The first quarter of 2026 illustrates the importance of preparation when it comes to financial planning and investing. After strong gains in 2025, markets have faced a combination of geopolitical shocks, higher oil prices, and renewed economic uncertainty. The conflict in Iran, which began at the end of February, became the dominant market story, pushing oil prices sharply higher and sparking the first market pullback of the year. However, by the end of March, headlines around a possible ceasefire emerged, and the situation continues to evolve.
Taking a broader perspective, markets have still performed well over the past twelve months. Beneath the surface, many parts of the market have supported portfolios, including energy, utilities, materials, and defense sectors of the market. There will undoubtedly be new market questions in the coming months, including a change in leadership at the Federal Reserve and the midterm election later this year.
For long-term investors, the first quarter is a reminder that markets rarely move in a straight line, and that the principles of sound investing matter most when uncertainty is at its peak.
Markets experienced the first pullback of the year
It’s natural to draw parallels between the start of this year and the beginning of 2025, since both were driven by global concerns. Coincidentally, both first quarter periods experienced pullbacks for the S&P 500 of 4.3%. While last year’s volatility was the result of tariffs and this year’s is due to the conflict in the Middle East, the effect on investor sentiment has been similar. When uncertainty rises, it is natural for markets to experience short-term swings in response to headlines.
The past is no guarantee of the future, but zooming out can help us understand how markets have behaved historically. Despite the challenges in the first quarter of 2025, the stock market experienced strong gains through the remainder of the year. The point is not that markets always recover quickly, but that market conversations tend to focus only on negative news. So, when rebounds do occur, they often do so when investors least expect them.
For investors, it is important to remember short-term market swings, especially those driven by headline risk, are simply part of the market cycle. Portfolios aligned with long-term financial goals are designed to navigate these challenging periods. This could be especially important as we approach the midterm election and fiscal concerns re-emerge later in the year.
Geopolitics and oil prices are the primary source of uncertainty
The most significant market development of the first quarter was the escalating conflict in the Middle East, which drove oil prices higher. Disruptions to the Strait of Hormuz, which carries roughly 20% of global oil from the Persian Gulf to the rest of the world, led to production cuts across major oil-producing nations in the region. Brent crude ended the quarter at $118 per barrel, up over 94% year-to-date, while WTI crude surpassed $100, the highest levels since the war in Ukraine began in 2022. Oil will continue to react to geopolitical headlines, including a possible ceasefire.
Higher fuel costs directly affect consumers through the price of gasoline at the pump and indirectly raise the prices of goods and services across the economy. While these types of events do affect consumer pocketbooks, economists tend to view these types of “supply-side shocks” as temporary when considering the health of the overall economy. This is because oil prices tend to improve once the geopolitical event has stabilized.
History also shows that geopolitical events, while creating short-term instability, typically do not derail markets in the long run. This includes the U.S. operation in Venezuela in January, which surprised markets but had little lasting impact on investments.
Economic growth is slowing but remains positive
Volatile energy prices are just one piece of the broader economic puzzle. Other signs point to an economy that has cooled over the past year, but that is still fundamentally healthy. This is after several years of investors and economists predicting recessions that never materialized.
Perhaps the most closely watched area is the labor market, and the latest payroll data shows that February job gains fell by 92,000 and the unemployment rate edged up to 4.4%. Importantly, job seekers now outnumber job openings for the first time in years.
Fewer people are entering the workforce due to lower immigration and an aging population. In other words, both the supply and demand sides of the labor market are cooling, which has helped keep the unemployment rate near historically strong levels. Investors tend to watch jobs data closely because employment directly affects household income, consumer confidence, and spending. Consumer spending makes up more than two-thirds of GDP, and has been stronger than many expected over the past several quarters.
The tariff story is evolving
Trade policy also took a turn at the end of January after the Supreme Court ruled 6-3 that the broad tariffs imposed under the International Emergency Economic Powers Act (IEEPA) were unlawful. The administration responded by imposing a temporary global import duty under a different law, Section 122 of the Trade Act of 1974. The administration also opened new Section 301 trade investigations in March, while about a dozen Section 232 investigations remain ongoing.
For investors, the main takeaway is that while the legal basis for tariffs has changed, the broader policy direction continues to be focused upon tariffs impacting the economy across consumer prices, business costs, and investor confidence. That said, last year showed markets adapt to these types of policy changes over time.
The first quarter of 2026 challenged investors with geopolitical shocks, higher oil prices, and economic uncertainty. Yet markets have been resilient, with well-balanced portfolios and financial plans doing what they were designed to do.
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