Key takeaways:
The first quarter of 2026 ended on a very different footing than when it began. What started as a market driven by economic momentum, earnings growth and a combination of fiscal and monetary stimulus, became a market dominated by the war in Iran and energy prices. Markets began the year supported by improving manufacturing activity, a stabilizing U.S. housing backdrop and inflation that remained relatively contained.
As the quarter progressed, the conflict involving Iran and the disruption around the Strait of Hormuz became the dominant macro variables, driving oil prices sharply higher and injecting volatility into global equity markets. Even with this shock, the broader backdrop remained more resilient than headlines suggested, and diversification once again proved valuable.
Global monetary policies were paused, as high oil prices dominated
Central banks largely shifted into wait-and-see mode. The Bank of Canada held its overnight rate at 2.25%, while acknowledging that the war had increased volatility in energy prices and financial markets. The U.S. Federal Reserve also remained on hold, as policymakers weighed the risk of supply-driven inflation against the possibility that higher energy costs could slow growth.
The key issue is whether elevated oil prices will become a sustained concern that will dent consumer and business confidence, or whether a credible path to de-escalation will allow energy prices to retreat and momentum to reassert itself.
How did Canadian equities perform in Q1?
Canadian equities were relatively resilient amid the energy shock, reflecting the market’s heavier exposure to energy and materials. Rising crude prices supported the energy sector and helped offset weakness in rate-sensitive areas.
Defensive sectors also contributed as investors sought stability, while the overall market benefited from its mix of dividends and real assets. In a quarter where macro shocks were repriced unevenly, Canada’s sector composition provided a measure of insulation compared with many global peers.
What impact did the oil crisis have on U.S. equities?
U.S. equities entered the quarter with strong fundamentals, but sentiment weakened as geopolitical tensions escalated and inflation expectations firmed alongside oil.
Leadership rotated away from expensive, rate-sensitive growth areas, and market performance became more about a valuation reset than a deterioration in underlying earnings power. The quarter reinforced how quickly narrow leadership can reverse, underscoring the importance of diversification beyond concentrated exposures.
Why were some international equities so affected by the energy shock?
International markets delivered mixed results, as the energy shock had uneven regional effects. Commodity-linked and some emerging markets showed greater resilience, supported by more favourable valuations and, in some cases, stronger domestic demand. Europe faced a more challenging backdrop given its reliance on imported energy, and higher input costs weighed on confidence.
The dispersion across regions highlighted that global shocks rarely impact markets uniformly, creating opportunities for investors willing to remain selective and disciplined.
What happened to fixed income yields?
Fixed income markets navigated a difficult mix of stable policy rates but higher yields across the curve, as investors repriced inflation risk tied to energy. Returns were modest, with income earned from holding bonds doing much of the work, while rising yields and wider credit spreads challenged longer-duration and lower-quality segments.
This environment emphasized the value of active duration management, an emphasis on quality and balanced exposure across maturities, rather than chasing short-term moves.
What can we expect going forward?
As we look ahead, the direction of oil prices remains central. If an off-ramp to the conflict materializes, markets may refocus on the underlying economic cycle that appeared constructive early in the quarter. At times like these, we remind investors to act when appropriate but not react to every headline. For more in-depth analysis, download our first quarter review.
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