Q1 2026 Review & Outlook
by Chris Broderick, Principal and Head of Research & Trading
War, Private Credit Worries and AI Anxiety Weigh on Stocks
Market volatility spiked in the first quarter of 2026. A surge in geopolitical tensions, growing concerns about potential stress in private credit markets, and fears that artificial intelligence (AI) may disrupt certain industries combined to push the S&P 500 moderately lower to start the year.¹
Geopolitical surprises began immediately in 2026. On January 3, the U.S. military conducted a raid in Venezuela and arrested Venezuelan President Maduro, briefly increasing market volatility amid uncertainty around Venezuela’s oil supply. The impact proved limited, however, as the country’s new leadership signaled a willingness to cooperate with the U.S., which helped ease tensions.²
Markets soon faced another headline risk when the U.S. Attorney for the District of Columbia issued two grand jury subpoenas to Fed Chair Powell related to the renovation of the Federal Reserve building.³ The action raised concerns about potential political pressure on the Federal Reserve and the risk that diminished central bank independence could lead to higher inflation. Several prominent Republican senators publicly supported Fed independence, helping to calm markets.⁴
Despite these headlines, stable economic data and a generally solid fourth-quarter earnings season kept economic and earnings growth forecasts largely intact. At its January meeting, the Federal Reserve also reiterated that it still expected to cut rates later this year.⁵ As a result, the S&P 500 ended January with a modest gain despite the volatility.⁶
Volatility continued in early February, but this time it centered on the technology and financial sectors. AI company Anthropic released a Claude Cowork app that triggered a sharp decline in software stocks as investors reassessed the potential for AI to replace or disrupt entire segments of the economy. The development challenged the prevailing assumption that AI would be almost entirely positive for economic growth and equity markets.⁷
At the same time, underlying concerns about private credit markets intensified as several large alternative asset managers restricted redemptions from certain funds.⁸ These developments raised fears that rapid growth in private credit over recent years may have led to weaker underwriting standards and elevated valuations.
Geopolitical risks returned at the end of February when the U.S. launched an attack on Iran, sparking a war that effectively closed the Strait of Hormuz and sharply reduced global oil supply. Oil prices surged overnight as a result. These factors pushed the S&P 500 slightly lower for the month, although the index remained positive for the year through February.⁹
Market declines accelerated in March as hopes for a quick resolution to the U.S.-Iran war faded. While the U.S. and Israel dominated the conventional military conflict, Iran and its proxies attacked neighboring Gulf energy infrastructure and oil tankers in the Persian Gulf. These attacks pushed oil prices above $100 per barrel and increased pressure on the global economy.
The S&P 500 fell modestly in response to these developments. Hopes for a ceasefire late in March helped limit losses, but the index still finished the quarter in negative territory.¹⁰
Outlook for the Second Quarter
Markets enter the second quarter facing three primary headwinds: higher oil prices resulting from the U.S.-Iran war, concerns surrounding private credit markets, and uncertainty about the broader impact of AI. While a transformative technology, it could have an unanticipated negative impact on important market sectors.
Progress toward resolving these issues will likely be necessary for the market to stage a durable rebound from the first-quarter decline. However, it is important to note that economic growth and corporate earnings remained solid in Q1, which continues to provide support for markets.
Starting with geopolitics, the primary concern for investors remains the price of oil. Sustained increases in oil prices can affect the economy in several ways:
1. The Federal Reserve may delay or avoid rate cuts if higher oil prices contribute to inflation.
2. Consumer spending could weaken as higher gasoline prices reduce disposable income.
3. Corporate profit margins may come under pressure because of rising transportation and energy costs.¹¹
Combined, these factors could increase the risk of stagflation, an environment of slower growth and higher inflation that is typically challenging for financial markets.
For geopolitical risks to fully recede, investors will likely need to see a credible ceasefire agreement among the U.S., Israel, and Iran, a reopening of shipping lanes through the Strait of Hormuz, and oil prices returning closer to pre-war levels.
Concerns about private credit markets also remain elevated. Rapid inflows into private credit strategies over recent years have raised fears that underwriting standards may have weakened and valuations may prove too optimistic.
Several important factors provide context for these concerns. First, the growth of private direct lending has not meaningfully increased total corporate debt. Instead, it has largely shifted activity away from public high-yield and syndicated loan markets following changes in banking regulations after the global financial crisis.¹² Second, private credit does not rely on fundamentally new credit analysis frameworks. Finally, there are currently no widespread signs of rising delinquencies or imminent credit losses in private credit portfolios.¹³
Even so, investor concerns around the sector continue to weigh on sentiment toward financial stocks. Financials represent the second-largest sector in the S&P 500 and play an important leadership role in broader market performance. A stabilization in private credit sentiment and a rebound in financial stocks would help support a broader market recovery.
Turning to AI, investor sentiment has shifted from broad enthusiasm to a more cautious stance. Two primary concerns have emerged. The first is that massive investment in AI infrastructure by major technology companies may ultimately deliver lower returns than initially expected, potentially weighing on earnings.¹⁴ The second is that AI advancements could disrupt entire industries, particularly software, potentially leading to job losses and slower economic growth.¹⁵
Because technology is the largest sector in the S&P 500, investor confidence in the long-term impact of AI will remain an important driver of overall market performance.
Bottom Line
The first quarter of 2026 contained several negative surprises, and markets begin the second quarter with continued uncertainty around geopolitics, private credit, and AI.
At the same time, several positive factors remain in place. The economy continues to demonstrate resilience, corporate earnings growth remains strong, and the Federal Reserve is still signaling the potential for additional rate cuts later this year. These factors helped support both stocks and bonds during the first quarter.
The first quarter also serves as an important reminder that markets rarely move in a straight line. Periods of volatility–particularly those driven by geopolitical or policy headlines–are a normal part of the market cycle. Portfolios designed around long-term goals are built to navigate these periods.
Our entire team remains dedicated to helping you navigate this market environment and keeping your financial plan on track. Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.
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1 https://paralleladvisors.box.com/v/Q22026EconIndicatorsandReturns
2 https://www.reuters.com/commentary/breakingviews/us-raid-venezuela-threatens-new-global-ruptures-2026-01-03/; https://www.reuters.com/world/americas/venezuela-acting-president-seeks-us-govt-collaboration-2026-01-05/
3 https://www.federalreserve.gov/newsevents/speech/powell20260111a.htm?
5 https://www.federalreserve.gov/monetarypolicy/files/monetary20260128a1.pdf
6 https://paralleladvisors.box.com/v/Q22026EconIndicatorsandReturns
8 https://www.advisorhub.com/trapped-in-private-credit-investors-wait-to-pull-out-5-billion/
9 https://paralleladvisors.box.com/v/Q22026EconIndicatorsandReturns
10 https://paralleladvisors.box.com/v/Q22026EconIndicatorsandReturns
11 https://paulkrugman.substack.com/p/war-oil-and-the-world-economy
14 https://www.reuters.com/world/china/big-techs-635-billion-ai-spending-faces-energy-shock-test-sp-global-says-2026-03-31/? ; https://www.barrons.com/articles/tech-stocks-mag-7-nvidia-meta-microsoft-3cf7fdad?
15 https://www.businessinsider.com/tech-layoffs-q1-march-data-ai-impact-2026-4?utm
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