2026: Q1 Macro Review

Macro Review – Q1 CY 2026

Global Markets

Global equities (MSCI All Country World USD) fell 3.1% in Q1 2026 as US-Israel military actions against Iran triggered a global energy shock, refocusing markets on inflation and macro risks. This instability was exacerbated by a more protectionist trade environment following the US implementation of a 10% global tariff. Consequently, monetary policy diverged; central banks in energy-sensitive nations remained hawkish while others eased cautiously. Although corporate fundamentals held steady, equity valuations compressed under higher risk premia, leading to tighter financial conditions and heightened downside risks.  

In contrast, Japan (MSCI Japan Local +3.0%; USD +1.5%) and the UK (MSCI UK Local +4.0%; USD +2.0%) showed greater stability, supported by commodity and cyclical exposures. Emerging markets (MSCI EM USD -0.1%) outperformed developed markets (MSCI EAFE USD -1.1%), bolstered by early tech-sector gains in Korea and Taiwan. 

Parallel pressures hit fixed income markets, where persistent inflation and shifting policy expectations drove yields higher and increased volatility. Conversely, commodities surged 40% during the quarter. While this rally was primarily fueled by the jump in energy prices, precious metals, industrial metals, and agriculture also contributed to the gains.  

United States

The S&P 500 concluded the quarter with a -4.3% return, breaking a three-quarter winning streak. This downturn was largely concentrated in March, following a moderately positive January and a flat February. Smaller companies also performed better than the broader market, with the Russell 2000 and equal-weight S&P 500 each gaining nearly +1%. The Nasdaq 100 faced a sharper decline, returning -5.8%. Yet beneath the surface, the quarter had meaningful bright spots — the average S&P 500 stock beat the index by nearly +5%, and investors with diversified portfolios held up considerably better. 

Oil prices and the Fed’s dilemma 

The quarter’s defining story was oil. Crude prices climbed +13% in January on supply worries tied to Venezuela and the Middle East, added another +4% in February, then surged nearly +50% in March alone after the U.S.-Iran conflict triggered closure of the Strait of Hormuz — a chokepoint handling roughly 20% of global oil flows. In total, WTI crude rose more than +70% in Q1 to around $103/barrel, the highest since mid-2022. Gasoline at the pump has already jumped nearly $1.00/gallon since late February. 

The oil shock landed on already-warm inflation. Core PCE rose 3.2% y-o-y in March. Headline CPI surged 0.9% in March alone — its largest monthly move since June 2022 — pushing the annual rate to 3.3%, while core CPI edged up to 2.6%. Expectations for multiple rate cuts at the start of the year eventually gave way to a more cautious outlook by quarter-end. 

Where diversification paid off 

The headline S&P 500 number masked a wide split in performance. Large-cap growth names — especially mega-cap tech — dragged the index down, while smaller and value-oriented companies fared far better. Energy surged +38.2%, while Materials, Utilities, and Consumer Staples each gained over +7.5%, with the Industrial and Real Estate sectors also trended upward.  In contrast, Financials, Consumer Discretionary, and Tech each fell more than -9%. Six of the eleven S&P 500 sectors beat the index. International equities gained nearly +1%, outpacing U.S. stocks by ~5%. 

Market leadership changed hands 

The quarter’s most telling story played out beneath the surface. In early 2026, a distinct transition in market leadership took place as investors pivoted away from the mega-cap tech stocks that previously dominated. This shift began in January and gained momentum in February, fueled by fears that AI might disrupt the software industry. March volatility narrowed the gap but didn’t close it. Ultimately, Q1 demonstrated that previous market leaders were surpassed by other sectors, highlighting how a managed strategy can help mitigate risk and manage turbulence. 

Manufacturing was a bright spot 

The ISM Manufacturing PMI crossed back above 50 (signaling expansion) in February for the first time in nearly a year, and held there in March. The Industrials sector hit an all-time high in late February. This underlying momentum entered the quarter before the oil shock, which should provide some cushion as the economic impact of higher energy prices works its way through. 

Bonds and credit 

The Bloomberg U.S. Aggregate Bond Index finished flat in Q1 after four straight quarters of gains of +1% or better. The 10-year Treasury yield ended at 4.32% (its highest since June 2025), briefly touching 4.45% in late March. The 2-year yield rose to 3.79%, up about +0.35% on the quarter. High-yield credit spreads widened to their highest level since early 2025 — reflecting caution, though still well below recessionary levels. 

Fundamentals remain intact – the encouraging underlying picture 

Despite the market decline, corporate earnings estimates have continued to rise. S&P 500 earnings and prices have tracked each other with a 96% correlation over the past 26 years. When earnings rise, stock prices generally follow. When earnings decline, as they did during the 2001 recession, the 2008 financial crisis, and the 2020 pandemic, stock prices tend to fall.  Right now, fundamentals remain intact. Even through the selloff, earnings estimates continued rising — analyst growth expectations and profit margins remain intact. The quarterly pullback was driven by uncertainty around oil, inflation, and Fed policy, not by deteriorating earnings or profit margins. That distinction is important for long-term investors. April’s rally lends further weight to that view.  

