The U.S. equity market was rattled by geopolitical shocks in the first quarter of 2026, resulting in a -4.3% return for the popular S&P 500 benchmark. As in prior wars, the U.S. / Iran conflict led to increased volatility across financial markets as investors focused on downside risks, including an oil market in turmoil. Iran’s proximity to and leverage over the Strait of Hormuz translated into a grave concern for the global economy, since the Strait facilitates the transport of over 20% of the world’s oil and natural gas shipments. A pronounced effect of the Middle Eastern war has been the swift rise in Brent crude oil prices to nearly $120 per barrel (almost double the price levels that began the year), with some economists qualifying this conflict as the largest disruption to global energy markets since the 1970s.
Investors may be feeling a brief sense of déjà vu – a year removed from a stock market correction caused by uncertainty around tariff policies. Afterall, expectations for the economy coming into 2026 were constructive, with analysts seeing adoption of artificial intelligence (AI) leading to higher productivity and profitability for companies across various sectors. Furthermore, the U.S. and its trading partners had become acclimated to the newly implemented trade agreements, and expectations were for real GDP growth to accelerate globally in 2026 (with the GDP outlook in the U.S. improving from 2.25% to 2.50% growth this year).
Higher gas prices present a new challenge for the U.S. economy and will be closely monitored by the U.S. Federal Reserve Committee, who has been on a mission to tame inflation. The Fed is now dealing with risks on both sides of its dual mandate, following recent news that the nation also lost 91,000 jobs in February.
On the bright side for investors, the time-tested investment approach of diversification did provide some comfort during the quarter. For example, international equities and small-company stocks registered gains in the first quarter while the widely owned technology and AI-related company share prices fell. Additionally, analysts are expecting 13% profit growth for S&P 500 companies in the recently concluded quarter, in what would be a stellar sixth consecutive quarter of double-digit earnings growth.
In these periods of macro-economic strife, the direction for financial markets will likely be driven more by the unpredictable nature of military conflict and less by the fundamentals of the global economy. While moments like this can feel unsettling, history has shown that markets tend to recover from geopoliticaldriven drawdowns over time, reinforcing the importance of maintaining a long-term perspective during these uncertain times.
