Your Money, Your Update
A Quarterly Review of Investment Trends and Strategy From Our Investment Committee
Quarter 1, 2026
Join Sayer Martin, CFA, and John Burke, as they discuss major market happenings heading into the second quarter of 2026, including a market overview, the Iran conflict, mega-cap technology and AI, and much more! They also offer perspectives on emerging market trends, sector performance, fixed income markets, and what else is to come in 2026.
*Filmed on April 1, 2026
Disclosures: Investment advisory services are offered through Stone House Investment Management, LLC, an SEC-registered investment adviser. Registration with the SEC does not imply a certain level of skill or training. Investing involves risk, including the potential loss of principal. Past performance does not guarantee future results. Forward-looking statements reflect our current views as of the recording date and are subject to change. Indexes are unmanaged and cannot be invested in directly.
Q1 2026 Review
The first quarter of 2026 was a reminder that markets can change direction quickly. We entered the year focused on themes we discussed in our year-end update, including broader market leadership, improving relative performance from value stocks, and growing questions around AI-related spending. By early March, however, a major geopolitical shock changed the conversation and reshaped the market backdrop almost overnight.
On March 1, the United States and Israel launched military strikes against Iran in what the U.S. military called “Operation Epic Fury.” Iran responded with missile and drone attacks across the region, and the Strait of Hormuz — the narrow passageway through which roughly 20% of the world’s oil supply flows — was effectively closed to tanker traffic. Oil prices, which had been drifting lower through January and February, moved sharply higher.
The effects resonated swiftly across asset classes, as areas of strength through the end of February reversed in March.
The discussion above is provided for informational and market commentary purposes only and should not be interpreted as a prediction, guarantee, or assurance regarding future market events or investment outcomes.
Q1 2026 Market Performance Overview
- U.S. Stocks: -4.6% (The S&P 500 gave back its early gains, led lower by mega-cap technology stocks and other rate-sensitive areas of the market.)
- Energy: +37.0% (Energy was the clear leader for the quarter as higher oil prices lifted companies such as ExxonMobil and Chevron.)
- Magnificent 7: -12.2% (All seven of the largest technology-related market leaders declined, with Microsoft and Meta among the biggest laggards.)
- Crude Oil: +84.0% (Oil saw its sharpest move since the pandemic as global supply fears increased.)
- U.S. Bonds: -0.6% (Bonds slipped as inflation concerns tied to higher oil prices pushed yields upward.)
- Gold: +8.6% (Gold posted a modest gain on safe-haven demand, though at a slower pace than its powerful advance in 2025.)
References to specific securities or issuers are for illustrative purposes only and do not constitute a recommendation to buy, sell, or hold any security. Index and ETF performance is provided for illustrative purposes only. Indices are unmanaged, and it is not possible to invest directly in an index. Returns do not reflect the deduction of advisory fees, transaction costs, or other expenses. Past performance does not guarantee future results.
The Iran Conflict, Oil, and What History Tells Us
The military situation escalated quickly. After the initial strikes, Iran declared the Strait of Hormuz closed and launched attacks against U.S. bases in Qatar, the United Arab Emirates, and Bahrain, along with strikes on Saudi oil infrastructure. By mid-March, the International Energy Agency described the disruption as the largest in the history of the global oil market, with normal flows through the Strait falling dramatically.
OPEC+ agreed to increase production, but that response had limited practical value if exporters could not move those barrels through the Strait. Iraq, which depends heavily on that route, faced the possibility of shutting in production entirely. Brent crude (the international oil benchmark) peaked around $120 per barrel on March 10, eased briefly after President Trump proposed a ceasefire framework on March 23, and then moved higher after Iran rejected the proposal. As of this writing, negotiations remain ongoing and the situation is still fluid.
For investors, the key question is not simply how high oil prices move, but how long the disruption lasts. The immediate effects have already been felt through higher gasoline prices, rising transportation costs, and renewed inflation concerns. Goldman Sachs estimated that traders were building in roughly $14 per barrel of geopolitical risk premium, while Oxford Economics modeled a scenario in which Brent averaging $140 for two months could push parts of the global economy into a mild recession.
