Quarterly Insights: A Trifecta of Concerns Hit Stocks
We woke up today to headlines referencing a social media post by Trump: unless Iran struck a deal in the next 12 hours, “a whole civilization will die tonight, never to be brought back again”—a ghastly threat. Not necessarily the “never to be brought back again” part, as that was implied by the civilization-dying threat. Though Trump was likely going to walk back these threats, many investors have become accustomed to, and profited from, the “Trump Always Chickens Out” trade (acronym TACO), but you can never be 100% sure.
The primary aspect of the deal Trump wanted was for Iran to reopen the Strait of Hormuz. Luckily, news broke earlier tonight that the US and Iran agreed to a two-week ceasefire. Although Iran will retain full control of the strait and only allow the passage of ships with the assistance of Iran's military, markets cheered and oil dropped over 10% on the news.
If you're interested, The Wall Street Journal wrote a good article, "The Day Trump's Iran Threat Gripped the World," about the events that unfolded.
Side note: Referring to the last newsletter and the topic of corruption, markets sent oil prices down by about 6% well before Trump announced the ceasefire. Clearly, some nonpublic information is being traded on, and hopefully those responsible will have to answer for these crimes.
Usually, this quarterly investment newsletter wrapping up the last three months is boring, and we admit that may still be the case this time, but there is a lot going on, so you may want to skim through this or possibly have AI summarize the key points😉
War and geopolitical tensions, credit concerns, and AI anxiety all contributed to the spike in market volatility, sending the S&P 500 lower to start the year.
Geopolitical surprises began immediately in 2026. On January 3, the U.S. military conducted a daring raid in Venezuela and arrested Venezuelan President Maduro, causing a temporary spike in market volatility due to uncertainty surrounding the country’s vast oil supplies. However, the impact proved limited, as the new Venezuelan leader pledged to work with the U.S., easing market tensions. Shortly after markets recovered from that initial surprise, another emerged when the U.S. Attorney for the District of Columbia issued two grand jury subpoenas to Fed Chair Powell related to the renovation of the Federal Reserve building. This action renewed concerns about potential threats to Fed independence, which, if compromised, could lead to persistently higher inflation. In response, several prominent Republican senators pushed back against the subpoenas and voiced support for Fed independence, helping to calm markets. While these surprise headlines caused short bursts of volatility, stable economic data and a generally solid fourth-quarter earnings season helped keep economic and earnings growth forecasts intact. Additionally, the Fed reminded investors at its January meeting that it still planned to cut rates again this year. Despite the headline-driven volatility, the S&P 500 ended the month with a solid gain.
Volatility continued in early February, this time more concentrated in specific sectors such as technology and financials. AI company Anthropic released its Claude Cowork app, triggering a steep decline in the software sector as fears grew that AI advancements could eliminate the need for entire segments of the economy. This challenged the prevailing view that AI would be broadly beneficial for markets and the economy. Meanwhile, underlying concerns about credit risks in private credit funds intensified, as several large alternative asset managers limited redemptions from specific funds, fueling fears of a potential bubble in the industry. Finally, on the last day of February, geopolitical risks escalated sharply when the U.S. launched a massive attack on Iran, sparking a war between the two countries that effectively closed the Strait of Hormuz and significantly reduced global oil supplies, causing oil prices to surge overnight. These factors combined to push the S&P 500 slightly lower for the month, although the index remained positive for the year.
Market declines accelerated in March as hopes for a quick resolution to the U.S.-Iran war faded. While the U.S. and Israel dominated the conventional military conflict, Iran and its proxies targeted neighboring Gulf states’ energy infrastructure and oil tankers in the Persian Gulf. This drove oil prices above $100 per barrel and increased pressure on the global economy. The S&P 500 declined modestly amid the surge in geopolitical risks, although late-month ceasefire hopes helped limit losses. The index finished March with a moderate decline and ended the quarter solidly in negative territory.
The first quarter of 2026 saw a surge in volatility, as military conflicts combined with more traditional market concerns—such as overvalued assets in private credit and the potentially negative impacts of AI—put moderate pressure on stocks. However, still-stable economic growth and corporate earnings helped support markets throughout the quarter.
