Monthly Market Update – March 2026

Energy Shock, Rate Fears and Resilient Consumers: What Shook Markets in March and the First Quarter

March was anything but quiet for investors. A surge in geopolitical risk, led by conflict in the Middle East collided with stubborn inflation and shifting interest-rate expectations to send stocks and bonds lower around the world. Yet beneath the volatility, the U.S. economy showed notable pockets of resilience that helped keep recession fears at bay, at least for now.

Key Takeaways

• FROM GOLDILOCKS TO GEOPOLITICS What began as a Goldilocks economic backdrop—with easing inflation, lower oil prices, and record equity highs—shifted abruptly just as the month started after military action in Iran sparked volatility. Energy prices surged, lifting short-term inflation expectations, but importantly, longer-term inflation remains well anchored, signaling markets still view the shock as transitory. 
• ARE WE THERE YET? A Deutsche Bank study finds that history rhymes, even in conflict. Decades of geopolitical events show markets typically suffer brief, manageable pullbacks after international shocks, often recovering within a month or two. The Iran conflict fits this pattern so far—suggesting markets may see a recovery soon.
• PRICE OF ADMISSION Recent volatility spikes tied to the Iran conflict look dramatic but are modest by historical standards, with many past episodes more severe. Despite frequent volatility surges since 2020, equities have delivered strong long-term gains—reinforcing that periodic distress is the cost of compounding.  
• EARNINGS RESILIENCE AMID THE NOISE S&P 500 earnings growth and profit margins remain historically high, providing a buffer against geopolitical and economic headwinds. Analysts are revising earnings higher—led by Energy—and AI-driven productivity gains may offset higher oil costs, suggesting earnings won’t be derailed.
• AMERICAN MANUFACTURING RETURNS U.S. manufacturing is firmly back in expansion mode, with the ISM Manufacturing PMI hitting its highest level since 2022 after three straight months above 50. Demand and production are strengthening across the sector, although a sharp surge in prices remains a big concern.
• MIDTERM SEASONALITY STINKS While long-term returns are driven by fundamentals, short-term market behavior often reflects seasonal patterns. Midterm election years have historically delivered lower returns and higher volatility, with choppy markets early and stronger gains later in the year—making them nerve‑testing, but shouldn’t derail long-term financial plans.

Market Summary

Asset Class Total Returns

Source: Bloomberg, as of March 31, 2026. Performance figures are index total returns: U.S. Bonds (Barclays U.S. Aggregate Bond TR), U.S. High Yield (Barclays U.S. HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

A Month and Quarter Defined by Geopolitics and Inflation Fears

Markets entered 2026 expecting cooling inflation and interest-rate cuts from major central banks. Instead, March brought a dramatic reset.

War in the Middle East damaged energy infrastructure and effectively closed the Strait of Hormuz, a critical chokepoint for global oil, gas, and commodity flows. Oil and gas prices surged sharply, feeding concerns that inflation could stay higher for longer. At the same time, a stronger U.S. dollar added pressure to non‑U.S. assets, especially those already dealing with rising energy costs.

Global stocks and bonds both finished the quarter in the red. U.S. stocks held up better than international peers in March, though non‑U.S. stocks performed better than the U.S. market over the full quarter. In fixed income, U.S. bonds outperformed foreign bonds, even as rising yields weighed on prices.

Energy Takes Center Stage

The biggest market story in March was energy. Brent crude oil prices jumped 63% in March alone, the largest monthly increase in four decades, after the Middle East conflict disrupted supply routes. The Strait of Hormuz is vital not just for energy but also for agricultural commodities, so grain prices also climbed, adding to global inflation pressure.

Energy stocks soared in response. In the U.S., the Energy sector rose 10.3% in March and finished the quarter up an eye-catching 38.3%, far and away the best-performing sector. Rising oil prices were a tailwind for producers, even as they created headaches for consumers, central banks, and most other asset classes.

U.S. Stocks: Technology Holds Up, But No One Escapes

The S&P 500 fell -5.0% in March, ending the quarter down -4.3%. It was the index’s worst month since the tariff-driven turmoil of March 2025 and its worst quarterly decline since the third quarter of 2022.

