As we close out the first quarter of 2026, the message from the markets is becoming clearer.
Stocks and bonds both pulled back, with the S&P 500 down roughly 4.6% for the quarter and the NASDAQ off more than 7%. At the same time, small-cap stocks actually managed a modest gain.
That divergence tells you something important—this is not a uniform decline. It’s a repricing of risk, particularly in areas where expectations had gotten ahead of reality.
The Headline Story: Oil and Geopolitics
The dominant force this quarter was the conflict involving Iran, which drove a dramatic move in energy markets.
Oil prices surged sharply—up more than 70% from earlier levels—and that has ripple effects across:
- Inflation
- Interest rates
- Consumer spending
- Corporate margins
Markets can deal with uncertainty. What they struggle with is uncertainty tied to inflation and energy at the same time.
Earnings Are Still Holding the Market Together
Here’s the part that many are missing.
Corporate earnings have remained strong:
- Fourth-quarter earnings were up approximately 14%
- 2026 earnings expectations have actually moved higher, not lower
- Technology and energy have been the primary drivers
This is why the market decline has been relatively contained.
When earnings are growing, downside tends to be limited—unless something breaks.
Valuations Are Quietly Resetting
One of the more important shifts this quarter hasn’t been talked about enough.
The price-to-earnings ratio on the S&P 500 dropped from about 23x to 20x.
That’s a meaningful reset.
It didn’t happen because earnings fell—it happened because prices adjusted downward while earnings held steady.
In many ways, that’s a healthier development than a market propped up by expanding multiples.
Inflation Is Not Going Back to Old Levels
There is still a widespread belief that inflation will settle back into the low, stable range we experienced for decades.
That assumption deserves scrutiny.
The structural forces that kept inflation low for years are no longer as powerful:
- Globalization is slowing
- Supply chains are being reworked
- Labor markets remain tight
- Technology is no longer producing the same disinflationary impact
Add rising energy prices to that mix, and the more realistic scenario is persistently higher inflation, not a return to prior norms.
The Fed Has Fewer Options Than Many Think
At the beginning of the year, markets were expecting multiple rate cuts.
Now, expectations have shifted toward little to no easing—and possibly tighter policy.
That’s a major change.
If inflation remains elevated, the Fed’s ability to step in and support markets becomes limited.
The Quiet Risk: Private Credit
One area that continues to develop beneath the surface is private credit.
This market has grown from about $1 trillion in 2020 to over $2 trillion today.
So far, stress in this area appears manageable. Banks remain well-capitalized, and issues are isolated rather than systemic.
But it is the type of risk that doesn’t show up all at once—it tends to build slowly and surface later in the cycle.
Recession Risk Is Moving—But Not There Yet
Before the current geopolitical situation, recession odds were relatively low.
Now, depending on how events unfold—particularly around energy—those probabilities are rising.
- Previously estimated around 15%
- Now closer to 25%, with the potential to move higher if conditions worsen
The key driver here is straightforward: oil and interest rates.
If both remain elevated for an extended period, growth will slow.
What Happens Next
Markets are at an inflection point.
For the current environment to stabilize, at least one of the following needs to happen:
- A resolution or de-escalation of the conflict
- A meaningful decline in oil prices
- A reset in investor expectations (what professionals call “capitulation”)
Until then, the market is likely to remain uneven.
My Perspective
The bull market is not over—but it is clearly on hold.
We are in a transition period where:
- Valuations are being reset
- Inflation is proving more persistent
- And geopolitical risks are influencing short-term direction
At the same time, the foundation remains intact:
- Earnings are still growing
- The financial system is stable
- The economy entered this period with momentum
That combination typically leads to volatility, not collapse.
Bottom Line
Here’s the reality as we move into the second quarter:
- Earnings are strong—but expectations may come down
- Inflation is not fully under control
- The Fed is constrained
- Energy remains the key swing factor
- Valuations are adjusting
This is not the kind of market that rewards complacency—but it is also not one that justifies panic.
Periods like this tend to separate disciplined investors from reactive ones.
About Gary Hager
Gary K. Hager, CFP®, CBEC, CTFA is the founder of Integrated Wealth Management. He advises business owners and families on exit planning, estate strategies, and long-term wealth structuring.