The first quarter of 2026 offered a compressed lesson in how quickly narratives can shift — and why staying invested through them matters. Markets entered the year constructively, supported by expectations of accelerating economic and corporate earnings growth and anticipated Federal Reserve rate cuts. That backdrop was disrupted in late February when military conflict in the Middle East effectively closed the Strait of Hormuz — the transit point for approximately 20% of global oil consumption. West Texas Intermediate crude, priced at $67 per barrel the day before the conflict began, surged to $101 by quarter-end, a 51% increase. The International Energy Agency described the disruption as the largest in the history of the global oil market.
In addition to oil, the Strait of Hormuz serves as a major transportation route for other commodities, including fertilizers, aluminum, helium (a key input in semiconductor production), and liquefied natural gas (LNG).
The S&P 500 sold off roughly 9% from its highs as investors repriced for higher energy costs, stickier inflation, and a Federal Reserve likely to remain on hold. Sector dispersion widened dramatically through quarter-end: Energy (+38%) and Materials more defensive sectors such as Utilities (+8%) and Consumer Staples (+8%) also held up relatively well. Financials (-10%), Consumer Discretionary (-9%), and Technology (-9%) lagged on concerns about slower growth and higher interest rates.
Then the narrative shifted again. As ceasefire negotiations progressed and visibility improved, equity markets rebounded sharply, with the major indices recovering to or near all-time highs and posting modestly positive returns year-to-date as of this writing. Oil prices have eased from their peaks, and much of the sector dispersion that defined Q1 has compressed.
This round-trip is instructive. It is a reminder that geopolitical shocks, while uncomfortable in real time, have historically had limited long-term impact on equity returns. Markets are ultimately forward-looking and driven by corporate earnings, which tend to grow over longer periods. Attempting to time entry and exit around these events is exceptionally difficult — some of the strongest market days tend to cluster near the weakest, and missing a handful of them ca n meaningfully impair long-term returns.
The underlying fundamentals that framed our constructive view entering the year remain largely intact:
- U.S. economic and corporate earnings growth remain on track for above-average levels in 2026
- The unemployment rate remains at historically low levels
- A significant capital expenditures cycle is underway for AI infrastructure
- Tariff escalation risk has moderated following the Supreme Court’s ruling that the International Emergency Economic Powers Act (IEEPA) cannot be legally used to impose tariffs
- The U.S. is a net oil exporter, mitigating the economic drag from Middle Eastern supply disruptions
The following are key risks we are monitoring:
Re-escalation in the Middle East: While the current trajectory is toward de-escalation, a renewed flare-up would likely push energy prices higher again and reintroduce supply chain disruptions, weighing on consumer health, economic growth, and corporate profitability.
Lingering global economic effects: Even with the conflict easing, ripple effects across the global economy — from supply chain adjustments to shifts in capital flows — could persist and be difficult to predict and quantify. Federal Reserve policy uncertainty: While the Federal Reserve appeared positioned to cut rates several times this year as inflation moved closer to desired levels, the Q1 shock complicated the outlook. Markets currently expect the Federal Reserve to hold rates at current levels through the remainder of 2026.
Mixed labor market signals: Although the unemployment rate has remained stable at 4.3% and job growth has been positive overall, the underlying data have shown volatility. Monthly non-farm payrolls have oscillated between gains and losses, influenced by factors such as weather, labor strikes, federal job cuts, and reduced immigration. Long-term, the potential impact of artificial intelligence (AI) on employment remains an additional consideration.
Elevated earnings expectations: Expectations for corporate earnings growth in 2026 remain high, which could leave the market vulnerable if results fall short.
Market Outlook
Following three consecutive years of double-digit total returns for the S&P 500, some pause and volatility was to be expected. Sell-offs of 5%-10% are common and a normal feature of the long-term investing journey — the Q1 drawdown and subsequent recovery fit squarely within that historical pattern. However, periods of turbulence can be uncomfortable in real time.
From an investment perspective, we view periods of uncertainty as opportunities. When visibility is limited, investors often sell stocks indiscriminately, without discernment about market position, management quality, or business model durability. This environment can present attractive entry points to both add to high-conviction existing positions and to initiate new investments that have become dislocated from their intrinsic value.
The investing environment remains constructive, given favorable underlying fundamentals, and the recent rebound confirms that investors are eager to re-engage at the first concrete signs of stability.
IMPORTANT NOTICE
Novare Capital Management, LLC (“Novare Capital”) is an independent SEC registered investment advisor. Advisory services are only offered to clients or prospective clients where Novare Capital and its representatives are properly licensed or exempt from licensure. The information furnished is intended to be general and educational in nature. It does not constitute investment advice and it should not be relied on as such. It does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. You should consult your tax and financial advisor. Past performance is not indicative of future results. All investment involves risk and should be carefully considered. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information, and Novare Capital shall have no liability for decisions based on such information. Unless stated otherwise, any estimates, projections (including performance and risk), or predictions given are intended to be forward-looking statements and speak only as of the date of this presentation. Such estimates are subject to actual known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those projected.