The Outlook: The interplay between energy costs, inflation, and Fed policy defined the quarter. With rising oil prices reshaping rate-cut forecasts, the upcoming April and May inflation reports will be critical in determining the trajectory of interest rates and the overall economy. First quarter served as a clear reminder of why a carefully managed portfolio matters. The market segments that previously drove growth took a backseat in Q1, allowing those with broad exposure across sectors, company sizes and styles to better weather the volatility. Ultimately, staying the course with a long-term strategy remains a cornerstone of successful wealth building. 

Europe

European equities fell 0.9% in Q1 2026 as Middle East conflict damaged energy infrastructure and nearly closed the Strait of Hormuz, delivering simultaneous energy and inflation shocks. While early indicators suggested a gradual recovery, March saw Eurozone business activity stall, with the S&P Global Flash Eurozone PMI hitting a 10-month low of 50.5. Consequently, the ECB cut its 2026 GDP growth forecast to 0.9% (from 1.2%) and raised headline inflation expectations to 2.6% (from 1.9%). While the ECB held rates steady for a sixth time, alongside pauses in Norway, Sweden, Switzerland, and the UK, President Lagarde warned of an April hike if the inflation shock spirals, as March eurozone headline inflation jumped to 2.5% from February’s 1.9 —its highest level since January 2025. 

The manufacturing PMI hit a 45-month high of 51.6 in March, yet momentum was undercut by input prices reaching their highest levels since October 2022. Meanwhile, the services sector expanded for a tenth consecutive month but neared stagnation. Though core inflation eased to 2.3%, the Economic Sentiment Indicator dropped to 96.6 as consumer confidence fell drastically and STOXX 600 Q4 earnings were forecast to decrease 2.0% year-on-year. Overall, these shocks have pushed inflation to its highest level since January 2025, fundamentally clouding the region’s policy outlook. 

Germany (-6.6%): Germany saw its manufacturing PMI hit a 46-month high of 52.2 in March, driven by rapid output and new-order growth. However, energy and inflation fears caused the ZEW Economic Sentiment to plummet 58.8 points to -0.5, missing the 39 market expectation. 

UK (+4.0%): Amidst Middle East energy shocks, the Bank of England held interest rates at 3.75% in March, shifting market expectations from imminent cuts to potential hikes this year. Despite February inflation remaining steady at 3.0%, a hawkish policy tone and flatlining growth have heightened the challenge for the UK economy. 

France (-3.5%): France finally adopted its 2026 budget after Prime Minister Sébastien Lecornu utilized Article 49.3 to bypass the National Assembly, surviving subsequent no-confidence votes. 

China

China’s equities fell 8.5% in Q1. A distinct performance gap emerged between resilient onshore A-shares—buoyed by domestic liquidity and structural growth in “green energy” and AI-related manufacturing—and struggling offshore tech stocks, which were hampered by high interest rate sensitivity and a shift in global capital flows. The market was capped by tepid domestic demand, low inflation, and a conservative outlook for corporate earnings. 

2026 GDP growth target has been set at a conservative 4.5% – 5%, reflecting its lowest objective since the early 1990s. The economy faces a complex array of internal and external pressures, including stagnant consumer demand, deflationary risks, and a volatile property sector. Geopolitical tensions, specifically trade friction with the U.S. and oil supply disruptions caused by the conflict in Iran, further complicate the outlook. 

While the domestic market remains soft—highlighted by a 3.2% drop in new-home prices—the industrial sector continues to serve as a vital engine for growth. This is evidenced by a 6.3% jump in industrial production and a 22% surge in exports, driven largely by high-demand sectors like semiconductors, automobiles, and electronics. 

Emerging Markets

Emerging markets equities rose 2.2% in Q1 2026, led by Latin America (+12.2%), EMEA (+1.8%), and Asia (+1.3%). 

• Asia (+1.3%): South Korea (+24.1%) led the region as March exports grew at their fastest pace in four decades, surging 48.3% year-over-year to US$86.13 billion behind the AI-driven chip boom. Despite this, stocks faced late-quarter pressure due to energy flow disruptions. Taiwan (+11.1%) revised its 2026 GDP growth forecast upward to 7.28% (from 1.63%) as tech exports boomed. The island also signed a landmark US trade deal, committing to US$84 billion in American goods through 2029 while lowering export tariffs to 15%. 

