Greetings from all of us at Integrity. After strong gains in 2025, markets have faced a combination of geopolitical shocks, higher oil prices, and renewed economic uncertainty primarily stemming from the conflict in Iran. Times like these can be unsettling for an investor. What do we do in the face of crises…do we hold the course or run for the exits?
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. 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.
That is why we are here for you, to guide you through the headlines with information and trusted counsel that we have built our business on. Perhaps we may draw wisdom from our ally across the pond to “Keep Calm and Carry On.”
Key Market and Economic Drivers
- The S&P 500 experienced a total return of -4.3% in Q1, the Nasdaq -7.0%, and the Dow Jones Industrial Average -3.2%.
- The Bloomberg U.S. Aggregate Bond Index was flat for the first quarter of 2026. The 10-year Treasury yield ended the quarter at 4.3% after falling as low as 3.9% at the end of February.
- Developed market international stocks (MSCI EAFE) were down -1.1% and emerging market stocks (MSCI EM) declined -0.1% over the quarter, both on a total return basis in U.S. dollar terms.
- Oil prices spiked with Brent crude reaching $118 per barrel at the end of March after beginning the year under $61. WTI ended the quarter at $101 per barrel.
- Gold ended the quarter at $4,668 per ounce after climbing as high as $5,417 in January. The U.S. Dollar Index (DXY) strengthened slightly to 99.96 over the same period.
- February inflation showed headline CPI rising 2.4% year-over-year and core CPI climbing 2.5%. The core PCE price index, the Fed’s preferred measure, rose 3.1% year-over-year in January.
- The Federal Reserve kept rates unchanged within a range of 3.50% to 3.75% at both meetings during the first quarter.
Markets experienced the first pullback of the year
It is natural to draw parallels between the start of this year and the beginning of 2025, with both 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, including dozens of record highs across major indices. 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.
The most helpful perspective is to remember that pullbacks are a normal and unavoidable part of investing. Since 1980, the S&P 500 has experienced an average intra-year drawdown of around 15%, even though markets tend to experience positive returns in more than two-thirds of years. It is natural for the average year to experience four or five pullbacks of five percent or worse. Last year saw six such pullbacks, even though the S&P 500 finished the year with an 18% total return.
For investors, the key takeaway is that short-term market swings, especially those driven by headline risk, are simply part of the market cycle. The design of portfolios aligned with long-term financial goals seek to navigate these periods. This could be especially important as we approach the midterm election and fiscal concerns reemerge 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 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.
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. The average price of gasoline across the country reached $4 at the end of March, and diesel prices have jumped significantly as well.
While these types of events do affect consumer pocketbooks, economists tend to view these “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. This was the case in 2022 when gas prices reached $5 before declining within months. While not pleasant, significant financial hardship is not expected to be an issue for the average American household at current gasoline levels.
History also shows that geopolitical events, while creating short-term instability, have not typically derailed 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. While the current situation is still evolving and the humanitarian consequences are significant, investors who made dramatic portfolio adjustments in response to past events often did so at the wrong moment.
Corporate strength remains a key support for markets
It is equally important to recognize what has been working beneath the surface—corporate fundamentals.
Expectations for corporate profits in 2026 remain strong, with analysts projecting double-digit earnings growth to start the year. Early indications from the first quarter suggest that many companies are continuing to deliver solid results, supported by resilient consumer demand and stable business investment.
Another encouraging development is the broadening of market participation. While the “Magnificent 7” have carried most of the gains in recent years, we are beginning to see strength across a wider group of companies. The other 493 companies in the S&P 500 have started to contribute more meaningfully to overall returns, which is typically a healthy sign for the durability of a market cycle.
That said, strong fundamentals are not without their challenges. Valuations remain elevated, with forward price-to-earnings ratios exceeding 22x. This suggests that markets are already pricing in a high level of continued earnings growth, leaving less room for disappointment if companies fall short of these expectations.
While we cannot predict exactly how these dynamics will unfold, the continued strength of corporate earnings is an encouraging foundation for markets.
The bottom line
The first quarter of 2026 has challenged investors with uncertainty and volatility. Yet markets and corporate earnings have been resilient, with well-diversified portfolios and financial plans being the best setup against unpredictable outcomes.
Much like the discipline and teamwork that led to recent gold medal victories for both U.S. hockey teams, long-term success is built through patience, consistency, and a commitment to the plan.
We are here for you to walk alongside you on your financial journey. Often our greatest value to our clients is to hold the course and continue focusing on long-term goals. In other words, “Keep Calm and Carry On.”
Thank you for allowing us the privilege to serve you.
Jimmy Murphy MBA, CFP®