First Quarter Performance Review
Market internals and performance in the first quarter were driven primarily by the U.S.-Iran war, along with concerns about private credit and the potential negative impacts of AI.
At the index level, the three major large-cap stock indices finished the quarter with losses. The Nasdaq was the worst performer, reflecting weakness in AI-related technology and software stocks. Small caps, however, outperformed large caps, as the Russell 2000 finished the first quarter with a modest gain. Small-cap stocks are generally viewed as more insulated from the quarter’s key headwinds, including geopolitical tensions, private credit concerns, and AI-related risks.
In the value versus growth dynamic, value significantly outperformed growth and posted a modest gain. Value-oriented strategies initially benefited from a rotation away from technology and toward sectors less exposed to AI. Later in the quarter, value received an additional boost from strength in lower-multiple energy and materials sectors, which rallied following the onset of the U.S.-Iran war. In contrast, technology-heavy growth strategies finished the quarter solidly lower.
At the sector level, performance was mixed, with six of the 11 S&P 500 sectors posting positive returns. Energy was the top-performing sector by a wide margin, surging more than 30% in the first quarter due to rising oil prices. The materials sector, which includes companies with significant commodity exposure, also performed well amid higher natural resource prices following the U.S.-Iran war. Additionally, consumer staples and utilities posted strong gains as investors rotated into less volatile, more defensive areas of the market.
Among the laggards, financials were the worst-performing S&P 500 sector in the first quarter, posting solid losses due to private credit concerns. Consumer discretionary also declined moderately amid worries that higher oil prices would weigh on consumer spending. Finally, the technology sector fell due to weakness in software and AI-related stocks.
| US Equity Indexes | Q1 Return | YTD |
|---|---|---|
| S&P 500 | -4.33% | -4.33% |
| DJ Industrial Average | -3.19% | -3.19% |
| NASDAQ 100 | -5.82% | -5.82% |
| S&P MidCap 400 | 2.50% | 2.50% |
| Russell 2000 | 0.89% | 0.89% |
Internationally, foreign markets relatively outperformed the S&P 500 and ended the quarter with only a small decline, despite the surge in geopolitical risks. Emerging markets outperformed both developed markets and the S&P 500, registering only a fractional loss despite the strong dollar, as the surge in commodity prices was viewed as offsetting the rising U.S. dollar. Foreign developed markets declined in Q1, but only modestly, and solidly outperformed U.S. markets, largely due to the smaller weighting of technology shares in foreign indices.
| International Equity Indexes | Q1 Return | YTD |
|---|---|---|
| MSCI EAFE TR USD (Foreign Developed) | -1.12% | -1.12% |
| MSCI EM TR USD (Emerging Markets) | -0.10% | -0.10% |
| MSCI ACWI Ex USA TR USD (Foreign Dev & EM) | -0.60% | -0.60% |
Commodities were, generally speaking, sharply higher in the first quarter, driven by the surge in the geopolitical risk premium following the outbreak of the U.S.-Iran war. Oil prices reached their highest levels since 2022, supported by the conflict and Iranian attacks on Gulf oil infrastructure, which further reduced global supply. Gold, meanwhile, hit a new all-time high above $5,000/oz. early in the quarter but finished with only a moderate gain, as the surging dollar pressured prices late in Q1.
| Commodity Indexes | Q1 Return | YTD |
|---|---|---|
| S&P GSCI (Broad-Based Commodities) | 40.02% | 40.02% |
| S&P GSCI Crude Oil | 77.70% | 77.70% |
| GLD Gold Price | 8.55% | 8.55% |
Turning to fixed income markets, the leading bond benchmark, the Bloomberg Barclays US Aggregate Bond Index, finished the quarter with a slight loss. Bonds were solidly higher mid-quarter but declined in March amid rising inflation concerns. Surging oil prices and hotter-than-expected inflation readings reduced expectations for Fed rate cuts. Short-term Treasury bills modestly outperformed longer-duration bonds and posted a positive return, as they are less sensitive to rising inflation risks.