Technology stocks, which posted strong earnings late last year, came under more scrutiny as investors questioned whether massive AI-related spending would translate into sufficient returns. Still, during the height of March’s uncertainty, tech proved relatively resilient as investors sought higher-quality companies. The tech sector fell -3.8% in March, less than the broader market.

Outside of Energy, however, there was little shelter. All ten other S&P 500 sectors posted losses in March. Industrials and Health Care were hit hardest, both down more than -8%, while Financials and Technology limited losses to about -4%.

For the full quarter, six of the eleven sectors managed gains, led by Energy. Materials and Utilities also delivered solid returns, up +9.7% and +8.3%, respectively. Financials, Consumer Discretionary, and Technology each fell just over -9% for the quarter.

Market size mattered less than expected. Both large‑cap and small‑cap stocks fell about -5% in March, but over the full quarter, small caps stood out. The Russell 2000 returned +0.9%, outperforming the S&P 500’s ‑4.3% decline. It was small caps’ fourth straight positive quarter and their biggest relative outperformance versus large caps since early 2021, suggesting investors are increasingly willing to look beyond mega‑cap names.

Meanwhile, valuations came back down to earth. Despite falling stock prices, earnings estimates continued to edge higher. The result: more reasonable valuations. According to FactSet, the S&P 500’s forward 12-month price-to-earnings ratio fell to 19.9, below its five-year average and the lowest level since last April.

International Stocks: A Tale of Regions

Outside the U.S., equity markets were notably stronger. Developed markets rose across all size and style categories, and like in the U.S., non-U.S. small-cap stocks outperformed the large-caps and value stocks outperformed their growth-style peers.

• Developed-market international stocks (MSCI EAFE) were hit hard in March:
• Non-U.S. developed stocks outperformed U.S. stocks for the quarter, but March was brutal. European markets were rattled by the geopolitical uncertainty, with the MSCI Europe ex-UK Index falling -10.3% in March. The U.K. held up slightly better, down -7.6%, and was one of the few bright spots for the quarter, gaining +2.3%.
• Elsewhere in developed markets, Australia and Japan posted positive first-quarter returns of +4.2% and +1.6%, respectively, but both fell sharply in March, with Japan down more than -12%.
• Emerging markets (EM) felt the full brunt of the energy shock
• Emerging market stocks also struggled in March. The MSCI Emerging Markets Index dropped -13.0%, with energy exposure a major concern. More than 80% of the oil and gas flowing through the Strait of Hormuz is destined for Asia, putting pressure on Asian markets with heavy energy import needs.

For the quarter, emerging markets eked out a near-flat return (-0.1%), while EM stocks excluding China rose +3.2%. Despite March’s selloff, emerging markets still outperformed developed markets over the first quarter.

Bonds: Rising Yields, Falling Prices

Like equity investors, bond investors had a rough month. The yield on the 10-year U.S. Treasury rose to 4.32%, up from 3.95% at the end of February. The 2-year Treasury yield surged, peaking at 3.99% in late March, its highest level since June 2025. Since bond prices move opposite yields, rising yields translated into falling bond prices.

• The Bloomberg U.S. Aggregate Bond Index fell 1.82% in March, its worst month since October 2024, and ended the quarter nearly flat at -0.05%, its first negative quarter since late 2024.
• Credit markets also felt the strain. As volatility increased, credit spreads widened to their highest levels since May 2025 for both investment-grade and high-yield bonds. 
• Municipal bonds underperformed Treasuries, posting their worst quarterly result since early 2025.

Economy & Policy: Resilient Manufacturing and Steady Rates

Despite market turmoil, the U.S. economy showed notable strength. 

