DOMESTIC EQUITIES
The S&P 500 lost 4.3% during the first quarter of 2026, with modest gains in January and February reversing sharply in March amid a sharp deterioration in sentiment.
The quarter was marked by increasing volatility, driven by a combination of slowing economic momentum, persistent inflation pressures, and heightened geopolitical and trade uncertainty. Early in the year, markets were supported by expectations that inflation would continue to moderate and allow for further easing from the Federal Reserve. However, that outlook shifted as the quarter progressed.
Inflation data remained uneven, with price pressures persisting across several areas, and surged late in the quarter as oil prices rose sharply following escalating conflict in the Middle East. US and Israeli strikes on Iran heightened concerns about global energy supply, with threats to disrupt key shipping routes driving crude oil above $100 per barrel. The resulting spike in energy prices fueled higher inflation expectations and raised concerns about a renewed drag on economic growth, as rising input costs and consumer prices risked weighing on both business activity and household spending. At the same time, labor market conditions showed signs of cooling, with slower job growth and rising layoffs contributing to concerns about underlying economic strength, though late-quarter data pointed to some continued resilience. These developments complicated the outlook for monetary policy, leading investors to reassess expectations for rate cuts and contributing to a broad-based selloff across risk assets by quarter-end.
Six of the 11 underlying sectors of the S&P 500 rose in Q1, with a wide dispersion between winners and losers. Energy was the frontrunner, gaining 38.3% in the quarter, driven by higher oil prices. Materials and utilities also posted strong performance, up 9.7% and 8.3%, respectively, as rising commodity prices and investor demand for more defensive, rate-sensitive sectors supported returns. Conversely, financials, consumer discretionary, and technology all lost between 9.1% and 9.4% over the quarter. These sectors were hurt as rising inflation expectations, rising bond yields late in the quarter, and concerns around slowing consumer demand weighed on investor sentiment.
The first quarter closed with small cap stocks outpacing large cap stocks, as smaller companies benefited from declining interest rates earlier in the quarter, though that tailwind faded as yields moved higher late in the period. Value stocks also bested growth, supported by strength in energy and materials and a broader shift toward more defensive areas of the market amid rising inflation expectations and economic uncertainty.
INTERNATIONAL EQUITIES
International developed markets, as measured by the MSCI EAFE Index, fell 1.2% in Q1, despite posting solid gains in the first two months of the year, as a sharp reversal in March and a strengthening US dollar weighed on returns.
In the eurozone, economic conditions showed early signs of stabilization, supported by improving business and consumer sentiment and moderating inflation, which fell below the European Central Bank’s (ECB) 2% target. The ECB maintained a data-dependent stance throughout the quarter, holding rates steady while monitoring evolving economic conditions. However, sentiment deteriorated late in the quarter as rising energy prices and escalating geopolitical tensions weighed on growth expectations, with business activity softening and export demand weakening.
In the United Kingdom, inflation eased gradually but remained above the Bank of England’s (BoE) target, while economic activity showed signs of moderation, particularly in the housing market and labor conditions. The BoE held rates steady, signaling that future rate cuts remained possible, though rising energy prices late in the quarter introduced additional uncertainty around the path of policy.
In Japan, inflation trends cooled and the Bank of Japan (BoJ) maintained its gradual normalization approach, keeping rates unchanged while monitoring economic conditions. Economic data pointed to a resilient domestic backdrop, though currency volatility remained a key theme, with a weaker yen supporting exports but weighing on returns for US-based investors. Late in the quarter, rising geopolitical tensions and energy prices posed additional challenges, as Japan’s heavy reliance on Persian Gulf oil imports left it particularly exposed to supply disruptions and higher input costs, though equities still managed to post modest gains over the period.
Elsewhere, the MSCI Emerging Markets Index ticked down 0.2% over the quarter, despite rising 2.1% in local currency terms. All of the losses were experienced in March, reversing the index’s nearly 15% rise in the two months prior to escalating geopolitical tensions.
