Market Update – Q1 2026 at a Glance
Overview
- Markets began 2026 positively, with gains in both equities and bonds through February. March volatility driven by U.S.-Israel actions against Iran and a sharp oil-price spike altered that momentum.
Market performance
- Canada outpaced the U.S.: Canadian equities rose 3.9% in Q1, helped by ~40% exposure to Energy, Materials and Utilities (each up >10%). U.S. equities fell 4.3%, weighed down by sectors with lower commodity exposure.
- Oil shock: Oil climbed over 70% in the quarter to above US$100/bbl after disruptions in the Strait of Hormuz, making energy the key market driver and reigniting inflation concerns.
Fixed income and credit
- Canadian bonds: Modest overall gains as early-quarter strength was largely offset by rising yields in March.
- Credit outlook: Spreads widened amid renewed fears of inflation, potential rate hikes and strains in private credit liquidity and default risk.
Central banks and policy
- Policy on hold: The Bank of Canada and the U.S. Federal Reserve left rates unchanged in Q1, adopting a cautious, wait-and-see stance amid slowing labour markets and persistent inflation risk.
Looking ahead
- Key drivers: Geopolitical stability, energy prices and central-bank decisions will likely determine near-term market leadership and risk pricing. Diversification remains important given elevated macro and geopolitical uncertainty.
Economic and Market Update
U.S. economy
- Growth: The U.S. economy expanded at a steady pace in Q1.
- Inflation & labour: Inflation remained above the Fed’s target while hiring cooled and the unemployment rate stayed roughly stable.
- Risks: Higher energy prices and global supply‑chain disruptions added near‑term inflationary pressure and weighed on the outlook.
- Policy: The Federal Reserve held the policy rate at 3.50–3.75%. Chair Powell emphasized uncertainty and that the Fed is prepared to adjust policy as conditions evolve.
Canada
- Growth & labour: Economic growth was subdued amid persistent excess supply; the labour market softened.
- Inflation: Inflation hovered near the 2.0% target, but rising global energy costs elevated short‑term inflation risks.
- Activity: Trade uncertainty continued to dampen business confidence and activity.
- Policy: The Bank of Canada kept its policy rate at 2.25% and signalled readiness to respond if the economic outlook worsens materially.
Both economies showed resilience but face upside inflation risks from energy and global supply issues. Central banks remained cautious, keeping rates steady while staying prepared to act if conditions change.
Bond Markets
Q1 performance:
- Canada Aggregate Bond Index: +0.23% for the quarter (strong start in Jan–Feb: +2.25%; weak March: −1.97%).
- Rates moved higher in March (US 10‑yr +38bps, Canada 10‑yr +35bps), pressuring bond prices.
Primary drivers
- Oil and geopolitics: The oil-price spike from Middle East tensions lifted inflation expectations and pushed yields up, especially at the short end.
- Policy repricing: Markets shifted sharply from expecting rate cuts to pricing a much lower chance of cuts — and a meaningful probability of additional 25bp moves higher from the Bank of Canada.
Credit and corporate bonds
- Credit spreads widened in March after hitting record lows earlier in the quarter, increasing the risk premium on corporate debt.
- Corporate bonds modestly underperformed the aggregate index but still posted positive returns overall.
Issuance and demand
- Supply surged: Corporate issuance reached about $50 billion in Q1, a record start and roughly 23% above the same period in 2025.
- Investor demand remained healthy despite the modest risk‑off move.
| Instrument | March Performance | YTD Performance |
|---|---|---|
| US 10 Year | 38 bps | 15 bps |
| Canada 10 Year | 35 bps | 4 bps |
| Canada Aggregate Bond | -2.0% | 0.2% |
| US Aggregate Bond | -1.8% | 0.0% |
Bond markets showed early strength but were undone by March’s yield repricing. Watch energy-driven inflation risks, central‑bank guidance, and credit‑spread dynamics for near‑term fixed‑income performance.
Stock Markets
Summary
- Q1 2026 saw elevated investor caution as geopolitical tensions rose, with equity markets under particular pressure in March.
Index performance (local currency)
- S&P 500: March −5.0%; YTD −4.3%
- S&P/TSX Composite: March −4.3%; YTD +3.9%
- EAFE: March −7.9%; YTD +0.3%
Key market drivers
- Geopolitics: Events in the Middle East (the war on Iran), Japan’s snap election, developments in Venezuela and U.S. interest in Greenland increased volatility and risk aversion.
- Energy & inflation: The conflict pushed oil above US$100/bbl, raising inflation concerns and contributing to sector rotation toward energy.
- Credit stress: Private credit markets tightened as liquidity and default risks rose, especially in semi‑liquid lending structures.
- Safe havens & commodities: Gold surged early in the quarter before a sharp pullback driven by central‑bank selling; it still finished up ~8% for the quarter and remained a key safe‑haven asset.
- Investor behavior: Dip buyers were cautious, limiting a swift rebound and amplifying March declines.
| Index | March Performance | YTD Performance |
|---|---|---|
| S&P 500 | -5.0% | -4.3% |
| S&P/TSX Composite | -4.3% | 3.9% |
| EAFE | -7.9% | 0.3% |
Geopolitical shocks and energy-driven inflation risks reshaped market leadership in Q1. Expect heightened sensitivity to macro and geopolitical developments, with sector dispersion and safe-haven flows likely to persist.
U.S. Equities
- Momentum and earnings: U.S. equities began the quarter with strong momentum, driven by solid earnings growth from technology firms.
- Sentiment shift: Despite earnings, investor sentiment cooled—especially toward SaaS—after rapid advances in generative AI (e.g., Anthropic, Google) highlighted automation risks for core software functions.
- Sector rotation: Software sold off sharply in February, sparking a broader move away from large-cap growth into more defensive or cyclical sectors.
- Drivers: Tighter financial conditions, higher geopolitical risk and increased credit stress cut risk tolerance and amplified sector moves.
- Outcome: Energy led the market while Technology lagged and Financials underperformed amid credit-market stress.
Canadian Equities
- Structural advantage: Canada’s heavy commodity exposure supported relative outperformance as macro narratives shifted toward inflation and supply risks.
- Volatility and flows: The quarter featured a sharp whipsaw between gold and oil—gold rallied early then faced aggressive selling as investors sourced U.S. dollars; oil jumped on Middle East supply disruptions.
- Sector impact: Rising oil prices propelled Energy to be the quarter’s top-performing sector (up ~29%), while commodity sensitivity shaped market leadership.
- Outcome: The commodity tilt provided resilience versus U.S. equities as investor focus moved to inflation and supply-chain risk.
Takeaway
The first quarter illustrated how rapidly geopolitical shocks can alter sector performance. Canada outperformed U.S. growth markets thanks to greater commodity exposure as energy and gold prices climbed and inflation worries resurfaced.
Rising oil and precious-metal prices underscored markets’ sensitivity to macro events, prompting investors to adjust inflation expectations and Fed policy outlooks.
Going forward, geopolitical stability, energy prices and central-bank decisions are likely to be the primary drivers of market returns and sector leadership.