Investments
Q1 2026: Market Commentary and Outlook
Anthony O'Brien, Head of Market Strategy, shares his market commentary and outlook for the first quarter of 2026.
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For investors, the first quarter of 2026 started off in reasonably familiar territory. A broadly positive US corporate earnings season, steady economic data and early signs that inflation pressures were easing combined to provide support for equity markets. By late January, large-cap US and European markets had touched record highs. But the mood shifted sharply as the quarter progressed.
Escalating conflict in the Middle East drove a surge in energy prices and reintroduced the inflation concerns many investors had assumed were fading. Across the asset classes, volatility rose, with equities, bonds and currencies all repricing as investors considered the possibility of a more prolonged shock.
- Equities retreat – global indices fell back from earlier highs as risk appetite weakened.
- Bonds lose their shine – yields pushed higher on rising inflation expectations.
- Oil dominates the story – energy prices surged at a pace rarely seen.
Client conversations
Noting the sharp change in tone this quarter, and that markets can reprice quickly after new geopolitical shocks, might be helpful in client discussions. You can keep conversations focused on what your client can control – cashflow, time horizon and expectations – rather than day-to-day headlines.
Market Commentary
Global equities unravel after a strong start
Global equity markets struggled to hold on to their early gains, with the MSCI World Index falling 3.6% in US dollar, total return terms over the quarter. Weakness was concentrated in March, with the spiking oil price feeding through to dampen broader risk sentiment.
By region, performance was uneven, largely reflecting differences in sector exposure and varying levels of sensitivity to higher energy costs.
Earlier resilience gives way to sharp falls for the US
US equities entered 2026 on a constructive footing. For the most part, corporate earnings exceeded expectations, labour-market data remained firm and inflation showed signs of cooling. The S&P 500 Index reached a new high in late January.
But that resilience didn’t last. As energy prices surged and inflation expectations were reset, US stocks sold off sharply. Over the quarter, the S&P 500 fell 4.3% in dollar, total return terms, its weakest quarter since 2022. Tech stocks were particularly volatile, with software and AI-related names seeing some of the steepest declines as valuations came under pressure.
The UK’s energy exposure provides support
The UK market stood out as a relative bright spot. The FTSE All‑Share returned 2.4% in sterling total return terms, supported by the index’s significant exposure to energy and materials. Rising oil prices boosted share prices across the sector, helping to offset broader weakness in global equities.
This divergence served as a reminder of the UK market’s distinct sector mix, which can behave differently from more growth‑orientated peers during periods of commodity‑driven inflation pressure.
Client conversations
Outlining why higher-growth areas (for example, technology) can move more when expectations or interest-rate assumptions shift could be useful. One way of keeping it client-focused is exploring what level of short-term volatility feels manageable for them and what helps them stay comfortable during unsettled periods.
Momentum fades for Europe ex UK
European equities started the year strongly, with the STOXX 600 reaching a record high in February. That momentum faded quickly once energy prices began to rise more aggressively. Over the quarter, European equities fell around 2.0% in euro, total return terms, with March delivering the sharpest losses as inflation concerns weighed on valuations.
Asia and emerging markets – mixed outcomes
The picture was more nuanced across developed Asia and emerging markets. Japanese equities were a notable outperformer earlier in the quarter, supported by domestic political developments and ongoing corporate‑governance reform. Despite giving back some gains in March, the TOPIX Index returned 3.6% in yen, total return terms over the first quarter.
Elsewhere, emerging markets ended the quarter broadly flat. The MSCI Emerging Markets Index fell 0.2% in dollar, total return terms, masking diverging country‑level performance. Tech‑heavy markets such as South Korea and Taiwan held up better early on, while Indian equities lagged as global risk appetite deteriorated.
Inflation fears take their toll on fixed income
Government bond markets also struggled as the quarter progressed. The sharp rise in oil prices revived concerns about inflation becoming more persistent, prompting investors to reassess expectations for interest‑rate cuts.
US Treasury yields rose over the quarter, with 10‑year yields ending the period at around 4.3%. European government bonds saw similar pressure, with German Bund yields briefly moving above 3% during March. In the UK, gilts also delivered negative returns as yields rose, particularly at longer maturities.
While credit spreads proved relatively steady, the sharp rise in yields meant both investment‑grade and high‑yield credit delivered negative returns in total‑return terms. For diversified portfolios, the first quarter of 2026 offered a reminder that bonds do not always provide immediate protection during inflation‑led sell‑offs.
Commodities – oil overwhelms
Commodities were the clear standout of the quarter, driven almost entirely by energy. Brent crude rose around 94% over the three months, marking its largest quarterly increase since the early 1990s. Prices spiked sharply in late February and remained elevated through March as markets priced in the potential for prolonged supply disruption.
Client conversations
It can be helpful to make the oil spike more tangible by discussing where clients tend to feel energy costs most (household bills, commuting, travel, business expenses). This can open a broader conversation about how short-term cost pressures may influence confidence and spending habits.