China was among the weaker performers during the quarter, as ongoing structural challenges continued to weigh on growth and investor sentiment. Domestic demand remained soft, with persistent deflationary pressures and subdued consumer spending highlighting weak underlying momentum, while continued stress in the property sector remained a key drag on the economy. Although exports and industrial activity provided some support early in the quarter, China remained heavily reliant on external demand, leaving it vulnerable to global disruptions, particularly as rising energy prices and geopolitical tensions complicated the outlook late in the period.
India was the weakest-performing major emerging market, declining 18.1% during the quarter as external pressures and energy price shocks weighed heavily on the economy. The surge in oil prices was particularly impactful given India’s reliance on imported energy, raising concerns about inflation and trade balances while also driving higher agricultural input costs through its dependence on imported fertilizers and energy-linked inputs.
In contrast, South Korea was one of the top-performing countries for the first quarter, rising 16.5%, supported by strong export growth and continued demand for semiconductors and AI-related technologies. However, performance was highly volatile, with equities falling sharply in March as global growth concerns, trade uncertainty, and a reversal in risk sentiment weighed on technology stocks.
FIXED INCOME
Over the first quarter of 2026, the Bloomberg US Aggregate Index ticked down by 0.1% and the broader Bloomberg US Universal Index slid 0.2%. The Federal Reserve held interest rates steady throughout the quarter as policymakers balanced cooling labor conditions against renewed inflation pressures. While markets scaled back expectations for rate cuts this year, yields moved higher across the Treasury curve, with the short end rising more sharply than intermediate and long-term maturities. The yield on the 10-year US Treasury rose 12 basis points during Q1, ending at 4.30%. The 2-year Treasury increased by 32 basis points over the quarter.
Credit spreads widened modestly during the first quarter as rising interest rates, a stronger US dollar, and heightened risk aversion weighed on sentiment. Higher-risk segments underperformed, with emerging market debt posting the weakest returns, declining 1.3% amid rising yields and a shift toward risk-off positioning. In contrast, shorter-duration assets held up relatively well, with short-term Treasuries and Treasury Inflation-Protected Securities among the stronger performers, rising 0.9% and 0.3%, respectively, as investors sought to limit interest rate sensitivity and hedge against rising inflation expectations. Most other fixed income sectors posted modest declines over the quarter.
US ECONOMY
US GDP grew at an annualized rate of 0.7% over the fourth quarter of 2025, the latest period for which data is available, reflecting a notable slowdown from the prior quarter. Growth came in well below expectations and marked a significant deceleration from the 4.4% expansion recorded in Q3. The slowdown was driven by reduced government spending, partly related to the government shutdown, alongside weaker consumer spending, softer business investment, and inventory adjustments. Taken together, the data point to a loss of economic momentum heading into 2026.
Labor market conditions softened over the first quarter, with slower job growth, rising layoffs, and declining hiring intentions pointing to reduced momentum. Early-quarter data showed weak payroll growth alongside a decline in job openings to multi-year lows, suggesting cooling demand for labor and a more cautious hiring environment. Layoffs increased and hiring activity remained subdued, making it more difficult for displaced workers to find new employment. Despite these trends, labor data late in the quarter showed some resilience, with stronger-than-expected payroll growth and a modest decline in the unemployment rate. Overall, the labor market appears to be gradually normalizing rather than deteriorating sharply, though underlying indicators suggest continued softening beneath the surface.
The US Federal Reserve maintained a cautious, data-dependent stance throughout the quarter, holding interest rates steady as it assessed mixed signals from inflation and the labor market. At the start of the year, markets broadly expected the Fed to deliver multiple rate cuts, reflecting confidence that inflation was trending lower. However, as the quarter progressed and inflation pressures proved more persistent, particularly amid rising energy prices, those expectations shifted meaningfully. By quarter-end, markets had largely scaled back or removed anticipated rate cuts, marking a notable reversal in sentiment. This evolution highlights the Fed’s increasingly difficult position, as policymakers balance slowing economic momentum against renewed inflation risks, contributing to elevated uncertainty around the path of monetary policy.
