First Quarter 2026 Market Insights Report
As we entered 2026, markets were closely focused on the Federal Reserve and its next move on interest rates. While there was growing pressure for rate cuts, the Fed remained data dependent, using inflation trends as its primary guide. Our attention remained on key economic indicators, including employment, consumer spending, inflation, and interest rates, while also monitoring geopolitical developments. Within employment, we have been paying close attention not just to job creation, but to the quality of jobs being added.
Geopolitical Developments
Economic concerns were quickly overshadowed by escalating geopolitical tensions, as the United States joined Israel in a military strike against Iran aimed at curbing its nuclear ambitions. While leaving political analysis to others, one notable development supporting the U.S. and Israeli perspective was Iran’s missile launch toward Diego Garcia, approximately 4,000 kilometers away, demonstrating a significantly greater range than previously estimated.
Energy Markets & Global Impact
The economic consequences of this conflict are expected to persist, particularly through higher oil prices and the uncertain timeline for normalization. A critical focal point is the Strait of Hormuz, a strategic waterway connecting the Persian Gulf to the Gulf of Oman and the Arabian Sea. Roughly 20 million barrels of oil per day, about 25% of global seaborne oil trade, pass through this corridor. Additionally, approximately 20% of global liquefied natural gas, particularly from Qatar and the UAE, transits the strait.
Equity Market Performance
The immediate market impact has been rising oil prices, contributing to renewed inflationary pressures. Equity markets experienced notable volatility in March, with a sharp decline followed by a late-month rebound. The S&P 500 finished the month down 4.98% and declined 4.33% for the quarter. The Nasdaq fell nearly 7%, reflecting both geopolitical concerns and ongoing uncertainty surrounding artificial intelligence. Despite this, on a trailing one-year basis through March 31, 2026, the S&P 500 remains up 17.4%, and the Nasdaq is up 24.5%.
Fixed Income & Commodities
Historically, bond markets serve as a safe haven during periods of geopolitical stress. However, persistent inflation concerns limited this effect. The U.S. Aggregate Bond Index returned 0.41% for March and just 0.20% for the first quarter. Gold continued its upward trend, albeit at a slower pace, rising 1.79% for both the month and the quarter.
Recent Market Reaction
Following the President’s address on Operation Epic Fury, markets reacted negatively overnight, with futures declining and oil prices rising. As of the morning of April 2, markets are mixed, with small-cap stocks in positive territory while large-cap U.S. equities are down approximately 0.2%. Investors are seeking clarity, particularly around a potential exit strategy.
Labor Market & Artificial Intelligence
Markets continue to assess the implications of artificial intelligence, particularly its impact on employment and workforce dynamics. While the most recent jobs report slightly exceeded expectations, job growth remains concentrated in healthcare and other lower-paying sectors, rather than higher-wage industries. This trend warrants close monitoring, as the composition of job creation will influence overall consumer spending.
Global Outlook
Geopolitics can shift between being a background factor and a dominant force in markets. At present, it is clearly front and center. Energy shocks are already affecting Europe, which remains heavily reliant on natural gas and has faced disruptions following reduced access to Russian supplies. Additional instability in the Middle East further increases uncertainty around European energy security and pricing.
Looking Ahead
We expect that hostilities in the Middle East will eventually subside. When that occurs, investor focus is likely to return to core economic fundamentals, including energy prices, job creation, and inflation, as well as the upcoming midterm elections. Given the current political landscape, the outcome of these elections will be critical in determining whether Republican policy priorities continue or whether a divided government leads to legislative gridlock.
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