We don’t know how long this conflict will continue, and we will not pretend otherwise. What we do know is that duration matters. Our own historical work on past oil shocks and military conflicts indicates that, based on the specific comparable episodes analyzed, the S&P 500 was higher 12 months after the crisis began in approximately 75% of comparable episodes since 1962. Even in periods when an oil spike and a military conflict happened at the same time, the median 12-month equity return was nearly 12%. Those outcomes, however, generally depended on the disruption being resolved or de-escalated within a matter of months.
Historical market observations are provided for context only and are not indicative of future market performance or outcomes. There can be no assurance that current market conditions will follow historical patterns.
Supply-driven oil spikes have historically been less damaging to stocks than demand-driven oil collapses. When oil falls because the economy is weakening (demand crashes), equity markets often struggle meaningfully. When oil rises because of a supply disruption, markets have more often recovered once the disruption eased. The 1990 Gulf War is a useful example: oil prices surged, the S&P 500 dropped sharply in the first few months, and then the market recovered strongly over the next one to two years. What we’re seeing now is currently believed to be a supply disruption, not a demand crash.
History does not give us certainty, but it does offer perspective. The key variable remains the same as it was in those earlier episodes: duration. The faster the Strait of Hormuz reopens and tensions de-escalate, the more likely markets are to follow a historically familiar recovery path. The longer the disruption persists, the more pressure builds on growth and inflation.
Current market conditions may differ materially from prior periods.
Mega-Cap Technology and AI
The weakness in the Magnificent 7 was another defining feature of the quarter. In our year-end commentary, we noted that leadership had already begun to narrow and that only two of the seven had outperformed the S&P 500 in 2025. That trend accelerated in Q1. The Roundhill Magnificent 7 ETF was down about 12%, with every constituent negative for the quarter. Microsoft fell 23.5%, Meta declined 13.3%, and Tesla, Amazon, and Alphabet were all down between 8% and 17%. Even Nvidia was lower by 6.5%.
References to specific securities are provided for illustrative market commentary purposes only and do not constitute a recommendation to buy, sell, or hold any security. Past performance does not guarantee future results.
Several pressures came together at once. First, investors have become more concerned about the scale of AI-related capital spending. The four largest technology companies by market capitalization are expected to spend roughly $700 billion combined this year on AI infrastructure, about 60% more than in 2025. That level of spending has weighed on financial flexibility, including at Amazon and Microsoft. Second, the oil shock has pushed inflation concerns back to the forefront, raising the odds of a higher-for-longer rate environment. That can make a difficult backdrop for growth stock valuations.
Third, the market is increasingly asking when those AI investments will begin to show up in earnings. Earnings growth for the Magnificent 7 is still projected to be strong, but the gap versus the rest of the market has narrowed. In our view, AI remains one of the most important long-term themes in investing, but this quarter has been a reminder that even transformative technologies can produce uneven investment outcomes. We remain constructive on the long-term opportunity, but selective in where we take risk.
There can be no assurance that these long-term themes will result in positive investment performance or outcomes.
Rotation Across the Market
If mega-cap growth was one side of the story, broader market rotation was the other. Areas that had lagged during the growth-led bull market of the past few years held up materially better in Q1. Value stocks outperformed growth by a wide margin: the Vanguard Value ETF was up 2.7% for the quarter, while the Vanguard Growth ETF was down 10.5%. That roughly 13-percentage-point spread was one of the most notable style shifts we have seen in some time.
International markets also continued to compare favorably with U.S. large caps, though results were more mixed than in 2025. Emerging markets were up 3.8%, outperforming the S&P 500 by roughly 8 percentage points. The iShares MSCI EAFE ETF and Vanguard Total International ETF also held up better than domestic large-cap stocks. Valuation remains a major part of the story: the MSCI EAFE Index traded at roughly 14 times forward earnings versus about 22 times for the S&P 500.
