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Diversification · Geopolitics · Market Review · Value Investing
In Q1 2026, global geopolitical events, particularly the war in Iran, caused US stocks to pull back significantly, with the S&P 500 falling 4.7% and the Nasdaq losing 6.7% by March 20, while developed international and emerging markets demonstrated relative resilience.
The war in Iran, coupled with US and Israel strikes in late February, spiked oil prices to $100 per barrel. The US Supreme Court struck down certain tariffs, but market reaction was muted.
The Federal Reserve maintained the federal-funds rate between 3.5% and 3.75% in January and March, debating inflation versus a sluggish labor market, as the US core consumer price index rose 2.5% year-over-year in February. Beyond US equities, developed international markets (MSCI World ex USA Index) lost 1.5%, while emerging markets (MSCI Emerging Markets Index) gained 4.5%.
US Treasuries declined 0.6%, pushing the benchmark 10-year yield to 4.39%. The broader bond market also saw declines, with the Bloomberg US Aggregate Bond Index down 0.7% and the Bloomberg Global Aggregate Bond Index falling 0.5%.
Value stocks and small caps in the US started the year strong, reversing their 2025 underperformance, while large-cap growth stocks lagged. Technology companies, especially software stocks, pulled back due to AI impact concerns.
Investors are advised against making reactive asset-allocation changes to geopolitical events, as markets are forward-looking. Diversification across global markets, small caps, and value stocks helps mitigate concentration risks, given the S&P 500's 36.4% concentration in its top 10 companies.