In the corporate bond market, both high-yield and investment-grade bonds declined slightly in the first quarter, as the U.S.-Iran war and spiking oil prices raised concerns about a potential economic slowdown. Reflecting broader investor anxiety about economic growth, both lower-yielding but higher-quality investment-grade bonds and higher-yielding, higher-risk corporate bonds experienced similar modest losses for the quarter.
| US Bond Indexes | Q1 Return | YTD |
|---|---|---|
| BBgBarc US Agg Bond | -0.05% | -0.05% |
| BBgBarc US T-Bill 1-3 Mon | 0.88% | 0.88% |
| ICE US T-Bond 7-10 Year | -0.09% | -0.09% |
| BBgBarc US MBS (Mortgage-backed) | 0.40% | 0.40% |
| BBgBarc Municipal | -0.18% | -0.18% |
| BBgBarc US Corporate Invest Grade | -0.54% | -0.54% |
| BBgBarc US Corporate High Yield | -0.50% | -0.50% |
Second Quarter Market Outlook
Stocks begin the second quarter facing three distinct headwinds: higher oil prices (a result of the U.S.-Iran war), credit concerns (emanating from private credit funds), and worries that AI, while a transformative technology, could have unanticipated negative impacts on key market sectors. Each of these concerns will need to be resolved for the market to fully rebound from the Q1 declines. However, it is important to note that economic growth and corporate performance remained solid in Q1, which is helping support markets.
Starting with geopolitics, the market’s focus remains on the price of oil. Elevated oil prices pose risks to both markets and the economy in several ways, including: 1) limiting Fed rate cuts, as the Fed may worry that higher oil prices could spur inflation, 2) reducing consumer spending, as higher gas prices cut into disposable income, and 3) pressuring corporate margins due to increased transportation and input costs. Ultimately, these factors could lead to stagflation, which would be negative for most asset classes. For geopolitical risks to fully recede, we would need to see a credible ceasefire agreement among all parties (the U.S., Israel, and Iran), a return of transit through the Strait of Hormuz to near pre-war levels, and a decline in oil prices toward pre-war levels.
Private credit, meanwhile, is evoking memories of the financial crisis among more tenured investors, fueling concerns that the recent influx of capital into private credit funds led to weakened underwriting standards and overvaluation. While comparisons to the financial crisis are understandable, it is important to recognize that the private credit market is significantly smaller than the markets that triggered the financial crisis. Additionally, Fed officials have recently stated they see no indication of a systemic issue. While that is reassuring, private credit concerns are still weighing on the financial sector, which is the second-largest sector in the S&P 500 and an important market leader. Easing concerns in private credit and a rebound in financials will be important for further market stabilization in Q2.
Finally, regarding AI, sentiment has shifted from broadly positive to more cautious, with two primary concerns emerging. First, significant spending on AI infrastructure by large technology companies may ultimately produce a poor ROI and weigh on future earnings. Second, advancements in AI could disrupt entire segments of the economy (such as the software sector) and lead to meaningful job losses, negatively impacting overall economic growth. Both concerns will need to be addressed for AI and the technology sector to fully rebound in Q2.
Bottom line: The first quarter brought several negative surprises for investors, and we enter the second quarter with continued uncertainty around geopolitics, credit conditions, and AI. That said, there are meaningful positives to consider, including a resilient economy, solid corporate earnings growth, and a Federal Reserve that continues to signal potential rate cuts. These factors supported both stocks and bonds in Q1, and despite elevated volatility, the outlook for the economy and markets is not uniformly negative. As we saw in Q1, both geopolitical and corporate developments can shift quickly.
At Noble Wealth Partners, we’ve guided clients through market cycles like this before and remain committed to helping you navigate them with confidence. Successful investing is a long-term discipline, not a short-term reaction, and our focus remains on the diversified strategy designed to support your long-term objectives.
In times like these, staying invested, remaining patient, and sticking to the plan built around your financial situation, risk tolerance, and time horizon is essential.
We continue to monitor risks across portfolios and the broader economy, and we appreciate the trust you place in us. Our team is here to help you move forward with clarity and discipline.
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