Market Overview

Investment Commentary: First Quarter 2026

Navigating uncertainty

The first quarter of 2026 was a reminder that markets do not move in straight lines.

The year began with a continuation of the positive trends seen through 2025. Corporate earnings remained strong, inflation was easing and confidence around artificial intelligence remained high. As the quarter progressed, the backdrop became more complex. By March, markets were adjusting to a geopolitical shock, renewed inflation concerns and shifting expectations for interest rates.

This was not a change in direction so much as a change in conditions. Markets adjusted to reflect that.

From momentum to recalibration

Economic data at the start of the year remained supportive. Labour markets were stable and corporate earnings continued to exceed expectations. Equity markets responded accordingly, with major indices reaching new highs in January.

That position proved sensitive to events.

The escalation of conflict in the Middle East, and disruption to energy flows through the Strait of Hormuz, marked a turning point. Oil prices rose sharply, bringing inflation concerns back into focus. This also raised a more important question: whether higher energy costs will prove temporary or persist long enough to affect growth.

Markets adjusted quickly. Expectations for interest rate cuts were reduced and, in some cases, reversed. Bond yields rose, equity markets fell back and volatility increased.

Markets did not break. They repriced.

 (Note: after the quarter end, equity markets bounced dramatically – see the chart below).

S&P 500 – 1 year chart (first quarter of 2026 shown between the vertical lines)

Source: TradingView, Oakham

Brent Crude Oil – 1 year chart (first quarter of 2026 shown between the vertical lines)

Source: TradingView, Oakham

Inflation risk: speed matters

The key issue during the quarter was not simply higher energy prices, but the pace of the move.

Markets can absorb gradual increases in costs. More challenging is a sudden shift, which raises the risk of slower growth alongside higher inflation. This combination tends to be difficult for both equities and bonds.

The duration of the disruption remains the critical variable. Forward markets continue to suggest that energy prices may moderate over time, but that assumption depends on how the geopolitical situation develops.

The path of inflation matters as much as the level.

The following chart shows how expectations of oil prices in future years has changed pre and post war.

 

Brent Crude Oil (USD per barrel): Forward Curve – 30^th April 2026

Source: Bloomberg, Saxo

Equities: adjustment without deterioration

Global equity markets declined over the quarter, with developed markets underperforming and the S&P 500 falling by around 4.3%.

Beneath that, fundamentals remain stable, and in some respects continue to improve.

Corporate earnings have again exceeded expectations. For the S&P500, fourth quarter results showed growth of roughly 14% year on year, around double the forecasts going into the reporting season. This strength reflects genuine improvement in both revenues and margins, with profitability at or near cycle highs.

The following chart shows that profit margins are at a record high for the past 5 years.

 

S&P500 net profit margin Q2 2021 – Q1 2026

Source: Factset

Earnings expectations have also edged higher. Analysts have upgraded forecasts for 2026, while markets became more cautious in the quarter. Valuations adjusted, moving from elevated levels to a more balanced range.

Prices adjusted. Profits did not.

This is an important distinction. The gap between market sentiment and underlying fundamentals narrowed, not because earnings weakened, but because valuations reset.

This left markets in a more stable position. Over time, equity prices tend to follow earnings, and for now that underlying trend remains intact.

The following chart illustrates the historic relationship between stock prices and earnings (in aggregate for the S&P 500).

 

S&P500 Index vs Earnings Growth (January 2000 to end March 2026)

Source: Optima Capital Management

The key question for the remainder of the year is whether earnings can continue to hold up if energy costs remain elevated and growth slows.

 

Market leadership: a pause rather than a change

Toward the end of 2025, market leadership had begun to broaden beyond a small number of large US technology companies. That trend paused during the first quarter.

In periods of uncertainty, investors tend to favour larger, more established businesses. This was reflected in a move back toward US markets as geopolitical risks increased.

This is not unusual. When visibility is limited, markets prioritise stability.

Importantly, the underlying case for broader participation has not disappeared. It has been interrupted rather than reversed. As conditions stabilise, there is a reasonable expectation that leadership will widen again.

 

Technology: a more selective market

The technology sector saw mixed performance during the quarter, and the divergence within it is instructive.

Software companies came under pressure, partly due to concerns that advances in artificial intelligence could affect existing business models. As AI tools become more capable, some areas of software face the risk of disruption rather than enhancement. This is a structural issue rather than a short term shift in sentiment.

At the same time, companies linked to AI infrastructure, including semiconductors and data centres, held up more strongly. Regardless of which applications succeed, the underlying infrastructure remains essential.

Markets are becoming more selective. Broad enthusiasm is giving way to more differentiated judgement about where value will accrue.

 

Semiconductors significantly outperform software – 1 year chart (first quarter of 2026 shown between the vertical lines)
SOXX (semiconductors) vs IGV (software sector)

Source: TradingView, Oakham

 

Fixed income: changing expectations

Bond markets experienced a more difficult period. Rising energy prices pushed inflation expectations higher, leading to an increase in yields.

This move was more pronounced in the UK and Europe, where economies are more exposed to energy import costs. Central banks face a more complex backdrop, balancing inflation pressures against slower growth.

Bonds remain an important part of portfolios, but their behaviour is closely linked to the inflation outlook.

The following chart shows the evolving position for inflation and interest rates in the UK.

 

UK inflation and Interest Rates

Source: BBC, ONS, Bank of England, 30 April 2026

 

Commodities: supporting portfolios

Commodities were the strongest performing asset class over the quarter, driven primarily by energy.

This is consistent with their role. In periods of geopolitical uncertainty, commodities can provide support within portfolios. Energy equities performed well, materials benefited from higher prices, and gold ended the quarter higher, although with some volatility.

 

Gold Price (USD) – 1 year chart (first quarter of 2026 shown between vertical lines)
Source: TradingView, Oakham

 

Portfolio positioning: consistency remains key

Our approach remains consistent. We do not attempt to predict short term market movements, where the risk of error often outweighs the benefit.

Instead, we focus on building resilient portfolios:

• Equities remain central to long term returns, with an emphasis on high quality companies with strong balance sheets and durable earnings
• Diversification across regions and sectors remains important as market leadership evolves
• Exposure to commodities and real assets is maintained, reflecting their role during periods of inflation and geopolitical uncertainty
• In fixed income, positioning remains balanced, recognising both improved income levels and sensitivity to inflation

The focus is on resilience rather than reaction.

 

Geopolitics: part of investing

Geopolitical events were a key driver of markets during the quarter, primarily through their impact on energy prices, inflation expectations and interest rate outlooks.

Two broad scenarios frame the outlook. If the situation stabilises and energy flows normalise, markets are likely to have already absorbed much of the adjustment. If disruption persists, further pressure on inflation and growth is likely.

Markets tend to adjust to events. It is the uncertainty around the length of the disruption that is driving volatility.

 

Fundamentals: still supportive

Despite increased volatility, the underlying backdrop remains broadly supportive:

• Corporate earnings continue to grow
• Economic activity remains positive
• Innovation continues to support productivity
• Corporate balance sheets remain relatively strong

The environment is more uncertain, but so far, the foundations remain in place.

 

Conclusion: maintaining perspective

The first quarter of 2026 has been a period of adjustment rather than deterioration.

Markets have responded to changing conditions, particularly around energy, inflation and geopolitics. While this has created short term volatility, the long term drivers of returns remain intact.

Earnings remain the anchor. Valuations have adjusted. The gap between expectation and reality has narrowed.

Periods like this are a normal part of investing. They can feel uncomfortable, but they are not unusual.

Maintaining discipline and a long term perspective remains key.