MARKET OUTLOOK
US markets enter the remainder of 2026 with a more uncertain backdrop, following a quarter marked by a sharp shift in sentiment. Prior to the escalation in geopolitical tensions, economic conditions appeared relatively stable, supported by solid earnings expectations and a gradually cooling (but still resilient) labor market. However, the recent surge in energy prices has introduced new risks to both inflation and growth, raising concerns that higher input costs and reduced consumer purchasing power could weigh on economic activity if sustained.
The path of monetary policy remains a key variable, as persistent inflation pressures could limit the Federal Reserve’s ability to ease policy despite signs of slowing growth. As a result, market performance may become more dependent on earnings durability and broader participation beyond the largest companies, particularly if volatility remains elevated.
Developed international markets face a similarly uncertain outlook, with conditions highly sensitive to the trajectory of energy prices and global trade dynamics. While the region benefited earlier in the year from moderating inflation and relatively accommodative policy, the recent rise in oil prices presents a more significant challenge, particularly for energy-importing economies in Europe and Asia. Higher input costs could weigh on both growth and inflation, complicating the policy path for central banks that had been moving toward easing. Currency movements also remain an important factor, as a stronger US dollar may continue to pressure returns for US-based investors. Despite these headwinds, relatively attractive valuations and improving fundamentals earlier in the year could provide support if geopolitical risks stabilize and energy markets normalize.
Emerging markets enter the remainder of the year with a more mixed outlook following a volatile first quarter. Performance is likely to remain uneven across regions, with outcomes heavily influenced by exposure to global trade, commodity prices, and currency movements. Economies reliant on imported energy may face increased pressure from higher oil prices, while commodity exporters could benefit from elevated resource prices. China remains a key driver, with the outlook dependent on the balance between policy support and ongoing structural challenges, including weak domestic demand and continued pressure in the property sector. Meanwhile, markets tied to global manufacturing and technology cycles, particularly those exposed to semiconductor and AI-related demand, may continue to benefit from resilient investment trends, though they remain sensitive to shifts in global growth and investor sentiment. Overall, dispersion across emerging markets is likely to remain elevated.
Fixed income markets face a more complex backdrop heading into the remainder of 2026, as elevated yields continue to provide attractive income opportunities while uncertainty around inflation and monetary policy persists. While the Fed has signaled that energy-driven inflation pressures may prove transitory and are unlikely to materially alter its longer-term outlook, the recent rise in oil prices has nonetheless complicated the near-term policy path. As a result, markets have pushed out expectations for rate cuts to late 2026 or 2027. In this environment, bonds are likely to continue serving an important source of income within diversified portfolios, though their role as a consistent hedge against equity declines has been less reliable in recent periods, particularly when rising inflation and interest rate volatility have driven both asset classes lower. Overall, fixed income remains an important component of portfolio construction, but outcomes may vary depending on the evolution of inflation, growth, and policy expectations.
2026: Q1 Review and Q2 Outlook
By Aldrich Wealth
Update for High-Net-Worth Families and Business Owners
The first quarter of 2026 was a reminder that markets can shift quickly as changing expectations around inflation, interest rates, and geopolitics reshape the investment landscape. For high-net-worth families and private business owners, this environment calls for a steady, thoughtful approach that balances near-term risks with longer-term opportunity.
Get the highlights or do a deep dive via the links below:
Q1 Overview: Key Performance Indicators
Q2: What to Watch
Key Considerations for Business Owners
Q1: Performance Deep Dive
DOMESTIC EQUITIES
The S&P 500 lost 4.3% during the first quarter of 2026, with modest gains in January and February reversing sharply in March amid a sharp deterioration in sentiment.
The quarter was marked by increasing volatility, driven by a combination of slowing economic momentum, persistent inflation pressures, and heightened geopolitical and trade uncertainty. Early in the year, markets were supported by expectations that inflation would continue to moderate and allow for further easing from the Federal Reserve. However, that outlook shifted as the quarter progressed.
