The early first-quarter broadening of equity gains, both domestic and international, was ultimately derailed by the Iran conflict and resulting energy shock that started in late February. In March, bond yields also increased and credit spreads widened, but both stayed within a manageable range.
Hope for a de-escalation of the conflict is allowing investors to refocus on fundamentals, but uncertainty remains high. Positive productivity gain and capital expenditure trends are intact, and we believe fiscal stimulus will help to offset higher energy prices in the near term. Steadfast earnings growth paired with a resilient economic backdrop support our constructive view of diversified equities.
Index Performance
U.S. Equity |
1Q26 |
Mar |
Feb |
Jan |
Russell 3000® |
(4.0%) |
(5.0%) |
(0.5%) |
1.6% |
S&P 500® |
(4.3%) |
(5.0%) |
(0.8%) |
1.5% |
S&P 500 Growth® |
(8.1%) |
(5.3%) |
(3.4%) |
0.5% |
S&P 500 Value® |
0.0% |
(4.6%) |
2.3% |
2.5% |
S&P MidCap 400® |
2.5% |
(5.4%) |
4.1% |
4.1% |
Russell 2000® |
0.9% |
(5.0%) |
0.8% |
5.4% |
International Equity |
|
|
|
|
MSCI ACWI Ex USA IMI |
(0.7%) |
(10.8%) |
5.1% |
6.0% |
MSCI World Ex USA IMI |
(0.9%) |
(9.9%) |
4.9% |
4.9% |
MSCI EM IMI |
(0.2%) |
(12.8%) |
5.3% |
8.6% |
Fixed Income |
|
|
|
|
Bloomberg U.S. Aggregate Bond |
0.0% |
(1.8%) |
1.6% |
0.1% |
Bloomberg U.S. Corporate High Yield |
(0.5%) |
(1.2%) |
0.2% |
0.5% |
Bloomberg EM USD Aggregate |
(1.3%) |
(2.9%) |
1.2% |
0.4% |
Bloomberg Municipal |
(0.2%) |
(2.3%) |
1.2% |
0.9% |
Bloomberg U.S. Treasury Bill 1-3mo |
0.9% |
0.3% |
0.3% |
0.3% |
As of 3/31/2026. Source: Morningstar Inc.
Which Asset Classes Led in Q1?
U.S. Mid-cap Equity (2.5%)
Our thesis: The current inflation backdrop is challenging for U.S. mid-capitalization (cap) equities, but we believe they can benefit from U.S.-centric revenue exposure over the long term.
Quarter recap: U.S. mid-cap equities posted strong returns to begin the year, amid a continued rotation away from large-cap growth stocks, while holding up enough during March’s pullback to lead equity asset class performance.
Looking ahead: Near-term inflation could be a challenge, but mid-cap equities should benefit from relatively attractive valuations and improving earnings.
U.S. Small-cap Equity (0.9%)
Our thesis: The current inflation backdrop is challenging for U.S. small-cap equities, but we believe they can benefit from U.S.-centric revenue exposure over the long term.
Quarter recap: Small-cap equities posted another positive quarter, benefiting from the rotation away from large-cap growth stocks as well as from lower interest rates.
Looking ahead: Near-term inflation and still-elevated borrowing costs could be headwinds, but small-cap equities should benefit from positive earnings trends.
Core Fixed Income (0.0%)
Our thesis: Core fixed income tends to be the primary ballast in multi-asset portfolios given its broad diversification across U.S. Treasury, corporate and securitized markets.
Quarter recap: Core bonds finished flat for the quarter. They relinquished early gains as bond yields increased during March, reflecting concerns about the passthrough of high energy prices to inflation.
Looking ahead: Over the long term, core fixed income can provide stability and income in portfolios, and help dampen volatility. In our view, current yields offer reasonable compensation despite increased near-term inflation expectations.
Which Asset Classes Lagged in Q1?
U.S. Large-cap Equity (-4.3%)
Our thesis: U.S. large-cap equities are the long-term growth and innovation engine of public equities given their sustainable, high-quality fundamental characteristics.
Quarter recap: U.S. large-cap equity performance lagged during the first quarter. Performance was led lower by technology stocks in response to artificial intelligence (AI) disruption concerns before March’s conflict-driven pullback.
Looking ahead: U.S. large-cap equities will continue to exhibit strong earnings growth and profit margins given their robust technology sector exposure, in our view.
Emerging Market Debt (-1.3%)
Our thesis: We believe emerging market (EM) debt offers better fundamentals and higher income generation compared to developed international markets. Most of the index is comprised of sovereign debt, which reduces credit risk relative to corporate credit.
Quarter recap: EM debt performance was the most challenged within fixed income, as U.S. dollar strength and certain geographic exposures were headwinds following the breakout of the conflict.
Looking ahead: Despite geopolitical risks, EM debt still offers an attractive yield pickup over developed markets, and exposure to sovereign debt linked to higher economic growth potential.
Developed International Equity (-0.9%)
Our thesis: Growth expectations have improved and, over the long term, developed international exposure offers diversification benefits in portfolios.
Quarter recap: Developed international equities gave up their strong start to the year and pulled back sharply following the start of the Middle East conflict in late February, given Europe’s and Japan’s status as net energy importers.
Looking ahead: Infrastructure and defense spending plans are expected to be a tailwind, and combined with improving earnings growth, should bolster economic activity.