• Early 2026 got off to a slow start due to winter weather, tariff uncertainty and the energy shock. The Atlanta Fed’s GDPNow model estimates first-quarter growth of +1.9%, down from earlier expectations. Still, high-frequency indicators like air travel, restaurant bookings, and consumer spending remained resilient even as gas prices hit multi-year highs.
• Economic data in March surprised to the upside. Manufacturing stayed in expansion territory for a third straight month, consumer confidence improved, and retail sales for February came in stronger than expected.
• The labor market delivered the biggest surprise. March nonfarm payrolls rose +178,000, far exceeding expectations and sharply rebounding from February’s job losses. The unemployment rate dipped to +4.3%, and job growth has increasingly come from the private sector.
• Meanwhile, corporate deal-making pushed ahead. Global merger and acquisition activity approached $1.3 trillion in the first quarter, nearly 20% higher than a year ago. Dealmakers say companies are increasingly comfortable pursuing transactions even during periods of volatility.

Rates on Hold

• Inflation remains a concern, but central banks held their ground. The Federal Reserve kept rates unchanged at 3.50%–3.75%, still penciling in one quarter-point cut later in 2026. The European Central Bank and the Bank of England also left rates unchanged.

Bottom Line

The first quarter of 2026 delivered a reminder that markets can shift quickly when geopolitics and inflation collide. Energy prices surged, interest-rate expectations flipped, and both stocks and bonds felt the pressure.

Looking ahead, much hinges on how the Middle East conflict evolves. While many expect de-escalation, uncertainty remains high. In that environment, diversification matters. Even after a tough start to the year, core bonds could still play a stabilizing role if growth slows, while exposure across regions and sectors may help investors balance inflation risks against economic uncertainty.

Source: Bloomberg. Data as of March 31, 2026.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

FROM GOLDILOCKS TO GEOPOLITICS

Shortly after the start of the year, the global economy appeared to be settling into a “Goldilocks” environment—with short- and long-term inflation expectations converging lower toward the Federal Reserve’s 2% target. WTI crude oil had drifted down toward pre-COVID lows near $60 per barrel, and on January 27 the S&P 500 reached a new all-time high (6,978.60).

That backdrop changed abruptly following the initiation of military action in Iran on February 28. As is typical with geopolitical shocks, uncertainty, headline risk, and volatility quickly followed. While markets have remained relatively orderly, they have clearly transitioned away from a Goldilocks setting to decidedly “not-Goldilocks”.

Investor attention has understandably focused on the near-term inflation narrative, as oil and energy prices surged. Less appreciated, however, is that longer-term inflation expectations remain well anchored. As shown in the chart below, short-term inflation expectations (1-year zero-coupon inflation swaps, blue line) have risen alongside WTI crude prices (black line), but long-term expectations (5-year zero-coupon inflation swaps, yellow line) remain relatively contained.

Meanwhile, traffic through the Strait of Hormuz—which handles roughly 20% of global energy flows—has been disrupted for five consecutive weeks. If these shipping disruptions persist, a temporary oil price shock could evolve into a true supply disruption, raising the risk of a more stagflationary outcome for the global economy.

For now, however, bond markets continue to price the shock as transitory, with long-term inflation expectations still contained—a critical distinction as investors assess whether current volatility reflects a passing shock or a more durable macro shift.

Oil Shock Drives Volatility and Inflation Fears

However Long-Term Inflation Expectations Remain Anchored

Sources: Bloomberg. Data as of April 6, 2026.

ARE WE THERE YET?

According to a quantitative study from Deutsche Bank, equity markets have shown a remarkably consistent pattern when responding to major geopolitical shocks. Looking back to 1939, the median market reaction across more than 30 geopolitical events has been a brief 15–20 trading-day drawdown, with average declines slightly greater than -4% from pre-shock levels—often followed by a swift rebound.

Importantly, Deutsche Bank notes that this “average path by day” differs from the maximum drawdown typically experienced during these episodes. Measured peak-to-trough, peak declines are deeper, averaging about -6% on a median basis and roughly -8% on average, reflecting the worst point reached at any stage, not a specific day. Historically, by around day 35, markets have fully recovered and resumed their uptrend.

This year’s Iran conflict stands out, but not in a surprising way. At 21 trading days after hostilities began (March 1–March 30), the S&P 500 fell approximately -7.8%, closely matching the average historical drawdown. As of April 6, the index had rebounded +4.2% over a four-day winning streak.