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Other commodities told a more mixed story. Gold rose over the quarter as a whole, despite suffering its largest monthly fall since 2008 during March. Industrial metals weakened into quarter‑end, reflecting concerns about global growth if higher energy costs persist.
Outlook
A new phase, but not a clean break
The recent ceasefire marks a shift in the conflict rather than a clear resolution. By nature, ceasefires are fragile, and it’s clear that the risk for further disruption hasn’t disappeared. That said, markets are responding to signs that escalation risks have eased, at least temporarily. After all, each of the key actors has an incentive, or incentives, to de-escalate. For the US, these relate to economics and domestic politics; for Iran, it’s preserving the regime. China, too, is expressing its interest in de-escalation, and it has leverage with Iran.
Historically, when ceasefires come under strain, the more common outcome has been renewed tension, not an immediate return to outright crisis. This matters for investors because it lessens the chance of worst-case scenarios. For markets, some of the most extreme downside risks have receded, helping to explain the relief across risk assets.
In the near term, what matters most is less the detail of any eventual settlement and more the practical implications for global trade. The most important of these is whether energy supplies continue to flow through key routes and at what pace.
A cautious look beyond oil
With immediate escalation fears easing, investors are showing willingness to shift their focus back to economic fundamentals. Provided oil prices stay below the most disruptive threshold, markets seem keen to move on.
Already, equities and credit spreads have recovered significant portions of their earlier losses, suggesting that much of the initial relief may be reflected in prices. From here, further progress is likely to depend less on geopolitics and more on how higher energy prices filter through to growth, inflation and policy.
Disruptions to the energy supply could take time to unwind
Uncertainty about energy supply is likely to be a lasting feature of the conflict. Even if conditions stabilise, we expect a full return to normal oil and LNG flows from the Middle East to be slow and uneven.
Supply chains have been disrupted, damaged infrastructure is in need of repair, tanker movements may lag and higher insurance costs are likely to persist. Against a backdrop like this, oil prices could retain a degree of risk premium, reflecting the ongoing chance of disruption at short notice.
For inflation, the implication isn’t necessarily the chance of a renewed surge, but pressures that take more time to fade.
Inflation: higher-for-longer risks re-emerging
Since the conflict began, markets have focused on the inflationary effects of higher energy prices. Bond and derivative market measures are suggesting that investors now expect higher inflation over the next few years than they did before the conflict started.
To put it simply, a large part of the recent rise in government bond yields reflects higher inflation expectations and not just higher-than-expected growth or tighter monetary policy. Shorter-dated inflation expectations have eased a little from their peaks, but they’re still elevated compared with levels from earlier this year. This makes the outlook – at a time when inflation was already expected to fall only gradually – more complex.
Fewer easy choices for central banks
Higher inflation expectations have reshaped views on central bank policy, too. Markets now expect policy rates to stay higher for longer than they did before the conflict, even allowing for some easing of tensions.
In the UK and the euro-area, investors have scaled back their expectations for near-term rate cuts and in some cases, they’re factoring in the possibility of further increases. This reflects concerns that central banks might not be able to ignore the inflationary effects of sustained higher energy prices, especially if they start to influence wage-setting or inflation expectations more broadly.
More pressure on consumers
For households, higher energy prices are likely to drag on confidence and real incomes. Even if prices stabilise, the level at which they do so matters, because spending power may be squeezed and uncertainty tends to encourage more cautious behaviour.
This could translate into higher precautionary saving and more subdued demand, particularly if food and goods prices are also subject to indirect effects over time. That, in turn, feeds back into growth expectations.
Client conversations
You could use this section to prompt conversations on how cost-of-living uncertainty is affecting clients’ day-to-day decisions and confidence. It may also be a good moment to revisit priorities and any upcoming life events, so the discussion stays grounded in what matters to them rather than the news cycle.
Government finances in a higher-rate world
Finally, the conflict has implications for government finances, especially in Europe. Governments could seek to lessen the effects of higher energy prices through subsidies or price caps, which would stretch fiscal positions still further, particularly at a time when borrowing costs are higher.
Over the longer term, increased investment in energy security, such as infrastructure resilience, diversified supply chains and strategic reserves, looks likely. Rising defence-spending commitments add another layer of pressure. Together, these dynamics could keep pressure on long-dated government bond yields and influence market pricing across sovereign debt markets.
Key takeaways
The quarter began with investors willing to take on risk, but the tone shifted sharply as Middle East escalation drove a surge in oil prices and revived inflation concerns. Markets repriced across equities, bonds and currencies, with higher yields reflecting inflation expectations as much as changes in growth prospects.
While the ceasefire has reduced the risk of some of the worst-case scenarios, the outlook remains sensitive to energy supply conditions and the speed at which price pressures fade. In the near term, investors are likely to focus on how higher energy costs feed through to household confidence and shape central banks’ choices.
The information in this article should not be regarded as financial advice and is based on our understanding in April 2026.
Money invested is at risk.
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