Inflation data remained uneven, with price pressures persisting across several areas, and surged late in the quarter as oil prices rose sharply following escalating conflict in the Middle East. US and Israeli strikes on Iran heightened concerns about global energy supply, with threats to disrupt key shipping routes driving crude oil above $100 per barrel. The resulting spike in energy prices fueled higher inflation expectations and raised concerns about a renewed drag on economic growth, as rising input costs and consumer prices risked weighing on both business activity and household spending. At the same time, labor market conditions showed signs of cooling, with slower job growth and rising layoffs contributing to concerns about underlying economic strength, though late-quarter data pointed to some continued resilience. These developments complicated the outlook for monetary policy, leading investors to reassess expectations for rate cuts and contributing to a broad-based selloff across risk assets by quarter-end.
Six of the 11 underlying sectors of the S&P 500 rose in Q1, with a wide dispersion between winners and losers. Energy was the frontrunner, gaining 38.3% in the quarter, driven by higher oil prices. Materials and utilities also posted strong performance, up 9.7% and 8.3%, respectively, as rising commodity prices and investor demand for more defensive, rate-sensitive sectors supported returns. Conversely, financials, consumer discretionary, and technology all lost between 9.1% and 9.4% over the quarter. These sectors were hurt as rising inflation expectations, rising bond yields late in the quarter, and concerns around slowing consumer demand weighed on investor sentiment.
The first quarter closed with small cap stocks outpacing large cap stocks, as smaller companies benefited from declining interest rates earlier in the quarter, though that tailwind faded as yields moved higher late in the period. Value stocks also bested growth, supported by strength in energy and materials and a broader shift toward more defensive areas of the market amid rising inflation expectations and economic uncertainty.
INTERNATIONAL EQUITIES
International developed markets, as measured by the MSCI EAFE Index, fell 1.2% in Q1, despite posting solid gains in the first two months of the year, as a sharp reversal in March and a strengthening US dollar weighed on returns.
In the eurozone, economic conditions showed early signs of stabilization, supported by improving business and consumer sentiment and moderating inflation, which fell below the European Central Bank’s (ECB) 2% target. The ECB maintained a data-dependent stance throughout the quarter, holding rates steady while monitoring evolving economic conditions. However, sentiment deteriorated late in the quarter as rising energy prices and escalating geopolitical tensions weighed on growth expectations, with business activity softening and export demand weakening.
In the United Kingdom, inflation eased gradually but remained above the Bank of England’s (BoE) target, while economic activity showed signs of moderation, particularly in the housing market and labor conditions. The BoE held rates steady, signaling that future rate cuts remained possible, though rising energy prices late in the quarter introduced additional uncertainty around the path of policy.
In Japan, inflation trends cooled and the Bank of Japan (BoJ) maintained its gradual normalization approach, keeping rates unchanged while monitoring economic conditions. Economic data pointed to a resilient domestic backdrop, though currency volatility remained a key theme, with a weaker yen supporting exports but weighing on returns for US-based investors. Late in the quarter, rising geopolitical tensions and energy prices posed additional challenges, as Japan’s heavy reliance on Persian Gulf oil imports left it particularly exposed to supply disruptions and higher input costs, though equities still managed to post modest gains over the period.
Elsewhere, the MSCI Emerging Markets Index ticked down 0.2% over the quarter, despite rising 2.1% in local currency terms. All of the losses were experienced in March, reversing the index’s nearly 15% rise in the two months prior to escalating geopolitical tensions.
China was among the weaker performers during the quarter, as ongoing structural challenges continued to weigh on growth and investor sentiment. Domestic demand remained soft, with persistent deflationary pressures and subdued consumer spending highlighting weak underlying momentum, while continued stress in the property sector remained a key drag on the economy. Although exports and industrial activity provided some support early in the quarter, China remained heavily reliant on external demand, leaving it vulnerable to global disruptions, particularly as rising energy prices and geopolitical tensions complicated the outlook late in the period.