While recent losses still sit near the lower end of the historical “normal” range (outside the 25th–75th percentiles), market action increasingly suggests a trough has formed and a recovery is underway. If conditions in the Strait of Hormuz stabilize, history suggests a continued recovery over the coming weeks remains plausible.

S&P 500 Around Major Geopolitical Events (since 1939)

The S&P 500 has gone past the average selloff around geopolitical shocks

Source: Bloomberg, Deutsche Bank Asset Allocation.

PRICE OF ADMISSION

The Cboe Volatility Index (VIX) is the market’s most widely followed gauge of expected near-term volatility for U.S. equities. Given the market gyrations tied to the U.S.–Iran conflict, it is a useful moment to step back and assess where the VIX sits relative to history.

As shown in the chart below, which tracks daily VIX closes and intra-day highs from 1990 through March 2026, the recent rise in volatility is evident. However, history provides important context. While today’s volatility should not be dismissed, there have been several hundred trading days since 1990 when the VIX exceeded its March 2026 peak of 35.3—often by a wide margin.

Since the start of 2020, volatility has spiked repeatedly above recent levels, including during the COVID-19 pandemic, the Russian invasion of Ukraine (2022), the unwinding of the yen carry trade (2024), and U.S. tariff announcements (2025). Notably, on the last Friday in February, just before the Iran conflict began, the VIX closed at 19.9, very close to its long-term daily average.

Following the outbreak of hostilities on February 28, the VIX moved sharply higher throughout March, reaching an intra-day peak of 35.3 on March 9, roughly 78% above the February close. The index closed above 30 as recently as March 30, before easing back to 25.3 by month-end.

While it remains unclear how long headline risks will persist or how markets will perform in the near term, history offers an important reminder. Despite repeated volatility spikes and drawdowns since 2020, global equities have delivered meaningful long-term gains. The S&P 500 has risen roughly +122% cumulatively, or +13.6% annually, since early 2020, while global equities have gained nearly +90%, or +10.7% annually in U.S. dollar terms.

Put simply, volatility is the cost of compounding—the unavoidable price of admission for achieving long-term compound returns.

Volatility Has Risen but Remains Far Below Many Periods in the Past

VIX Volatility Index Levels Since 1990

Source: Cboe, Avantis Investors. NOTE: The VIX Index tracks the expected 30-day future volatility of the S&P 500 Index.

EARNINGS RESILIENCE AMID THE NOISE

We have highlighted for several months the strength in earnings growth and profit margins, and both remain near the upper end of their historical ranges. This strength provides a meaningful cushion against potential economic headwinds. Encouragingly, both metrics have held up since the depths of tariff-related turbulence last year, and early indications suggest they remain resilient during the U.S.–Iran conflict.

Recent analysis from Strategas Research Partners illustrates this resilience well. Their chart tracks S&P 500 earnings-per-share expectations for calendar years 2026 and 2027, benchmarking them against how expectations evolved for calendar year 2025. What stands out—and is somewhat surprising—is that Wall Street earnings revisions are trending upward rather than downward.

Less surprising is the source of those upward revisions. They are largely driven by the Energy sector, where higher oil prices directly boost producer profitability, leading analysts to raise earnings estimates. Importantly, the expected negative spillovers to non-Energy sectors have not yet materialized in consensus forecasts.

While many investors anticipate eventual downward revisions outside Energy, those may be delayed. Companies and consumers may be pulling forward purchases to get ahead of expected price increases, temporarily supporting revenues. In addition, some upward revisions likely reflect productivity gains from Artificial Intelligence (AI), automation, and efficiency improvements that were previously underappreciated in earnings models.

Economists expect AI adoption to lift productivity and restrain labor costs, offsetting some of the pressure from higher energy prices. Notably, these gains are likely to be long-lasting, while the current rise in energy prices is expected to be shorter-lived. The U.S.–Iran conflict is also not expected to disrupt AI-related capital spending, including cloud investment, data-center build-outs, and semiconductor demand. Indeed, FactSet is reporting the highest number of S&P 500 companies issuing positive earnings guidance in five years.

