The first quarter of 2026 began with strong market momentum but quickly shifted to volatility amid escalating geopolitical tensions and rising oil prices. Equity markets declined as investors grew more selective, focusing on earnings quality while economic data signaled resilience alongside emerging signs of strain. Looking ahead, markets face continued uncertainty driven by inflation pressures, Federal Reserve policy expectations, and the evolving impact of global conflicts.
The first quarter began with momentum and ended with uncertainty and turbulence. As we wrote in the year-end newsletter, we were both optimistic and concerned about geo-political issues for 2026. January started off with the attack on Venezuela, threat of conflict over Greenland and ended with the attack on Iran. Economically, growth held up, inflation stayed near target, and yet by March it was clear that the market's tolerance for risk had shifted decisively. A disruption in oil supply, tied to the conflict between
the United States, Israel and Iran, threatened to reignite inflation just as cracks appeared in labor market data.
January extended 2025's momentum. Major indices pushed to or near record highs, buoyed by AI enthusiasm and soaring tech valuations. But the market was already becoming more selective. Companies with durable earnings and strong balance sheets were being rewarded, while high-flying tech and speculative growth names drew increasing skepticism.
Sentiment soured quickly. Growth- and rate-sensitive sectors corrected, energy and real assets moved to the front, and the broader market mood shifted from optimistic to cautious. Below is an overview of the numbers, what’s driving them, and what to look ahead to in Q2.
Equity markets changed character this quarter. Investors moved on from the valuation-driven gains that fueled 2025's rally and toward a more demanding focus on earnings quality.
Here are where the numbers wound up at the end of Q1 2026:
• The S&P 500 dropped 4.63%.
• The Nasdaq 100 tumbled 5.98%.
• The Dow Jones Industrial Average slipped 3.58%.
The U.S. entered 2026 in reasonable shape. Household finances were solid, and January's jobs report came in at nearly twice expectations, signaling real momentum at the outset. However, as the quarter progressed, the tone shifted. Consumer sentiment weakened, hiring plans stalled, and February's jobs report delivered an unexpected jolt: the economy shed roughly 90,000 positions. Still, wage growth remained positive, suggesting a gradual cooldown rather than a crack.
At both the January and March meetings, the Fed held its policy rate steady at 3.50–3.75%, as expected. What mattered more was the shift in expectations. Markets entered the year anticipating steady rate cuts through 2026; by March, however, those expectations had been scaled back considerably, as the economy proved resilient and inflation more stubborn than anticipated. Rising oil prices further tightened the Fed's constraints. With energy costs threatening to keep inflation elevated, rate cuts could be delayed well into the year. The practical takeaway: don't count on falling rates to do the heavy lifting. Policy is likely to remain restrictive — supportive of income from cash and quality bonds but offering little tailwind for equity valuations.
The defining surprise of Q1 was crude oil surging above $100 per barrel by mid-March. The trigger was the United States and Israel armed conflict with Iran, which began on February 28 and choked tanker traffic through the Strait of Hormuz, a critical artery for global oil supply.
Since the beginning of the conflict, the war has continued to progress through March. President Trump has signaled a willingness to end the war, either through talks or force, but the true conclusion to this conflict will only be seen with time.
Throughout the first quarter we have seen private credit dominate the story lines in the media. Several private credit products “gated” or did not allow distributions from investors who requested them. The private credit that Paragon has used for clients were not affected by the gates in the first quarter and all distributions that were requested were granted. In addition, Paragon held a client webinar for those who owned private credit with members of Blackstone’s private credit team to answer questions and concerns.
April, May, and June will see key monthly releases of PPI, CPI, and Job Market data, helping paint a clearer picture of the economy’s standing as we move into the halfway point of the year. Additionally, Q2 will also feature two Federal Reserve meetings: one on April 28-29 and the other on June 16-17. Markets are currently pricing in no change in rates for the April meeting.
The long-term impacts of the war in Iran remain unseen, but most markets are feeling the strain of short-term effects, which are likely to continue as the conflict persists.
In addition to our recent and timely arranged webinar we offered on private credit, we are excited to once. again welcome Michael Townsend, Charles Schwab’s Managing Director, Legislative and Regulatory Affairs on May 4th for an interactive conversation about what is happening in Washington, and the effects of geopolitics. Clients and prospects should have received an invitation, if you have not, and want to attend, please contact us and we will get you on the list.
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