Wealth Management Insights - Q1 2026

by Daniel Kern and Matthew Martino, CFA

The S&P 500 fell 4.4% in the first quarter, with market gains turning to losses in March in response to the military conflict with Iran, which quickly spread to the rest of the Middle East. The “fog of war” is thick, with uncertainty mounting over the length, magnitude, and long-term implications of the conflict.

Foreign stocks were also down for the quarter. Developed international and emerging markets stocks finished the quarter slightly down after a double-digit decline in March.

There was significant dispersion across S&P 500 sectors in Q1, with energy gaining 37%, while technology was down more than 9%. Energy and commodity stocks were boosted by higher prices caused by the near-closure of the Strait of Hormuz. The Magnificent 7 were far from magnificent, with concerns about whether the return on investment would justify the massive spending on AI. Software stocks also endured a difficult quarter amid fears that AI models would create existential risk for many leading software companies.

The situation in the Middle East and concerns about AI overshadowed other noteworthy developments during the quarter. S&P 500 companies reported mid-teens earnings growth and high-single-digit sales growth during Q1, though earnings disappointments were punished more harshly than positive earnings surprises were rewarded. Despite the uncertain environment, earnings projections continue to be robust. Although investor sentiment toward technology stocks turned negative in Q1, forward earnings estimates for the technology sector continue to be strong. Tariffs were also in the headlines during the quarter, as the US Supreme Court ruled against the Trump administration’s use of the International Emergency Economic Powers Act (IEEPA) to impose tariffs. As expected, the administration is prepared to impose tariffs under different statutory authorities.

Treasury yields had fallen to multi-year lows before the Iran conflict started, but finished the quarter higher. Two-year Treasury yields—which move inversely to their prices—rose 0.32% to 3.8% during the quarter; 10-year yields rose 0.15% to 4.3%.

Oil prices rose dramatically, with Brent crude oil up more than 90% and West Texas Intermediate crude oil up more than 75%. As a net energy exporter, the United States is thought to be more insulated from energy price hikes than many countries in Europe and Asia, though prices at the pump rose meaningfully higher throughout the country. The rally in gold and silver continued early in the quarter but faded in February and March.

	Q1
Equity
MSCI All Country World Index	-3.1%
S&P 500 Index	-4.4%
NASDAQ Composite Index	-2.7%
Russell 2000 Index	0.9%
MSCI World ex-US Index	-0.8%
MSCI Emerging Markets Index	-0.1%
Fixed Income
Bloomberg Aggregate Index	-0.05%
Bloomberg 1–5 Year Gov/Credit	0.1%
Bloomberg Municipals	1.6%
Bloomberg 1–3 Month T-Bill	1.0%

Iranian conflict

Although the US and Israeli airstrikes have killed many of Iran’s leaders and stifled the country’s military capabilities, Iran’s counterattacks have effectively closed the Strait of Hormuz and damaged critical infrastructure throughout the Middle East. Oil, liquified natural gas, fertilizer, and helium are among the commodities in short supply, with higher prices and supply chain interruptions becoming a global challenge. The closure of the Strait of Hormuz is the latest “supply shock” for US economic growth during the past year, preceded by tariffs and the reduced labor supply due to changes in immigration policy. Consumers and businesses may tighten their belts in response to rising prices and elevated uncertainty, which could lead to an unappealing combination of slower economic growth and higher inflation. Investors are hoping the conflict ends soon, which should lead to commodity prices coming down from current levels. It is our expectation that commodity prices will remain somewhat above pre-war levels, as damage to the region’s infrastructure may take years to repair.

Artificial Intelligence

There was a widening performance gap in Q1 between perceived AI winners and losers. The death of software is a widely predicted outcome, with many software stocks declining sharply amid fears that AI tools will displace legacy software offerings. Hyperscalers also faced tougher questions about the return on investment from massive capital spending, with particular concern raised about debt-financed spending and circular financing arrangements. In contrast, companies that provide infrastructure such as liquid cooling, power generation, computer networking to the AI buildout continued to rally in Q1.

