First Quarter 2026: A Crude Awakening
While the year opened with a market fixated on artificial intelligence (“AI”) and anticipated rate cuts by the Federal Reserve, the focus quickly shifted to the Iran war and spiking energy costs. Reuters reported that the conflict erased an estimated $7 trillion in global equity value over the quarter, as US large cap stocks closed the quarter down 4.2%. By the end of March, Brent crude oil prices were approaching record highs, pushing bond yields up and prompting analysts to raise inflation forecasts.
Tech stocks, the primary drivers of the bull market since 2022, declined meaningfully amid concerns of AI disruption and stretched valuations. Microsoft tumbled 23.4%—its worst quarterly performance since Q4 2008 and its worst start to the year since going public in 1986. These effects rippled out to other segments; AI-exposed sectors apart from technology also experienced selloffs as investors hypothesized that AI could lower barriers to entry and upend existing industry dynamics.
Meanwhile, overall markets remained resilient, as the market rotation that surfaced in late 2025 persisted into the first quarter, dampening the blow for broader indices. Rather than a uniform pullback, investors trimmed positions in overextended large-cap growth stocks to rotate into cheaper pockets of the market: small-cap, value, and international equities, underscoring the importance of diversification. Accordingly, small caps outperformed the broader US equity market, while large-cap growth stocks fell 9.8%, marking their worst showing since Q2 2022.
As Q1 closes, geopolitical uncertainty dominates sentiment, leaving investors and the Federal Reserve with an unclear path forward.