Small- and mid-cap stocks performance was also notable. The Russell 2000 was up 0.8% and the Russell Mid-Cap Index gained 1.0%, both substantially better than the large-cap technology-heavy benchmarks. Smaller companies may have benefited from lower direct international exposure, a greater share of domestic revenue, and in some cases debt structures that were less pressured by the current rate backdrop. This broadening of leadership is something we have been watching for several quarters, and it is another reminder that diversification continues to matter.
Diversification does not ensure a profit or protect against loss. Past performance does not guarantee future results.
Sector Winners and Losers
Beneath the surface, the quarter was defined by a very wide gap between sectors that benefit from the current environment and those that do not. Energy was the standout winner, up around 37%, while materials rose 10.2% on higher commodity prices. Utilities gained 7.5%, supported both by their defensive nature and by power demand tied to AI data center expansion. Consumer staples rose 5.5% and industrials added 4.3%, with defense-related names among the leaders.
On the weaker side of the ledger, financials fell 9.9% as recession concerns and interest-rate uncertainty increased. Consumer discretionary declined 8.7% as rising gas and grocery prices pressured lower-income households. Technology dropped 7.7%, reflecting both higher-rate concerns and the debate around AI capital spending. Communication services (including large-cap issuers such as Google and Meta) fell 5.8%, and health care was down 5.3%. In other words, this was not a uniform market decline; it was a quarter that rewarded certain business models and penalized others.
Fixed Income Markets
Coming into 2026, we noted that bonds were once again offering positive real yields. That remains true, but the oil shock made the path less straightforward. The broad U.S. bond market was down 0.6% in Q1. Investment-grade corporates fell 1.1%, high yield was down 1.3%, and long-duration Treasuries lost 0.5%. The challenge is clear: when oil rises above $100 per barrel, inflation expectations tend to rise with it, putting upward pressure on yields and downward pressure on bond prices.
The Federal Reserve is now in a more difficult position. A return to inflation pressure argues for caution on rate cuts, while a slower economy argues the other way. Morgan Stanley has noted that this environment raises the odds of smaller policy moves or even a pause. Even so, we continue to believe fixed income has an important role to play in portfolios.
Outlook and Positioning
The first quarter of 2026 was a powerful reminder that markets rarely move in straight lines. Just a few months ago, the focus was on AI enthusiasm, rate cuts, and whether the U.S. market could extend a multiyear run. By quarter-end, attention had shifted to oil supply, military conflict, inflation pressure, and the range of possible Federal Reserve responses.
We don’t know how the Iran conflict will evolve. We don’t know whether oil will remain above $100 or retreat quickly on signs of de-escalation. We don’t know whether the Fed will cut rates, hold steady, or need to consider a different path. What we do know is that markets have worked through difficult geopolitical and economic shocks before, and that disciplined, diversified investors have historically been better positioned to navigate periods like these over time, although outcomes can vary.
Our recent portfolio changes were designed to improve diversification and quality. We added to core U.S. equities, developed international stocks, U.S. Treasuries, and defense exposure, while trimming select factor, gold, and emerging-markets positions. These changes reflect how we are currently thinking about risk and opportunity in portfolios.
Flex accounts have been in cash since early March, and re-entry timing is monitored daily. While holding cash can help manage downside risk during uncertain periods, it can also mean missing part of a market rebound if conditions improve quickly.
After three consecutive years of double-digit gains for U.S. stocks, we have continued to note that valuations were elevated relative to long-term history and that return expectations for U.S. equities remain more modest than recent realized returns. This quarter was a good reminder that when valuations are full, markets have less room for error. Still, it’s important to keep in mind that volatility is normal: the S&P 500 sees an average drawdown of 14% annually.
As always, our focus remains on navigating market shifts thoughtfully, adjusting portfolios where appropriate, and keeping short-term headlines in perspective. The headlines are loud right now, but history has at times favored a steady hand. Thank you for your continued confidence.
Disclosures
The information provided herein is for informational purposes only and should not be construed as investment, tax or legal advice or a recommendation to buy or sell any securities. Past performance is not indicative of future results. All investing involves risk, including the possible loss of principal.
