Stock markets initially got off to a good start in the first quarter of 2026, with US markets up slightly and international markets up over 10% as of the end of February. However, after the US and Israel launched attacks on Iran in the early hours of Saturday, February 28th, global markets began to decline. As the war became more protracted, stock markets continued their fall, to a first quarter low on March 30th. As of the end of the first quarter, the S&P 500 index was down 4.3%.
For many observers, the real question was why markets haven’t fallen further. After all, an approximately 5% decline happens quite often during the course of a typical year. In 2025, which was a great year for the stock market, there were a total of six pullbacks of at least 5%.
Factors supporting the market include strong corporate earnings growth, continued enthusiasm around the artificial intelligence sector, and a general belief that the Iran conflict will be short-lived. Another reason is that wars, terrible as they are in human terms, have more limited impacts on market performance than is generally believed. Markets had strong positive returns in the five years after the start of WWII, the Korean War, and the Gulf War. Not all wars are the same, of course, and in the current Iran conflict, the price of oil is one of the market’s biggest areas of focus due to concerns about shipping through the Strait of Hormuz, through which 20% of global oil flows.
The concern about oil prices is also a concern about broader inflation. The impact of rising oil prices impacts consumers directly at the pump, but also impacts electricity costs, fertilizer costs, transportation, and
manufacturing costs, all of which indirectly affect almost all consumer goods. The most recent inflation data published on April 10th is already starting to show the impact of the Iran war, with the Consumer Price Index jumping by 0.9% for the month of March and 3.3% year-over-year. The risk of inflation, in turn, makes it less likely that interest rates will continue on their current downward path, which in turn negatively impacts stock markets. We’ve already seen rate expectations changing rapidly (see the Fixed Income section below).
As long as investors continue to expect the war in Iran to be relatively brief, they will expect any supply shock to inflation to be short-lived, and the economy to return to normal. The risk is that a longer war pushes up oil prices for long enough to slow the economy. The US is much more energy independent now than in the oil shock of the 1970s, but long-term elevated energy prices would almost certainly still have significant negative impacts on economic growth. Other countries such as Japan, that have almost no oil production of their own, are much more sensitive and their economies have a shorter runway.
As of this writing, markets are indicating a belief that the war in Iran will be limited in duration. Oil futures markets project prices to be significantly lower by year end. Let’s hope this is true, for the sake of the markets and more importantly for the sake of peace. Still, as we discuss in the Looking Ahead section, diversification is proving to be helpful in reducing volatility in investor portfolios in this crisis, as it has been in so many others..
Stocks
Sharp declines in March pushed many stock indexes into negative territory for the quarter. US stocks, as measured by the Russell 1000, were down -4.2%. One of the hardest-hit areas were large growth stocks (such as Microsoft), which declined by -9.8% as measured by the Russell 1000 Growth index. Offsetting these negative returns were small stocks and value stocks (such as Johnson & Johnson) which both posted positive returns.
International stocks were also slightly negative, as the MSCI ACWI ex-USA index of foreign stocks (both developed and emerging countries) declined -0.7%.
Although the overall US stock market declined, there were areas with eye-popping returns. As oil prices skyrocketed, energy stocks gained significantly. The Energy Select Sector Index was up +37.9% for the quarter. Exxon Mobil, the largest component of the index, was up more than +40% in just the three-month period.
Bonds
The Federal Reserve decided to hold rates firm for the first quarter, taking a pause from a series of rate cuts that had brought the Fed Funds rate down to a target range of 3.50% – 3.75%. As inflation has continued to be stubborn and as the Iran War has created concern about shortages, futures markets have changed their projection for further rate cuts in 2026 from two cuts to none.
At the same time, longer rates reversed course from declining to rising immediately after Iran attacks began on February 28th. March 31st. The 10- year Treasury had closed at 3.95% on Friday February 27th, but jumped up to 4.32% by This directly impacted mortgage rates, which saw a similar increase.
Commodities
After starting the year at $61 per barrel, Brent crude oil finished the quarter at $118 per barrel, the largest increase in a quarter on an inflation-adjusted basis in data going back to 1988. The price jump in oil quickly spread to gasoline, jet fuel, and natural gas, and will set off a chain reaction in prices broadly. For example, we are already seeing a surge in airfares.
Gold prices continued to rise in the first quarter, after having gained +65% in 2025. Although there was volatility, overall gold ended the quarter with an increase of +7%.
Looking Ahead
On January 7th 2026, the date of our last commentary, we noted in this Looking Ahead section that “Nobody can predict the event that will cause the market to drop, but it’s safe to say we can expect a decline of at least 10% within the next 12 months”. It didn’t take long to see a decline very similar to that. From February 25th to March 30th the S&P 500 declined by 9%, and the event was the Iran War. Did we correctly predict the future? Not at all. The rest of that sentence was “… which is simply the historical average”.