India was the weakest-performing major emerging market, declining 18.1% during the quarter as external pressures and energy price shocks weighed heavily on the economy. The surge in oil prices was particularly impactful given India’s reliance on imported energy, raising concerns about inflation and trade balances while also driving higher agricultural input costs through its dependence on imported fertilizers and energy-linked inputs.
In contrast, South Korea was one of the top-performing countries for the first quarter, rising 16.5%, supported by strong export growth and continued demand for semiconductors and AI-related technologies. However, performance was highly volatile, with equities falling sharply in March as global growth concerns, trade uncertainty, and a reversal in risk sentiment weighed on technology stocks.
FIXED INCOME
Over the first quarter of 2026, the Bloomberg US Aggregate Index ticked down by 0.1% and the broader Bloomberg US Universal Index slid 0.2%. The Federal Reserve held interest rates steady throughout the quarter as policymakers balanced cooling labor conditions against renewed inflation pressures. While markets scaled back expectations for rate cuts this year, yields moved higher across the Treasury curve, with the short end rising more sharply than intermediate and long-term maturities. The yield on the 10-year US Treasury rose 12 basis points during Q1, ending at 4.30%. The 2-year Treasury increased by 32 basis points over the quarter.
Credit spreads widened modestly during the first quarter as rising interest rates, a stronger US dollar, and heightened risk aversion weighed on sentiment. Higher-risk segments underperformed, with emerging market debt posting the weakest returns, declining 1.3% amid rising yields and a shift toward risk-off positioning. In contrast, shorter-duration assets held up relatively well, with short-term Treasuries and Treasury Inflation-Protected Securities among the stronger performers, rising 0.9% and 0.3%, respectively, as investors sought to limit interest rate sensitivity and hedge against rising inflation expectations. Most other fixed income sectors posted modest declines over the quarter.
US ECONOMY
US GDP grew at an annualized rate of 0.7% over the fourth quarter of 2025, the latest period for which data is available, reflecting a notable slowdown from the prior quarter. Growth came in well below expectations and marked a significant deceleration from the 4.4% expansion recorded in Q3. The slowdown was driven by reduced government spending, partly related to the government shutdown, alongside weaker consumer spending, softer business investment, and inventory adjustments. Taken together, the data point to a loss of economic momentum heading into 2026.
Labor market conditions softened over the first quarter, with slower job growth, rising layoffs, and declining hiring intentions pointing to reduced momentum. Early-quarter data showed weak payroll growth alongside a decline in job openings to multi-year lows, suggesting cooling demand for labor and a more cautious hiring environment. Layoffs increased and hiring activity remained subdued, making it more difficult for displaced workers to find new employment. Despite these trends, labor data late in the quarter showed some resilience, with stronger-than-expected payroll growth and a modest decline in the unemployment rate. Overall, the labor market appears to be gradually normalizing rather than deteriorating sharply, though underlying indicators suggest continued softening beneath the surface.
The US Federal Reserve maintained a cautious, data-dependent stance throughout the quarter, holding interest rates steady as it assessed mixed signals from inflation and the labor market. At the start of the year, markets broadly expected the Fed to deliver multiple rate cuts, reflecting confidence that inflation was trending lower. However, as the quarter progressed and inflation pressures proved more persistent, particularly amid rising energy prices, those expectations shifted meaningfully. By quarter-end, markets had largely scaled back or removed anticipated rate cuts, marking a notable reversal in sentiment. This evolution highlights the Fed’s increasingly difficult position, as policymakers balance slowing economic momentum against renewed inflation risks, contributing to elevated uncertainty around the path of monetary policy.
MARKET OUTLOOK
US markets enter the remainder of 2026 with a more uncertain backdrop, following a quarter marked by a sharp shift in sentiment. Prior to the escalation in geopolitical tensions, economic conditions appeared relatively stable, supported by solid earnings expectations and a gradually cooling (but still resilient) labor market. However, the recent surge in energy prices has introduced new risks to both inflation and growth, raising concerns that higher input costs and reduced consumer purchasing power could weigh on economic activity if sustained.