Index performance is provided for comparison purposes only. Indices are unmanaged, and it is not possible to invest directly in an index. Index returns do not reflect the deduction of advisory fees, transaction costs, or other expenses, which would reduce performance.
This material may contain forward-looking statements based on current expectations, estimates, projections, and opinions of Stone House Investment Management, LLC, as of the date indicated. Such statements are subject to change without notice and actual results may differ materially.
Diversification does not ensure a profit or protect against loss in declining markets.
Data and statistics are obtained from sources believed to be reliable, but Stone House Investment Management, LLC, does not guarantee their accuracy or completeness.
Investment advisory services are offered through Stone House Investment Management, LLC, an SEC-registered investment adviser. Registration with the Securities and Exchange Commission does not imply that Stone House Investment Management, LLC or its representatives, has achieved a certain level of skill, certification or training or that the SEC approves of Stone House Investment Management, LLC or its services.
Sources
Market data: https://www.morningstar.com/
Goldman Sachs Research: Expert insights on the Iran conflict’s impact on oil prices, with a focus on the March 2026 period. https://www.goldmansachs.com/insights/articles/how-will-the-iran-conflict-impact-oil-prices
Morgan Stanley: Market impact analysis related to the Iran war and detailed defense sector evaluations in March 2026.
Center for Strategic and International Studies (CSIS): In-depth analysis of the strategic significance of the Strait of Hormuz and its implications for global energy markets during March 2026. https://www.csis.org/analysis/iran-conflict-sending-oil-prices-soaring-what-happens-next
Oxford Economics: Modeled recession scenarios arising from the recent oil shock, with a focus on macroeconomic projections for March 2026.
Vanguard: 2026 Economic and Market Outlook, including international equity projections and comparative valuation perspectives. https://corporate.vanguard.com/content/dam/corp/research/pdf/isg_vemo_2026.pdf
S&P Dow Jones Indices: Factor index performance data as of February 2026, supporting sector and style trend analysis. https://www.macrotrends.net/2526/sp-500-historical-annual-returns; https://www.factset.com/earningsinsight
MSCI: Research on international value investing and EAFE Value index analysis.
Bloomberg Intelligence: Detailed earnings projections for the Magnificent 7. https://fortune.com/2026/01/11/magnificent-7-stock-market-dominance-cracking-nvidia-microsoft-apple-meta-alphabet-amazon-tesla/
Wellington Management: Private credit outlook as of December 2025, informing fixed income and alternative asset positioning. https://www.wellington.com/en/insights/private-credit-outlook
BlackRock: 2026 fixed income views, including yield and risk assessments in the current environment. https://www.blackrock.com/us/financial-professionals/insights/whats-different-about-2026
LPL Research: Fixed income market outlook, with research from December 2025 supporting bond market commentary.
Reuters, CNN, NPR, Euronews, Al Jazeera: Reporting and updates regarding the Iran conflict and related geopolitical developments. Reuters: https://www.reuters.com (Brent/WTI price data, analyst forecasts)
CNN Business: https://www.cnn.com/2026/03/01/business/oil-prices-us-attack-iran-vis
NPR: https://www.npr.org/2026/03/02/nx-s1-5732287/iran-war-oil-gasoline-prices
Euronews: https://www.euronews.com/business/2026/03/26/oil-prices-and-markets-look-for-direction-amid-conflicting-messages-from-iran-and-the-us
Chatham Financial: https://www.chathamfinancial.com/insights/boe-ecb-recap-march-2026
Kiplinger: https://www.kiplinger.com/investing/live/march-fed-meeting-2026-live-updates-and-commentary
Trading Economics: https://tradingeconomics.com/united-states/government-bond-yield
Stone House Investment Management: Proprietary historical analysis on oil shocks and military conflicts, covering 12 episodes from 1962 to 2026, which informed our perspective on market behavior following such events.
Sector Review: U.S. Tech Earnings: Hyperscalers A | S&P Global Ratings https://www.spglobal.com/ratings/en/regulatory/article/sector-review-us-tech-earnings-hyperscalers-again-are-hyperspending-s101669934?
