Q1 2026: Iran war, oil shock obscure deglobalization and AI shift

Global markets entered 2026 with broad gains, then shifted focus in March after the Iran conflict drove oil prices higher. For the quarter, the MSCI ACWI ex‑U.S. rose about 2.0% while the S&P 500 fell roughly 4.4%. Asia Pacific increased 4.5% and emerging markets gained about 3.8%; Europe declined nearly 1%. Large-cap growth stocks were weakest, down about 10.4% for the quarter, while value stocks gained 3.3% and small‑cap value rose roughly 3.2%. Gold finished the period up about 8.6% with volatile trading, and U.S. REITs held up better than their international peers.

Fixed-income returns varied across sectors. Long-duration U.S. Treasuries finished roughly flat after intra-quarter swings. Intermediate Treasuries outperformed the 30‑year sector and were used for hedging by some market participants. International sovereign bonds and emerging-market debt declined near 2%, pressured by a stronger dollar and rising global yields.

Economic data through most of the quarter showed ongoing growth, a gradual softening in labor markets and headline inflation that remained modestly above the Federal Reserve’s 2% target. Corporate earnings were generally solid, with stronger results in energy and technology companies.

Policy shifts toward greater self-reliance continued. Several countries increased domestic investment in energy, defense, manufacturing and advanced technology. These actions have raised production costs by reducing economies of scale and by moving supply chains away from the most efficient global locations. As inventories built before tariff changes have run down, some price pass-through into consumer prices has become visible across industries.

Headline inflation across major economies has settled in a roughly 2–3% range. In the United States, tariffs, a stronger dollar at times, reduced immigration and energy-price shocks coincided with inflation staying above the Fed’s 2% goal. Market pricing showed a mix of expectations for gradual rate moves and persistent inflation risk that is not fully reflected in long-term bond prices.

The Iran conflict affected economic behavior tied to oil prices. U.S. domestic output remains near consumption levels, but price volatility altered decisions: some producers retained windfall earnings rather than expand capacity, and some consumers reduced discretionary spending. The dollar’s movement during the quarter reshaped relative returns for international assets, with dollar strength weighing on many commodity-exposed economies.

The AI sector entered a new phase. Capital spending on data centers and core infrastructure moderated while corporate deployment of AI tools expanded across more industries. Market valuations shifted as companies perceived to be at risk from AI declined in value and firms integrating AI solutions showed relative gains. Data-center assets face depreciation risk as technology and usage patterns evolve.

Private markets saw increased capital flows into private equity and private credit. The number of private vehicles in the market rose, compressing historical illiquidity premiums. Some private credit funds experienced redemptions and heightened scrutiny. Product structures with broader diversification, greater transparency and fee levels closer to public-market norms were more in demand.

The quarter’s mix of geopolitical shock and structural change produced higher asset correlations during the March selloff, even as longer-term trends in trade policy, energy strategy and technology adoption continued to shape returns. Market participants adjusted hedges and portfolio allocations as the quarter closed.