Q1 2026 Market Review: Navigating Geopolitical Tensions, Rising Oil, and Market Volatility

Sean Gross, CFP®, AIF® | Co-Founder & CEO

The first quarter of 2026 serves as a compelling reminder of why preparation is essential in financial planning and investing. Following strong performance in 2025, markets faced a confluence of geopolitical shocks, surging oil prices, and renewed economic uncertainty. The conflict in Iran, which broke out at the end of February, emerged as the dominant market narrative, driving oil prices sharply higher and triggering the year’s first market pullback. By late March, however, headlines surrounding a potential ceasefire began to surface, and developments continue to unfold.

Stepping back to view the broader picture, markets have still delivered exceptional performance over the trailing twelve months. Beneath the headline numbers, several areas of the market—including energy and defensive sectors—have provided meaningful portfolio support. In the months ahead, new market questions will inevitably arise, among them a leadership transition at the Federal Reserve and the midterm election later this year.

For long-term investors, the first quarter reinforces that markets rarely move in a straight line, and that disciplined investing principles matter most precisely when uncertainty is at its highest.

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.

Markets experienced the first pullback of the year

It is natural to draw comparisons between the early months of this year and the start of 2025, as both were shaped by global concerns. Notably, both first-quarter periods saw the S&P 500 decline by 4.3%. While last year’s volatility was driven by tariffs and this year’s stems from the conflict in the Middle East, the effect on investor sentiment has been broadly similar. When uncertainty intensifies, it is entirely normal for markets to experience short-term swings in reaction to headlines.

Past performance is no guarantee of future results, but taking a longer view can offer useful historical context. Despite the turbulence in the first quarter of 2025, stocks delivered strong gains for the remainder of the year, with major indices recording dozens of new all-time highs. The point is not that markets always rebound swiftly, but rather that market commentary tends to emphasize the negative. As a result, recoveries often occur when investors least anticipate them.

Perhaps the most grounding perspective is to recognize that pullbacks are a normal and unavoidable feature of investing. Since 1980, the S&P 500 has posted an average intra-year drawdown of roughly 15%, even as markets have delivered positive returns in more than two-thirds of calendar years. A typical year tends to see four or five pullbacks of five percent or more. Last year saw six such declines, yet the S&P 500 still finished with an 18% total return.

For investors, the central takeaway is that short-term market fluctuations—particularly those triggered by headline-driven uncertainty—are simply part of the market cycle. Portfolios built around long-term financial goals are designed precisely to navigate these kinds of periods. This perspective may be especially relevant as the midterm election approaches and fiscal concerns resurface later in the year.

Geopolitics and oil prices are the primary source of uncertainty

The most consequential market development of the first quarter was the escalating Middle East conflict, which sent oil prices surging. Disruptions to the Strait of Hormuz—a critical passage that carries roughly 20% of global oil from the Persian Gulf to the rest of the world—led to production cuts among 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 per barrel, 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 at the pump and indirectly through elevated costs for goods and services across 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 tend to view such “supply-side shocks” as temporary when assessing overall economic health. This is because oil prices typically stabilize once the underlying geopolitical event has been resolved. A similar pattern emerged in 2022, when gas prices peaked near $5 before declining within months. While not a comfortable environment, significant financial hardship is not anticipated for the average American household at current gasoline price levels.

History also demonstrates that geopolitical events, despite generating short-term instability, have rarely derailed markets over the long run. This was evident following the U.S. operation in Venezuela in January, which surprised markets but had little enduring impact on investments. While the current situation continues to evolve and the humanitarian consequences are significant, investors who made dramatic portfolio adjustments in response to past geopolitical events often did so at an inopportune moment.

Economic growth is slowing but remains positive

Volatile energy prices are only one dimension of a broader economic picture. Other indicators point to an economy that has moderated over the past year but remains fundamentally sound—this after several years in which economists and investors alike forecast recessions that never arrived.

Among the most closely monitored indicators is the labor market. 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—a relationship that has since reversed.

Context is important here. Fewer individuals are entering the workforce 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 strong levels. Jobs data receive close attention from investors because employment directly influences household income, consumer confidence, and spending. Consumer spending accounts for more than two-thirds of GDP and has been more resilient than many anticipated over the past several quarters.

Sector performance has diverged

While the broader S&P 500 has pulled back, performance at the sector level has varied considerably. In fact, six of the eleven S&P 500 sectors posted positive returns 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 stimulate further investment. Other sectors showing relative strength include Consumer Staples, Utilities, Materials, and Industrials, all of which have benefited from a more risk-averse market environment. Many of these are commonly regarded as “defensive” sectors, as they represent more stable businesses with steadier cash flows that are less sensitive to economic cycles.

By contrast, the Information Technology sector declined approximately 9%, and many large-cap stocks within the Magnificent 7 have underperformed. This represents a notable shift from recent years, when a concentrated group of large technology companies drove the majority of market gains. 

As always, it is important to keep these moves in perspective. As illustrated in the chart above, sector leadership can rotate based on prevailing market and economic conditions. Energy was the top-performing sector in both 2021 and 2022, while technology-related stocks struggled during those years—only to reverse course over the following three years. As with asset classes more broadly, it is extremely difficult to predict which sector will lead or lag in any given year, which is why a well-diversified portfolio is better positioned to navigate a range of market environments.

The tariff story is evolving

Trade policy also shifted 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 separate legal authority, Section 122 of the Trade Act of 1974. Additionally, the administration launched new Section 301 trade investigations in March, while approximately a dozen Section 232 investigations remain ongoing.

For investors, the key takeaway is that while the legal framework for tariffs has shifted, the broader direction of trade policy is likely to continue. Tariffs will probably 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 kinds of policy changes over time. Regardless of how the tariff landscape develops later in the year, staying invested and avoiding overreaction to policy shifts remains the prudent approach.

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.