• India (-14.4%): India’s equity market faced a sharp 14.4% contraction. The West Asia geopolitical crisis prompted foreign investors to pull over $20 billion from Indian markets, driving the rupee to record lows beyond 93 per USD. Meanwhile, Brent crude surged past $120 per barrel, pushing retail inflation toward the RBI’s 6% upper limit. These pressures were further compounded by a shortage of Qatari LNG—which traditionally accounts for 47% of India’s imports—stalling the fertilizer and power sectors. Despite these headwinds, the trade deficit narrowed to a nine-month low of $20.67 billion in March, driven by rising shipments and declining purchases. Exports climbed to $38.92 billion (up from February’s $36.61 billion), while imports retreated to $59.59 billion from a previous $63.71 billion. IMF raised India’s FY27 GDP growth forecast to 6.5% despite global conflicts. 

• EMEA (+1.8%): Saudi Arabia (+9.3%) surged as Brent crude topped US$100 per barrel, despite a 50% drop in March oil exports caused by the Strait of Hormuz blockade. To mitigate the 20 million bpd regional shortfall, the Kingdom diverted over 4 million bpd to its Red Sea port. South Africa (0.0%) held its policy rate at 6.75% as February inflation eased to 3%, while the government signed a framework trade deal with China to circumvent 30% US tariffs on its exports. 

• Latin America (+12.2%): Brazil (+14.5%) cut the Selic rate 25 bps to 14.75% but raised its inflation forecast to 3.9%. Mexico (+8.1%) saw inflation hit 4.02% (above its 3.0% target), though its 2026 GDP forecast rose to 1.6%. US export tariffs fell 13.6% following a Supreme Court ruling. 

Pacific Basin

• Pacific Basin equities rose 2.6%, navigating a volatile March shaped by Middle East war and shifting regional policies. 
  • Australia (+0.6%): The RBA delivered two consecutive 25-bps hikes, lifting the cash rate to 4.1% following a narrow 5-4 split decision in March. While annual growth accelerated to 2.6% in Q4, persistent labor tightness and elevated February inflation prompted Governor Michele Bullock to warn that Middle East turmoil could necessitate further tightening later this year. 
  • Japan (+3.0%): Prime Minister Sanae Takaichi’s LDP secured a two-thirds majority in the 465-seat lower house, stabilizing markets after an initial bond rout triggered by a two-year food sales tax suspension. The economy showed strength as Q4 GDP was revised to 1.3% annualized, while real wages grew a decades-high 1.4%. The BoJ held rates at 0.75% but struck a hawkish tone, signaling a potential April hike due to energy-driven inflation risks. 
  • Singapore (-0.6%): The economy ended 2025 with 5.0% growth, bolstered by a 6.9% Q4 surge in pharma and AI-chip manufacturing. Although the MAS held rates for a third meeting and the 2026 GDP forecast was raised to 2%–4% (from 1%–3%), the government warned in March that the Middle East energy shock may force a policy shift to protect price stability. 

Commodities

• Energy (+82.8%): The sector saw historic gains driven by Middle East conflict and the near-closure of the Strait of Hormuz, causing massive supply disruptions. Gas oil (+125.9%), heating oil (+116.8%), crude oil (+83.3%), and gasoline (+69.4%) surged on high geopolitical risk premiums. Conversely, natural gas (-3.0%) fell as warmer weather and record US production created an oversupply. 

• Industrial Metals (+6.0%): Performance was mixed but positive overall: 

• Aluminum (+18.5%) and Zinc (+4.3%) rallied due to supply tightened by energy costs, production curbs, and low inventories. Nickel (+2.3%) rose on Indonesian supply concerns. 

• Copper (-0.7%) and Lead (-7.2%) declined, pressured by weak Chinese demand, global growth fears, and high battery-sector inventories. 

• Precious Metals (+7.0%): Gold (+7.1%) and silver (+6.3%) hit record highs as investors sought safe havens. Demand was driven by Middle East conflict, US-Europe frictions over Greenland, and concerns regarding trade wars, dollar weakness, and Fed independence. 

• Agriculture & Livestock (+4.9%) 

• Wheat (+21.0%) and Soybeans (+11.4%) jumped due to supply withholding, Black Sea disruptions, and biofuel demand linked to high crude prices. 

• Livestock: Feeder cattle (+9.2%) rose on historically low herd numbers, while lean hogs (+0.4%) saw modest gains. 

• Softs: Coffee (-12.5%) fell on strong Brazilian rainfall, and Cocoa (-46.3%) plummeted as favorable West African weather and high prices led to a significant supply surplus and demand destruction. 

Currencies

Currency markets reflected divergent growth, shifting rate differentials, and high geopolitical risk. The US dollar strengthened, fueled by resilient economic data, firm real rates, and safe-haven demand. Emerging markets currencies remained mixed, driven by idiosyncratic fundamentals and commodity exposure. Ultimately, energy shocks and geopolitical instability spiked volatility, favoring safe havens and reinforcing broader cross-asset trends. 

Market Performance Total Returns (%)