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Key Takeaways, First Quarter 2026

Economics moved to the back burner while geopolitics dominated. The war with Iran caused energy prices to surge. This has raised fears of a global recession, high inflation, and diminished expectations for Fed rate cuts. As a result, investors shifted their preference to lower-risk asset classes.

Stock markets fell. Tech and other growth stocks were down almost 10%, hurt by combined fears of an economic slowdown, disruption by AI, and high valuations. Interest rates rose. Some are expecting rates to remain steady, while others are forecasting rate increases.

The war increased economic uncertainty. The data and indicators continue to be mixed, but they do not capture the potential range of outcomes. Rather than the previous expectation of 1 or 2 rate cuts later this year, currently there is no consensus on future Fed actions.

Equities

The broad US stock market lost 4% but performance was bimodal. Energy stocks gained almost 40%. Cyclical and value sectors gained 5% to 10%.
The US stock market is down 17% from its October 2025 peak but it is still up 18% over the last 12 months.
US stocks lagged International as geopolitical tensions mounted, and economic data disappointed. Developed International markets were down 1.2%, and Emerging were down 0.2%. International stocks led for the last 12 months, but US stocks are still ahead for longer periods.
After outpacing the market from 2023 through late 2025, Growth stocks lagged. The Russell 1000 Growth Index fell 9.8%, while Value rose 2%. Growth returned 18.8% versus Value’s 25.7% for the last 12 months.
Small caps led Large for the quarter and for the trailing 12 months, but lagged over longer periods.

Fixed Income

The Fed held the Fed Funds rate unchanged. The outlook for further actions is uncertain. At the short-end, the yield on 1-year Treasuries rose 20 bps in Q1. For longer maturity bonds, the yield of 5-year Treasuries rose 19 bps, and the 10-year and 20-year yields rose 12 bps and 9 bps respectively.
For the last 12 months, Treasury yields were down at the short end. The 1-year was down 35 bps. They were little changed in the middle of the curve, with the 5-year down 4 bps, and the 10-year up 7 bps. At the long end, 20-year rates are up 26 bps, and 30-year 29 bps.
Credit spreads widened, and both Investment Grade Corporate and High Yield bonds fell 50 bps. For the last 12 months they were up 4.8% and 7.0%, respectively.
Core bonds were flat as the yield offset wider spreads and higher rates. They were up 4.3% for the last 12 months.