Although many software companies are vulnerable to the disruption caused by new AI tools, we are finding compelling opportunities among the software companies that have “protective moats” around their businesses, such as software companies that provide mission-critical workflows using proprietary data. In our view, these firms will be hard to dislodge from longstanding client relationships, as will software companies that serve highly regulated industries, such as financial services and healthcare.

It may take time for the benefits of AI to spread more widely across the economy, so investors will need to be patient with developments that may take years rather than months to play out.

Tariffs

The US Supreme Court issued its long-awaited ruling on the use of IEEPA to impose tariffs. Although the Court struck down the use of IEEPA to impose tariffs, the ruling will influence how tariffs are imposed rather than if they will be imposed. The administration quickly pivoted to reimpose tariffs under different statutes. Investors generally responded favorably to the Supreme Court’s decision, with the consensus that a more process-driven approach to tariffs would create limits on their magnitude and time horizon, taking some worst-case scenarios off the table.

Employment

Job growth was slow in Q1, though the quarter finished with enough job creation in March to offset a weak February. The important counterweight to slowing job growth is that immigration policies have reduced the size of the labor force, which makes it likely that the monthly rate of job creation needed to maintain stability is much lower than previously thought. We assess today’s labor market as cooling but not collapsing, though the full impact of the Iranian conflict is yet to be seen.

Unemployment among younger workers has drawn a lot of attention, with concern that AI is an obstacle to new entrants gaining traction in the workforce. We are concerned about the long-term implications of AI for workers, but we think the explanation for today’s challenges faced by younger workers may be more nuanced. Overall rates of hiring and firing are lower than normal, which may disproportionately affect people entering the workforce for the first time.

Inflation and Fed policy

The Iranian conflict will likely be a significant obstacle for the Fed’s quest to bring inflation down to the 2% target. We view the oil price surge as a supply-side disruption over which the Fed has limited influence, one that is taking place at a time when economic growth seems to be slowing rather than accelerating. Although inflation remains persistently above the Fed’s 2% target, we expect the Fed to stay on hold rather than raise rates as long as long-term inflation expectations remain under control. In contrast to the Fed, which has a dual mandate of price stability and full employment, central banks such as the European Central Bank (ECB) have a singular mandate to control inflation, making it more likely that they will raise rates.

Portfolio Positioning

The US economy entered the year in good shape, which provides some cushion to offset the impact of higher energy prices and other costs. Corporate profits and profit margins have been strong, consumers are benefiting from higher tax refunds, and the job market is slowing rather than collapsing. While inflation remains above the Fed’s 2% target, inflationary pressures are much lower than they were in 2022 when Russia invaded Ukraine.

If the conflict ends in weeks rather than months, the economy is likely to slow rather than fall into recession. Stocks and bonds would likely rally under that scenario. The dislocations happening in the Middle East, however, call into question many of the assumptions made by investors entering the year. At Nixon Peabody Trust Company, we are revisiting our expectations to identify both risks and opportunities, looking for openings to add to positions that we think have fallen excessively, while mitigating risk given a changing outlook.

We advise against making any material asset allocation changes in response to market volatility, though we understand it can be tempting to try to time the market. Unless there is a change in your goals, cash needs, income, or obligations, it is prudent to stay the course with your long-term asset allocation. Solid corporate profit growth makes it likely that the market will deliver lower but still positive stock returns in a volatile 2026.

Our mission is to help individuals and families meet their personal and financial goals through thoughtful planning and advice. Our personalized approach and broad range of services are designed to allow you to enjoy the present and be confident about the future. If you have questions or comments about your personal portfolio or any of the trends and strategies we’ve outlined here, please reach out to us or any member of your Nixon Peabody Trust Company team. We’re always happy to hear from you.

Daniel Kern
Chief Investment Officer
+1 617.345.1044
dkern@nixonpeabody.com

Matthew Martino, CFA
Senior Director of Portfolio Strategy
+1 617.345.1122
mmartino@nixonpeabody.com