2026 began on a steady footing, with stable growth and expectations for interest rate cuts. As the quarter progressed, policy and trade tensions emerged before geopolitical developments in the Middle East became the dominant market driver. While the starting point for inflation and interest rates is more supportive than in previous shocks, a prolonged disruption could still create a more challenging backdrop for growth and inflation.
Q1 2026 Review & Outlook
The first three months of 2026 were ultimately defined by escalating tensions in the Middle East, which became a key influence on markets by the end of the quarter. This marked a sharp contrast to the start of the year, when economic growth was stable and inflation—while still somewhat persistent—was low enough for central banks to consider further rate cuts.
In February, attention turned to policy and trade developments. President Trump’s emergency IEEPA tariffs were ruled unlawful, prompting a swift response in the form of a 15% levy, albeit with a limited duration unless extended by Congress.
By March, geopolitical risks had intensified significantly. Conflict involving the US, Israel and Iran led to disruption across the region, including threats to shipping through the Strait of Hormuz—a critical route for global energy supply. This raised concerns around oil and gas flows and contributed to increased market volatility.
The key question is how these developments feed through to the broader economy. While comparisons to the oil shocks of the 1970s are understandable, the impact today may be less severe. Economies are more energy efficient, supply is more diversified, and strategic reserves can help smooth short-term disruptions. Additionally, while inflation has been elevated in recent years, the wage-price dynamics seen in past decades are less entrenched.
Recent history also provides useful context. Inflation was already rising into 2021 due to strong demand and supply disruptions, before the Russia-Ukraine war accelerated the move higher. Today, inflation is lower and interest rates are already significantly higher than they were ahead of that shock.
However, while the starting point is more favourable, the duration and severity of current disruptions will be key. The longer uncertainty persists, the greater the potential impact on inflation and economic growth.
Bottom Line
Periods like this can create a strong temptation to act, but reacting to fast-moving events is often unwise. The outlook can shift quickly, and consistently timing such moments is extremely difficult. Maintaining a steady, well-diversified mix of investments is often more effective than making reactive changes that may feel right in the moment but prove costly over time.
Q&A
What did fixed income (bonds) do in the first three months of 2026?
Bonds started the year positively, supported by higher yields and stable economic conditions. However, performance weakened as Middle East tensions raised concerns about inflation. Markets began pricing in higher interest rates due to rising energy costs, pushing yields up and bond prices down. Shorter-dated bonds held up better, as they are less sensitive to interest rate changes, while longer-dated bonds experienced greater declines.
What did stock markets do in the first three months of 2026?
Equities began the year on a strong footing, with markets outside the US—particularly Japan and emerging markets—leading performance. Smaller companies also outperformed early on. However, this trend reversed as geopolitical tensions escalated. By March, most equity markets came under pressure, with the exception of energy stocks. Rising oil prices increased concerns about inflation and economic growth, leading to heightened volatility despite a late-month rebound.
What did real assets do in the first three months of 2026?
Real assets demonstrated their diversification benefits. Commodities, particularly oil and gas, rose sharply due to supply concerns linked to the Middle East conflict. Gold initially gained as a safe haven but later fell as expectations for higher inflation and interest rates strengthened. Infrastructure performed well early in the year, supported by long-term trends, though rising rate expectations weighed later on. Property also improved initially but ended the quarter broadly flat as inflation concerns resurfaced.
Month by Numbers (As at 31st March 2026)
Equities
- UK: -5.91%
- Europe: -7.68%
- US: -4.93%
- Emerging Markets: -10.55%
- Japan: -10.76%
Bonds / Rates (absolute change)
- UK Base Rate: 0.00% (3.75%)
- Fed Funds Rate: 0.00% (3.75%)
- UK 10-Year Yield: +0.62% (4.86%)
- US 10-Year Yield: +0.37% (4.32%)
Currencies
- GBP / USD: -1.93% ($1.32)
- GBP / EUR: +0.26% (€1.14)
- DXY (USD Index): +2.41% (99.96)
Commodities
- Gold: -11.43% ($4674.5)
- Oil (Brent): +42.68% (103.97)
Noteworthy
- Shell PLC: +16.58%