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Market Commentary
Market Commentary – Q1, 2026
Dire Straits
This pushed U.S. fuel prices to four-year highs, amplifying inflationary pressures.
Overview
Geopolitical conflict, combined with increased uncertainty about the potential disruption from AI dominance shaped first-quarter returns. U.S. large-cap stocks (as proxied by the S&P 500 Index) closed at a new all-time high on January 27, but ended the quarter down 4.3%. U.S. small-cap stocks, as represented by the Russell 2000 Index, fared better, finishing the quarter up 0.9%. U.S. intermediate-term bonds (the Bloomberg U.S. Aggregate Bond Index) ended the quarter flat.
Q1 returns were shaped by geopolitical conflict and AIrelated concerns
Layoffs remain below 2025 levels
Individual income tax refunds are 14% higher than last year
The quarter ended in the middle of tax filing season. So far, many taxpayers have received larger refunds than in recent years. This was driven primarily by the One Big Beautiful Bill Act (OBBBA). As of late March 2026, the average refund was $3,521—up roughly 14% from a year earlier and the highest since 2022, according to the IRS.3
As expected, the Federal Reserve kept interest rates unchanged at its March Federal Open Market Committee (FOMC) meeting. According to projections, Fed officials no longer expect any changes in interest rates for 2026.4 Market expectations for the rate path fluctuated throughout the quarter, ranging from two 0.25% cuts to a small probability of a 0.25% hike, but ultimately converged with the Fed’s guidance for no cuts in 2026.5
Current Fed Chair Jerome Powell’s term ends in May, and Kevin Warsh has been nominated as his successor. His confirmation hearing was scheduled for April 16 but appears to have been delayed with a new date not yet scheduled.6,7
Rate cut expectations ranged from two 0.25% cuts to a slight chance of a 0.25% hike
25% of the world’s seaborne oil flows through the Strait of Hormuz daily
Dire Straits
The Strait of Hormuz, situated between Iran and Oman and just 30 miles wide at its narrowest point, is one of the world’s most critical energy chokepoints. Approximately 20 million barrels of oil per day, or nearly 25% of global seaborne supply, passes through the Strait via two unidirectional shipping lanes.9
On February 28, a coordinated strike by U.S. and Israeli forces targeted Iran’s leadership, military command centers, air defense systems, missile launch sites, naval facilities, and elements of its nuclear and missile infrastructure. The initial strike killed Iran’s Supreme Leader and much of the Islamic Revolutionary Guard Corps’ command structure.10 Iran retaliated with a series of missile and drone attacks across the region, including strikes on Gulf energy infrastructure across Qatar, Saudi Arabia, the United Arab Emirates, and Bahrain.11 In Qatar, attacks impacted a major domestic LNG producer, temporarily disabling roughly 17% of capacity, with repairs expected to take three to five years.11
The U.S.-Iran conflict has led to a de facto closure of the Strait of Hormuz
The conflict led to a de facto closure of the Strait of Hormuz, severely constraining global oil flows.12 While non-U.S. and non-Israeli vessels have reportedly been allowed transit, overall traffic remains significantly reduced. As a result, export-dependent producers, including Iraq, Saudi Arabia, the UAE, Qatar, and Bahrain, collectively temporarily stopped or reduced output, reducing crude oil production by an estimated 7.5 million barrels per day in March.13
National average gas prices rose to the highest since 2022
In late March, the U.S. tabled a 15-point proposal to Iran (reportedly conveyed via
Pakistan) aimed at curbing Tehran’s nuclear and missile programs in exchange for phased sanctions relief and security guarantees.16 After President Trump ramped up
threats further, a two-week ceasefire agreement was reached in early April.17
The outlook for energy prices remains highly dependent on the status of the Strait of Hormuz
Energy accounts for nearly 8% of U.S. inflation
The U.S. government entered 2026 with affordability as a defining priority
The administration entered 2026 with affordability, including housing, credit card interest rates, healthcare costs, and gasoline prices, as a defining priority, a political narrative it built before the November midterm elections. The conflict in the Middle East and the subsequent closure of the Strait of Hormuz led to a surge in energy prices that has fed directly into rising inflation expectations and the increased likelihood of a stagflationary environment (slowing economic growth, higher unemployment, and rising inflation) in 2026.
The Middle East conflict has increased the likelihood of a staglationary environment
In early February, software stocks fell on fears AI agents would disrupt licensing models
In early February, markets experienced a sharp sell-off across the technology sector,
particularly in the software segment, amid rising concerns that AI agents will erode
traditional per-seat licensing models. The move, dubbed the “SaaSpocalypse,” was
catalyzed by updates to Anthropic’s Claude model, which proved that more advanced AI models could handle complex tasks across different business systems.26, 27 The reaction was swift, pushing many into dire straits. Software stocks fell more than 30% from late2025 highs, and some names declined by over 50%. After trading at a persistent premium for over a decade, software valuations compressed sharply, converging with S&P 500 price-to-earnings levels for the first time since the early 2010s.
