.png)
Q1 2026 | A Quarter in Review
- Konner DeLeon
- Apr 7
- 7 min read
2026 Q1 MARKET INSIGHTS
The first quarter of 2026 was defined by volatility amid geopolitical tensions, shifting yield curve dynamics, and a rotation toward value-oriented companies.
The escalating conflict in the Middle East triggered meaningful moves across energy, equities, and fixed income markets. Investors continued to reassess risk as sticky inflation and uncertainty around the Fed's next move on rates persisted.
Markets rewarded investors who stayed diversified and disciplined during this period of heightened volatility.
KEY TAKEAWAYS
Investment Philosophy and Outlook
The Iran conflict continues to drive market volatility. As a result, small cap and value companies have outperformed as investors prioritize stronger fundamentals and less speculative valuations.
Geopolitical Uncertainty
Tensions in the Middle East dominated headlines this quarter, driving market volatility as the closure of the Strait of Hormuz pushed oil prices above $100 a barrel. The resulting inflation and rate pressures left a geopolitical risk premium in markets despite hints of de-escalation.
Market Performance
Q1 of 2026 was a highly volatile period, with most major US and global indexes declining. Markets ended the quarter with a strong rally on optimism for a potential Iran deal.
Fixed Income & Bond Market
Treasury yields increased as long-term rates rose while the Fed held short-term rates steady. The credit markets remained stable despite higher yields, with tight spreads indicating confidence in corporate fundamentals rather than rising default concerns. After years of being the hot topic in private markets, increased redemption requests in Q1 had many private credit funds limiting investor access to capital.
Federal Reserve Guidance
The Fed held rates steady during both meetings, citing a resilient economy, stable unemployment, elevated inflation, weak housing, and modest job growth. Even with the Iran conflict, we would expect the Fed to stay data dependent before making any changes to policy.
_______________________
INVESTMENT PHILOSOPHY & OUTLOOK
The conflict with Iran will continue to be a key driver for the markets until a resolution is reached.
While President Trump publicly stated that he expects the war to last two to three more weeks, it could extend past this. We will be keeping a close eye on the downstream effects of longer-term elevated oil and energy prices.
Although the geopolitical environment has been in the spotlight, we cannot forget about the sector rotation out of technology and AI driven stocks at the end of 2025. This will be something we continue to watch after a deal is reached on the Iran war. We are still uncertain if the large capital investments and outlays into AI buildouts will turn into real profits for companies and investors.
With the volatility we have seen in the markets, small cap and value companies have outshined their growth counterparts. In periods of uncertainty, this is a trend that we could continue to see as investors rotate towards stronger companies with less speculation built into their price. Looking at the graphic below, you can see the outperformance of small cap and value companies in action.
In this graphic, we are comparing the Dimensional Large Cap Value Fund (DFLVX) to the Dimensional Large Cap Growth Fund (DUSLX). Large Cap Value posted a return of +4.08% while Large Cap Growth returned -4.21%.
In this graphic, we are comparing the Dimensional Small Cap Value Fund (DFSVX) to the Dimensional Small Cap Growth Fund (DSCGX). Small Cap Value captured a return of +6.84% while Small Cap Growth returned -0.88%.
_______________________
Geopolitical Uncertainty
Geopolitical uncertainty dominated headlines in the first quarter of 2026 and was the central driver for volatility in the markets. Tensions in the Middle East rose to new heights in late February following the military action of the US and Israel against Iran. This triggered retaliatory threats from Iran and significant disruption to the global energy and shipping markets with the closure of the Strait of Hormuz. The closure of the Strait of Hormuz has been a key factor for market volatility as one-fifth of the world’s oil supply passes through the strait. During this time, oil prices increased to over $100 a barrel and have continued to stay elevated.
Beyond just increased energy prices, there has been a cascading impact on inflation expectations, long-term interest rates, and monetary policy. US equity markets experienced pullbacks with global markets following due to heightened volatility from supply-chain disruptions and currency pressures.
Although there were signals of de-escalation to end the quarter, there is still uncertainty regarding the timeline and due to this, there is a risk premium embedded in asset prices.
Market Performance
The first quarter of 2026 was full of volatility with the major indexes experiencing significant swings in both directions.
