which have benefited from a more risk-averse market environment. Many of these sectors are considered “defensive” in nature, as they represent businesses with more stable cash flows that are less tied to the economic cycle.

By contrast, the Information Technology sector has declined approximately 9%, and many mega-cap stocks within the Magnificent 7 have lagged. This marks a notable departure from recent years, when a small group of large technology companies drove the bulk of market gains.

As always, it is important to keep these moves in context. As the chart above illustrates, sector leadership can rotate based on shifting market and economic conditions. Energy was the top-performing sector in 2021 and 2022, a period when technology-related stocks struggled, before the dynamic reversed over the following three years. As with asset classes more broadly, predicting which sector will lead or lag in any given year is extremely difficult — which is precisely why a well-diversified portfolio is better positioned to navigate varying market environments.

The tariff landscape continues to shift

Trade policy took a significant turn at the end of January after the Supreme Court ruled 6-3 that the broad tariffs imposed under the International Emergency Economic Powers Act (IEEPA) were unlawful. The administration responded by implementing a temporary global import duty under a different legal authority, Section 122 of the Trade Act of 1974. The administration also launched new Section 301 trade investigations in March, while approximately a dozen Section 232 investigations remain ongoing.

For investors, the core takeaway is that while the legal foundation for tariffs has changed, the overarching policy direction remains intact. Tariffs will likely continue to influence the economy through consumer prices, business costs, and investor confidence. That said, the experience of last year demonstrated that markets can adapt to these types of policy shifts over time. Regardless of how the tariff story unfolds later this year, the priority for investors remains staying invested and avoiding overreaction to policy developments.

Summary

The first quarter of 2026 challenges investors with geopolitical shocks, higher oil prices, and economic uncertainty. Yet markets have been resilient, with well-balanced portfolios and financial plans doing what they were designed to do. Investors should continue to focus on long run goals in the coming months. If you still have questions about your investments, schedule time with your advisor. If you’re looking for an advisor or an unbiased opinion, connect with one of our team members today!

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The S&P 500 Index is a market-capitalization-weighted index that represents 500 of the largest publicly traded companies in the United States. It is widely used as a benchmark for overall stock market performance but does not represent all available investment opportunities. Past performance of the S&P 500 or any other market index is not indicative of future results. Investing in equities involves risks, including market volatility and potential loss of principal.

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