The path of monetary policy remains a key variable, as persistent inflation pressures could limit the Federal Reserve’s ability to ease policy despite signs of slowing growth. As a result, market performance may become more dependent on earnings durability and broader participation beyond the largest companies, particularly if volatility remains elevated.
Developed international markets face a similarly uncertain outlook, with conditions highly sensitive to the trajectory of energy prices and global trade dynamics. While the region benefited earlier in the year from moderating inflation and relatively accommodative policy, the recent rise in oil prices presents a more significant challenge, particularly for energy-importing economies in Europe and Asia. Higher input costs could weigh on both growth and inflation, complicating the policy path for central banks that had been moving toward easing. Currency movements also remain an important factor, as a stronger US dollar may continue to pressure returns for US-based investors. Despite these headwinds, relatively attractive valuations and improving fundamentals earlier in the year could provide support if geopolitical risks stabilize and energy markets normalize.
Emerging markets enter the remainder of the year with a more mixed outlook following a volatile first quarter. Performance is likely to remain uneven across regions, with outcomes heavily influenced by exposure to global trade, commodity prices, and currency movements. Economies reliant on imported energy may face increased pressure from higher oil prices, while commodity exporters could benefit from elevated resource prices. China remains a key driver, with the outlook dependent on the balance between policy support and ongoing structural challenges, including weak domestic demand and continued pressure in the property sector. Meanwhile, markets tied to global manufacturing and technology cycles, particularly those exposed to semiconductor and AI-related demand, may continue to benefit from resilient investment trends, though they remain sensitive to shifts in global growth and investor sentiment. Overall, dispersion across emerging markets is likely to remain elevated.
Fixed income markets face a more complex backdrop heading into the remainder of 2026, as elevated yields continue to provide attractive income opportunities while uncertainty around inflation and monetary policy persists. While the Fed has signaled that energy-driven inflation pressures may prove transitory and are unlikely to materially alter its longer-term outlook, the recent rise in oil prices has nonetheless complicated the near-term policy path. As a result, markets have pushed out expectations for rate cuts to late 2026 or 2027. In this environment, bonds are likely to continue serving an important source of income within diversified portfolios, though their role as a consistent hedge against equity declines has been less reliable in recent periods, particularly when rising inflation and interest rate volatility have driven both asset classes lower. Overall, fixed income remains an important component of portfolio construction, but outcomes may vary depending on the evolution of inflation, growth, and policy expectations.
This material is for informational purposes only and reflects the opinions of Aldrich Wealth LP as of the date published. These views are based on publicly available information and third-party sources believed to be reliable but are not guaranteed as to accuracy or completeness. Statements regarding economic, market, or geopolitical developments represent our interpretation of evolving conditions and should not be viewed as definitive or as implying direct causation. Market outcomes are influenced by a variety of factors, and actual results may differ materially from those expressed or implied. This communication is not intended as a recommendation or as personalized investment advice. It is not a comprehensive analysis of all relevant factors or risks. Forward-looking statements are inherently uncertain and are not guarantees of future performance. Past performance does not guarantee future results. All investments involve risk. Indices are unmanaged, not available for direct investment, and do not reflect fees or expenses.
Aldrich Wealth LP is an investment adviser registered with the U.S. Securities and Exchange Commission.
Meet the Author
Partner + Chief Investment Officer
Darin Richards, CFA®
Aldrich Wealth LP
Darin has been the CIO of Aldrich Wealth since 2004, where he spearheads the development and implementation of the firm’s investment philosophy, guides the investment committee, and co-manages the private wealth team. Darin has made over 50 appearances as a guest on CNBC Power Lunch and has been quoted in several publications, including The Wall… Read more Darin Richards, CFA®
Darin's Specialization
Connect with us
Related Articles
Q4 2025 Market Commentary + 2026 Outlook
Q3 2025 Market Commentary + Outlook
Looking for support or have a question?
Contact us to speak with one of our advisors.