Market Commentary: Q1 2026
Q1 2026 Market Review
Global markets experienced modest declines in the first quarter of 2026, with the MSCI ACWI falling approximately 3.5% and the US S&P 500 declining 5.1%. The pullback was driven by a combination of geopolitical developments, including the onset of hostilities in the Middle East, along with renewed concerns around inflation and slowing growth triggered by disrupted trade markets. Despite the global decline, international developed and emerging markets continued to outperform U.S. equities, extending the relative performance trends established in 2025. Emerging markets, in particular, demonstrated resilience, supported by favorable valuations and greater exposure to energy and commodities.
Investor sentiment remained fragile as markets began the quarter with concerns about valuations, the sustainability of Artificial Intelligence capital expenditure cycles, and a possible imbalance in private credit markets.
U.S. Market Developments
Beyond the headlines from the Middle East, U.S. markets were shaped primarily by Federal Reserve policy and tariff uncertainty. The Federal Reserve held the federal funds rate steady at both its January and March meetings1, reinforcing an intention to leave rates higher for longer than previously anticipated, as inflation remained above target.
Trade policy uncertainty also weighed on sentiment. Legal challenges constrained some original tariffs, but alternative legal pathways enabled parts of the tariff policy to be reinstated, prolonging uncertainty for businesses and investors. Late in the quarter, escalating conflict involving Iran drove oil prices sharply higher, raising inflation expectations and amplifying global risk aversion.
Also during the quarter, the U.S. labor market showed signs of cooling. Job openings, hiring, and wage growth slowed throughout the quarter, even as the headline unemployment rate remained relatively stable2, conveying a labor market that is cooling but not cracking3. Importantly, rising productivity enabled continued GDP growth despite stagnant jobs growth. Nevertheless, consumer confidence weakened during the quarter, pressured by higher gasoline prices, elevated costs of living, and increased market volatility. While consumer spending held up better than sentiment indicators suggested, the widening divergence suggests that any further economic disruptions could strain future consumer spending.
International and Emerging Markets
International developed and emerging markets outperformed U.S. equities in Q14, benefiting from a combination of valuation advantages, reduced policy uncertainty, and favorable sector exposure. After years of underperformance, non-U.S. markets entered 2026 trading at significant discounts to U.S. equities, offering a margin of safety during periods of global repricing.
The rising energy prices linked to Middle East tensions disproportionately benefited regions with greater commodity and energy exposure, including parts of emerging markets and developed economies outside the U.S. Additionally, global investors continued to rotate away from concentrated U.S. mega-cap exposures toward broader geographic opportunities with improving fundamentals.
Fixed Income Markets
Bond markets faced a challenging backdrop in Q1 2026, pressured by persistent inflation, cautious central-bank guidance, rising energy prices, and geopolitical risk. Returns varied significantly across regions, maturities, and credit sectors. With rate cuts delayed and inflation risks elevated, shorter-duration exposures proved more resilient than long-duration bonds.
Outlook
Energy markets were a defining theme of the quarter and are likely to have a considerable impact for the remainder of the year. The elevated price of oil will likely translate into higher costs across a range of consumer goods in the coming year, while shortages of derivative products such as plastics may further strain supply chains. Meanwhile, other much needed inputs, such as fertilizer and helium, have also been impacted by the restriction on shipping through the Strait of Hormuz and will have ripple effects on supply and prices in the months to come.
At the time of writing, recent headlines suggest that diplomatic efforts between the United States and Iran may be gaining traction, raising the possibility of a de-escalation in tensions. While this is a constructive development, the situation remains fluid. Even in the event of a sustained agreement, the extent of damage to regional infrastructure suggests that a near-term return to pre-conflict supply and demand dynamics is unlikely.
Looking ahead, financial markets are likely to remain sensitive to inflation trends, central bank policy signals, and geopolitical developments. The tensions between slowing economic growth and persistent inflationary pressures present a challenging environment for policymakers and investors alike. Uncertainty surrounding trade policy, energy markets, and geopolitical stability adds further complexity to the near-term outlook.
In the longer term, the disruption to the flow of oil may motivate increased investment in closer-to-home renewable sources of energy. This is just one example of how companies and markets adapt and adjust over time, often creating new markets and industries.
While near-term volatility is likely to persist, the dispersion in returns across regions, sectors, and factors underscores the enduring importance of diversification. Investors who entered the quarter with broad, well-diversified portfolios were better positioned to absorb the market's volatility. Maintaining such balanced exposure across asset classes and geographies remains a key strategy for navigating an environment characterized by uncertainty, ongoing policy transitions, and shifting industrial leadership and is consistent with the long-term principles of disciplined portfolio construction, an approach that continues to guide how our team invests on behalf of our clients.
1 Fed interest rate decision March 2026: Holds rates steady
2 U.S. Job Openings and Hiring Fell in February – WSJ
3 Uncertainty Calls for Caution, Humility in Policymaking - Federal Reserve Bank of Atlanta
4 U.S. equities represented by MSCI US TR USD; International Developed equities represented by MSCI ACWI Ex US NR USD; Emerging Markets represented by MSCI ACWI Emerging Markets NR USD.
Index Disclosure and Definitions
Investors cannot invest directly in an index. Indexes have no fees. Historical performance results for investment indexes do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the occurrence of which would have the effect of decreasing historical performance results. Actual performance for client accounts will differ from index performance.
S&P 500 Index represents the 500 leading U.S. companies, approximately 80% of the total U.S. market capitalization.
Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
The Nasdaq Composite Index (NASDAQ) measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market and includes over 2,500 companies.
MSCI World Ex USA GR USD Index captures large and mid-cap representation across 22 of 23 developed markets countries, excluding the US. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets (as defined by MSCI). The index consists of the 25 emerging market country indexes.
Bloomberg Barclays US Aggregate Bond Index measures the performance of the U.S. investment grade bond market. The index invests in a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States — including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year.
Bloomberg Barclays Global Aggregate (USD Hedged) Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging market issuers. Index is USD hedged.
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