The first quarter of 2026 underscores why preparation is essential in financial planning and investing. Following strong gains in 2025, markets have contended with a combination of geopolitical disruptions, elevated oil prices, and renewed economic uncertainty. The conflict in Iran, which broke out at the end of February, dominated market narratives, sending oil prices sharply higher and triggering the year’s first notable market pullback. By the end of March, however, reports of a possible ceasefire began to surface, and the situation continues to develop.

From a broader vantage point, markets have still delivered impressive performance over the trailing twelve months. Beneath the headline numbers, several pockets of the market — including energy and defensive sectors — have provided meaningful support to portfolios. New questions will likely emerge in the months ahead, among them a leadership transition at the Federal Reserve and the upcoming midterm election later this year.

For long-term investors, the first quarter serves as a reminder that markets seldom move in a straight line and that the principles of disciplined investing are most consequential during periods of peak uncertainty.

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 arrived in Q1

It is natural to draw comparisons between the opening months of this year and those of 2025, as both were shaped by global concerns. Notably, both first quarters produced identical S&P 500 pullbacks of 4.3%. While last year’s volatility stemmed from tariffs and this year’s reflects the conflict in the Middle East, the effect on investor sentiment has been remarkably similar. When uncertainty rises, short-term market swings driven by headlines are a common response.

Past performance is no guarantee of future results, but a longer-term lens can offer helpful historical context. Despite the turbulence of Q1 2025, equity markets went on to post strong gains for the remainder of the year, including dozens of record highs across major indices. The lesson is not that markets always recover swiftly, but rather that market conversations tend to fixate on negative developments — meaning that rebounds often arrive when investors least anticipate them.

Perhaps the most grounding perspective is recognizing that pullbacks are a normal and inevitable feature of investing. Since 1980, the S&P 500 has experienced an average intra-year drawdown of around 15%, even though markets tend to experience positive returns in more than two-thirds of years. A typical year sees four or five pullbacks of five percent or more. Last year saw six such pullbacks, even though the S&P 500 finished the year with an 18% total return.

The key takeaway for investors is that short-term market swings — particularly those driven by headline risk — are simply part of the market cycle. Portfolios constructed around long-term financial goals are designed precisely to navigate these periods. This perspective may prove especially valuable as the midterm election approaches and fiscal concerns resurface later in the year.

Geopolitical tensions and oil prices are driving uncertainty

The most consequential market development of the first quarter was the escalating conflict in the Middle East, which propelled oil prices higher. Disruptions to the Strait of Hormuz, which carries roughly 20% of global oil from the Persian Gulf to the rest of the world, led to production cuts across major oil-producing nations in the region. Brent crude ended 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 will continue to react to geopolitical headlines, including around a possible ceasefire.

Higher fuel costs affect consumers directly through gasoline prices at the pump and indirectly through elevated prices for goods and services across the broader economy. The national average price of gasoline reached $4 at the end of March, while diesel prices have also climbed considerably.

While these developments do weigh on consumer budgets, economists generally regard such “supply-side shocks” as temporary when assessing the overall health of the economy. This is because oil prices tend to stabilize once a geopolitical event resolves. This was observed in 2022 when gas prices reached $5 before declining within months. While not pleasant, significant financial hardship is not expected to be an issue for the average American household at current gasoline levels.

History also demonstrates that geopolitical events, despite generating short-term instability, have not typically derailed markets over the long run. This includes the U.S. operation in Venezuela in January, which surprised markets but had little lasting impact on investments. While the current situation is still evolving and the humanitarian consequences are significant, investors who made dramatic portfolio adjustments in response to past events often did so at the wrong moment.

Economic growth is moderating but remains in positive territory

Volatile energy prices represent just one dimension of the broader economic picture. Other indicators point to an economy that has moderated over the past year but remains fundamentally sound — this after many years in which widely predicted recessions failed to materialize.

The labor market remains a key area of focus. The latest payrolls data show that February job gains fell by 92,000 and 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 relationship has now reversed.

Context, however, is important. Fewer individuals are entering the workforce due to lower immigration and an aging population. In other words, both the supply and demand sides of the labor market are cooling simultaneously, which has helped keep the unemployment rate near historically strong levels. Investors monitor employment data closely because jobs directly influence household income, consumer confidence, and spending. Consumer spending accounts for more than two-thirds of GDP and has proven more resilient than many anticipated over recent quarters.

Wide divergence in sector-level performance

Even as the overall S&P 500 has experienced a pullback, sector-level performance has varied considerably. In fact, six of the eleven S&P 500 sectors are positive 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 encourage further investment. Other sectors demonstrating strength include Consumer Staples, Utilities, Materials, and Industrials, all of which have benefited from a more risk-averse market environment. Many of these sectors are widely considered “defensive,” as they represent businesses with more stable cash flows that are less sensitive to the economic cycle.

By contrast, the Information Technology sector has declined approximately 9%, and a number of mega-cap stocks within the Magnificent 7 have underperformed. This marks a departure from recent years, when a small group of large technology companies accounted for the majority of market gains.

As always, it is important to keep these moves in perspective. As the chart above illustrates, sector leadership can shift based on prevailing market and economic conditions. Energy was the best performing sector in 2021 and 2022 when technology-related stocks struggled, and that dynamic reversed over the following three years. Just as with asset classes, predicting which sector will lead or lag in any given year is extremely difficult, which is why a well-balanced portfolio is better positioned to navigate varying market environments.

The trade policy landscape continues to shift

Trade policy also experienced a notable development at the end of January when 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 imposing a temporary global import duty under a different law, Section 122 of the Trade Act of 1974. The administration also opened new Section 301 trade investigations in March, while about a dozen Section 232 investigations remain ongoing.

For investors, the central takeaway is that while the legal framework for tariffs has shifted, the overarching policy direction is likely to persist. Tariffs will continue to influence the economy through consumer prices, business costs, and investor confidence. That said, last year demonstrated that markets are capable of adapting to these types of policy changes over time. Regardless of how the tariff story unfolds later this year, the key is to remain invested and avoid overreacting to policy developments.

The bottom line? 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.