After nearly a decade at a premium, software valuations compressed sharply
Companies are shifting budgets to AI investments at the expense of headcount
Tech valuation compression occurred even as earnings expectations strengthened
All things considered, the U.S. large-cap drawdown in Q1 was relatively muted
Markets
U.S. large-cap stocks declined by 4.3% over the quarter, but remain only 6% below all-time highs, a relatively muted drawdown considering we are experiencing the largest oil price shock since the pandemic and the most significant drop in the S&P 500’s largest sector, technology—all happening in the same three-month period. U.S. small-cap stocks were a relative outperformer, ending the first quarter up 0.9%.
Emerging markets were resilient, particularly given disproportionate exposure to Middle Eastern oil, ending the quarter down only 0.1%. International developed large-cap stocks (predominantly European markets) ended the quarter down 1.1%. Among emerging markets, Peru (+21%), Brazil (+19%), and South Korea (+17%) led the gains. Indonesia (-21%), India (-18%), and China (-9%) stood out as notable laggards. In developed markets, European countries saw notable declines over the quarter, including Germany (-9%) and France (-5%).
Fixed-income markets had a muted start to the year. U.S. intermediate-term bonds
ended the quarter flat. After rising to 4.4% on March 27, the 10-year U.S. Treasury yield ended the quarter at 4.3%. The yield curve (the spread between the 10-year and 2-year Treasury yields) remained positive throughout the quarter, finishing March at 0.5%.
Gold gained nearly 6% over the quarter, despite a 12% drop in March. Driven by the
conflict in the Middle East, which started on the last day of February, West Texas Intermediate (WTI) crude oil prices jumped by $44 per barrel over the quarter to end at $101 per barrel. WTI crude prices dropped by 16% to $94 per barrel on news of a twoweek ceasefire in early April.
Despite a 12% drop in March, gold ended Q1 up 6%
Each week of disruption fuels price rises and delays Fed easing
Looking Forward
Two questions hang over markets today. First, how long will tanker traffic in the Strait
remain disrupted? Every week of continued disruption compounds fertilizer, food, and energy price increases and delays the Fed’s ability to resume its easing path (although we do not anticipate major policy changes in the first few months of Warsh’s term as Fed Chair). A strategic pivot toward de-escalation, framed as a policy success, appears to be the only viable path forward for the government, though it is likely not what the Trump administration had in mind when strikes began. Without a sustained ceasefire in the coming weeks, markets will likely begin to anticipate a global stagflationary slowdown, including potential recessions for economies that are heavily dependent on imported energy. European and Asian economies dependent on imported Middle East crude oil are likely to be disproportionately affected, potentially left in dire straits.
The ‘SaaSpocalypse’ may simply be an overdue correction
Second, we are monitoring whether the “SaaSpocalypse” is simply a repricing moment or an extinction event for software. History suggests the former. What has been dubbed the “SaaSpocalypse” could perhaps be a long-overdue correction dressed in apocalyptic language. The companies most likely to emerge stronger are those with durable data moats, outcome-based pricing models, and genuine AI integration—not those that just sell basic software access by the seat. Further, if AI advancements are so profoundly disruptive that market participants can simply “vibe-code” secure and scalable software solutions to any data-based task, then that would likely be quite positive for the other roughly 90% of the stock market that isn’t SaaS.
While supply disruptions are likely to persist, they appear temporary and not structural
Looking back over the quarter and in particular the conflict that defined it, the optimal
strategy from an investment perspective may have been to do nothing, treating recent
turbulence as a short-term shock. Credit spreads never spiked meaningfully, and crude
oil futures do not signal a sustained supply shock. Although supply disruptions will likely persist, effects appear likely to be temporary rather than structurally transformative. Conditions on the ground may change, of course, and if they do, we can change our minds with them.
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Definitions
Asset class performance was measured using the following benchmarks: U.S. Large Cap Stocks: S&P 500 TR Index; U.S. Small & Micro Cap: Russell 2000 TR Index; Intl Dev Large Cap Stocks: MSCI EAFE GR Index; Emerging & Frontier Market Stocks: MSCI Emerging Markets GR Index; U.S. Intermediate-Term Muni Bonds: Bloomberg Barclays 1-10 (1-12 Yr) Muni Bond TR Index; U.S. Intermediate-Term Bonds: Bloomberg Barclays U.S. Aggregate Bond TR Index; U.S. High Yield Bonds: Bloomberg Barclays U.S. Corporate High Yield TR Index; U.S. Bank Loans: S&P/LSTA U.S. Leveraged Loan Index; Intl Developed Bonds: Bloomberg Barclays Global Aggregate ex-U.S. Index; Emerging & Frontier Market Bonds: JPMorgan EMBI Global Diversified TR Index; U.S. REITs: MSCI U.S. REIT GR Index, Ex U.S. Real Estate Securities: S&P Global Ex-U.S. Property TR Index; Commodity Futures: Bloomberg Commodity TR Index; Midstream Energy: Alerian MLP TR Index; Gold: LBMA Gold Price, U.S. 60/40: 60% S&P 500 TR Index; 40% Bloomberg Barclays U.S. Aggregate Bond TR Index; Global 60/40: 60% MSCI ACWI GR Index; 40% Bloomberg Barclays Global Aggregate Bond TR Index.