From Record Highs to War-Driven Selloff: A Quarter of Extremes

The first quarter of 2026 began with optimism and ended in geopolitical crisis. In January, the S&P 500 set a fresh all-time closing high of 6,978.60 on January 27, fueled by strong Q4 2025 earnings, the Fed’s decision to hold rates steady, and market enthusiasm over the nomination of Kevin Warsh as the next Fed Chair. The Russell 2000 surged over 6% in January alone, reaching a record of 2,735 on January 22, as small caps outperformed on domestic growth optimism.

February brought the first signs of trouble. The Nasdaq posted its worst monthly decline since March 2025, falling over 3%, led by a sharp rotation out of AI and software stocks after DeepSeek-related disruptions reshaped the competitive landscape for large-cap tech. Hot producer price index data released February 27 added to fears of rekindling inflation. Then, on the final weekend of February, U.S. and Israeli forces launched strikes on Iran, setting off a chain of events that would define the remainder of the quarter.

March: The Iran War Reshapes Markets

The U.S.-Iran military conflict escalated rapidly in early March. Iran’s retaliatory closure of the Strait of Hormuz : a chokepoint for approximately 20% of global oil supply : sent WTI crude surging to $117.63, its highest level since 2022. Oil inventories declined by an estimated 155 million barrels during the first three weeks of March alone. Gasoline prices spiked, and energy stocks rallied sharply even as the broad market sold off.

The S&P 500 fell 5.1% in March : its largest monthly decline in over a year and its third negative month in the past four. Ten of eleven S&P 500 sectors ended March in the red. The Nasdaq fared even worse, with technology and growth names disproportionately affected by rising discount rates and deteriorating risk sentiment. By quarter’s end, the Nasdaq had shed 7.1% from its December 31 close.

A late-month rally provided some relief: on March 31, reports that Iranian President Pezeshkian was open to negotiations triggered the best single-day gain since May for the S&P 500, which surged 2.91% on the day. But the rally was not enough to erase the damage. All five major U.S. equity indexes closed the quarter in negative territory.

The Fed Holds Steady as Inflation Landscape Shifts

The Federal Reserve held the federal funds rate at 3.50-3.75% at both the January and March FOMC meetings, consistent with a patient approach. January CPI came in cooler than expected at 2.4% year-over-year, the lowest since May 2025, with core CPI easing to 2.5%. The data briefly boosted hopes for rate cuts in the second half of the year.

However, the Iran-driven oil shock is expected to reshape the inflation trajectory. The March CPI report, released after quarter-end on April 10, showed headline inflation surging to 3.3% : driven by a historic 10.9% monthly spike in energy costs. Core CPI, however, remained contained at 2.6%, giving the Fed analytical room to characterize the energy spike as transitory. Markets ended Q1 pricing in two rate cuts for 2026, though post-CPI expectations scaled back to one.

Dollar Weakens, Gold Surges, Bitcoin Stumbles

The U.S. Dollar Index (DXY) declined 2.8% during Q1, falling from 103.40 to 100.50 : its weakest quarter since Liberation Day in April 2025. The combination of geopolitical uncertainty, capital flight to non-dollar assets, and expectations of eventual Fed easing weighed on the greenback.

Gold was the quarter’s standout performer, rising 7.8% and reaching a new all-time high of $5,602 on January 28 before correcting as margin calls and liquidity demands forced some liquidation during the March selloff. Gold closed the quarter at $4,679, well above year-end 2025 levels, confirming its role as the premier safe-haven asset.

Bitcoin, by contrast, suffered its worst quarter since Q2 2022, falling 27.5% from $87,540 to approximately $63,500. Spot Bitcoin ETF outflows accelerated in February, and the cryptocurrency’s high correlation with risk assets during periods of stress undermined its “digital gold” narrative.

Ceasefire, Earnings Season, and the Path Forward

As Q2 begins, investors face a dramatically different landscape than the one that prevailed at the start of the year. A fragile two-week ceasefire between the U.S. and Iran, announced April 7, has already triggered a powerful relief rally: the S&P 500 posted its best week since November in the first full week of April, and WTI crude plunged over 16% in a single session. The durability of this rally depends entirely on geopolitical outcomes.

Key Catalysts for Q2

Islamabad Peace Talks (April 11): U.S. and Iranian delegations met for direct talks in Pakistan on April 11. Vice President Vance led the U.S. delegation. Any breakdown could rapidly reverse the early-April rally and send oil prices back toward $110+.

Earnings Season: Q1 2026 earnings season kicks into high gear in mid-April. Goldman Sachs, Bank of America, Morgan Stanley, TSMC, and Netflix are all scheduled to report in the week of April 13-17. Markets are expecting approximately 14.4% S&P 500 EPS growth. Bank trading revenue will reveal how Wall Street navigated the war-era volatility.

Fed Policy (April 28-29 FOMC): The April FOMC meeting will be the first since the Iran conflict and associated CPI spike. The cool core CPI reading preserves flexibility for the Fed to look through the energy shock, but year-ahead inflation expectations surging to 4.8% in the Michigan survey may concern policymakers regarding credibility.

Consumer Resilience: March Retail Sales data, scheduled for mid-April, will be the first consumer spending data to fully reflect the gas price shock on household budgets. Consumer Sentiment hitting a record low of 47.6 in April suggests meaningful headwinds to spending.

Oil Supply Normalization: Even with a ceasefire, analysts expect the Strait of Hormuz to take months to fully reopen. Energy costs are likely to remain elevated into the summer, maintaining upward pressure on headline inflation and downward pressure on consumer discretionary spending.

Positioning Considerations

The quarter ahead presents an unusually binary outlook. A successful de-escalation and Strait reopening could trigger a significant equity rally and normalization of energy costs. Conversely, a collapse of talks could result in renewed military action and a return to $110+ oil. In this environment, diversification, liquidity, and active risk management remain paramount. Gold’s resilience and the 10-year Treasury’s decline to 4.32% suggest the market is pricing in sustained uncertainty.