The base-case assumption remains that the current oil shock is not supply-driven, does not destroy long-term demand, and is unlikely to prompt aggressive monetary tightening. Reinforcing this view, Federal Reserve Chair Jerome Powell recently noted that the Fed typically looks through oil price spikes as long as inflation expectations remain anchored (as shown in the “Oil Shock Drives Volatility and Inflation Fears” chart earlier).

While it may seem counterintuitive, higher oil prices do not necessarily imply weaker S&P 500 earnings. When combined with strong margins, upward earnings revisions, and AI-driven productivity gains, current conditions suggest earnings growth may prove more durable than many fear.

Earnings Estimates Haven’t Been Hampered by Middle East

2025, 2026, 2027 S&P 500 Earnings Progression from Early to Late March

Source: Strategas.

AMERICAN MANUFACTURING RETURNS

Last Wednesday, April 1, the Institute for Supply Management (ISM) released its March Manufacturing PMI, delivering a clear signal that U.S. manufacturing activity is expanding again. The headline PMI rose to 52.7, beating expectations of 52.3 and improving from 52.4 in February. This marks the strongest reading since August 2022 and, importantly, represents three consecutive months above 50—the threshold that separates economic expansion from contraction.

This rebound is especially notable given context: the current expansion follows 11 consecutive months below 50, signaling a sharp and meaningful break from the prior downtrend.

Looking beneath the headline, the details reinforce the positive momentum. New Orders, a key indicator of future demand, eased modestly to 53.5 from 55.8, but Production accelerated, rising to 55.1 from 53.5. Meanwhile, the Backlog of Orders remained elevated at 54.4, and Supplier Deliveries surged to 58.9, highlighting strong demand and rising industrial output.

Taken together, these components paint a straightforward picture: demand is improving, production is picking up, and activity across the industrial economy is gaining traction.

The report was not without concerns. On the inflation front, the Prices Paid index jumped sharply to 78.3 from 70.5, the highest level since June 2022. This surge suggests renewed cost pressures, tied to higher energy and input prices.

The key takeaway: U.S. manufacturing is experiencing a surprisingly strong resurgence, but the sharp rise in the Prices index will likely intensify concerns about stubborn inflation, keeping policymakers and markets on alert.   

March Manufacturing Activity Reaches Highest Level Since 2022

American industry is expanding again, with third successive robust reading

Source: Institute for Supply Management, Trading Economics.

MIDTERM SEASONALITY STINKS

Over the long term, markets are driven by fundamentals such as earnings growth and economic activity—the dominant drivers of compounding wealth over the long-term engines for investors. In the short term, however, seasonality often influences market dynamics and investor sentiment, and it is helpful to be aware of to set expectations around volatility and returns.

Some seasonal patterns are calendar-based, such as the January Effect—where tax-loss selling in December is followed by reinvestment in January—or September weakness, which has historically posted below-average returns. Other seasonal effects are more institutional and policy-driven, with the midterm election cycle being a prime example.

Midterm years sit at the intersection of markets, policy uncertainty, and investor psychology, often marked by negative headlines and political gridlock as the sitting president’s party typically loses Congressional seats. Historically, markets tend to behave differently during these periods, with lower average returns and higher volatility.

Data from Bespoke Investment Group shows that year two of the Presidential cycle has historically been the weakest, with an average annual return of just +0.6%. While clearly lower than the other three years, it is still positive on average. Typically, the first nine months of a midterm year is choppy, followed by a stronger-than-average fourth quarter, as political and policy uncertainty fades after the election.

Importantly, seasonality does not override fundamentals, but it can be challenging psychologically during historically unfavorable periods like midterm years. We view this analysis as contextual rather than a timing signal. For perspective, it may be helpful to remember that the two years following midterm elections have historically delivered the highest median returns of the Presidential cycle.

Median % Change by Year of Election Cycle (S&P 500 Since 1928)

Midterm years have been notoriously weak for the stock market

Source: Bespoke Investment Group.

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment. It offers many long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (Vanguard Total International Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 24% U.S. Bonds, 10% International Bonds, 6% High Yield Bonds, 14% Large Growth, 14% Large Value, 4% Mid Growth, 4% Mid Value, 1% Small Growth, 1% Small Value, 17% International Stock, 4% Emerging Markets, 2% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.