The Russell 2000 Index, which tracks small cap companies, was one of the only indexes in the green for the first quarter and posted a gain of 0.58%. On the other hand, the S&P 500 shed 4.6% in the first quarter and Nasdaq Composite fell 7.1%. Continuing to look at the US markets, the Dow Jones Industrial Average fell 3.6%. The Dow and Nasdaq both briefly entered correction territory during the quarter.
The US Dollar index or the DXY, strengthened in Q1 of 2026, supported by safe haven flows from the Iran conflict and higher oil prices.
Looking at diversified US, International, and Emerging market indexes, the MSCI All Country World Index fell 3.2% in the first quarter. The MSCI World Index, which tracks developed countries, shed 3.6% while the MSCI Emerging Markets index closed the quarter nearly flat, falling just 0.23%.
Even with market uncertainty, US markets closed the last day of the quarter with the largest single day gain since May of 2025. Closing on a strong note for a volatile first quarter. This was mainly on the hopes of a deal to end the war in Iran, but we will continue to watch the markets as there may continue to be volatility.
Fixed Income & Bond Market
U.S. Treasury markets experienced some shifts during the first quarter of 2026. This was primarily driven by movements at the long end of the yield curve rather than any changes to monetary policy itself.
The Federal Reserve held its target rates steady in the first quarter, so short-term Treasury rates remained stable. This action by the Fed reinforced our view that the short-term view on monetary conditions is in line with what the Fed would expect to see.
On the other hand, the yields on intermediate term and long-term treasuries ticked higher. The 10 and 30‑year Treasury yields rose in response to a combination of heavy Treasury issuance, an elevated term premium, and renewed inflation risk tied to higher energy prices from ongoing geopolitical tensions. These factors increased the expected compensation for longer-dated fixed income assets.
The Treasury yield curve transitioned out of its long‑standing inversion. With long‑term yields rising faster than short‑term rates, the curve now exhibits slightly positive slope. While this doesn’t signal the beginning of an aggressive economic reacceleration, it does suggest that we could begin to see markets price in a more balanced outlook where we are factoring in sticky inflation and continued government borrowing.
In the credit markets, conditions were less favorable for investors, but the markets themselves remained resilient. Investment-grade yields reached their highest levels since 2025 which was mainly driven by the rise in underlying treasuries rather than a meaningful deterioration of corporate fundamentals. Looking at credit spreads, they have continued to stay tight which signals continued confidence in corporations and minimal concerns for default.
Taking a look at private credit, several large private credit managers saw elevated redemption requests in Q1. This appeared to be driven by investors’ increased liquidity needs amid broader market volatility. While private credit can play a valuable role in a portfolio, it is important to remember that the illiquidity premium is not without risk. Holding an appropriate allocation within a well-diversified public and private portfolio can be one way to effectively mitigate the need for early access to capital.
Federal Reserve Guidance
As expected, both FOMC meetings were uneventful to start the year, with rates being held steady. In the past quarter, the economy continued to expand at a solid pace while consumer spending remained resilient. Housing remained weak and job gains were low.
The unemployment rate showed signs of stability at 4.4% and inflation stayed elevated with core PCE (which measures price changes in consumer goods and services while excluding volatile food and energy costs) sitting around 3.0%. Tariffs continue to add upward pressure on goods inflation.
In the second meeting of the year, most of the economic indicators continued to trend in the same direction, except with a new variable, the war in Iran. The Fed referenced the conflict in Iran but is still uncertain around oil prices and the inflation pass through to consumers. Core inflation was revised higher to 2.7% and the median Federal Open Market Committee member projects that Real GDP growth will be higher at 2.4%.
Looking to the second quarter meetings, the Fed’s decision could be seen as a hawkish hold as they wait for more data. This means that rates are staying unchanged but there is potential for a rate hike if inflation remains high.
We don’t expect the Fed to raise or lower rates solely based on the rise in oil and energy prices from the Iran war. But we will continue to watch the downstream effects as this could have an impact on the Fed’s future monetary policy decisions.
_______________________
If you found this article useful, we'd love to stay in touch. Use this link to subscribe for future updates, and feel free to share with friends or family who might find it valuable using the share buttons below.
_______________________
DeLeon Wealth, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
Sources: