Valuation Reset Amid Geopolitical Shock. Uncertainty Persists but Opportunities Are Emerging

• The Federal Reserve held rates steady at 3.50-3.75% with only one dissenter favoring a cut, as February payrolls fell 92,000 versus expectations for a gain and core PPI remained elevated at 3.9% annualized, with April rate cut probabilities now at zero.
• Brent and WTI crude prices peaked above $119 in March due to effective closure of the Strait of Hormuz, through which 80% of oil and LNG flows to Asia, while Eurozone inflation jumped from 1.9% to 2.5% in one month, prompting markets to price in two rate hikes from the Bank of England.
• The S&P 500's forward P/E multiple compressed 17% during the quarter, but historical analysis shows positive returns 69% of the time in the following month (median 3% gain) when drawdowns exceed 10% while earnings growth accelerates, suggesting a potential buying opportunity despite ongoing geopolitical uncertainty.

Market Summary: Q1 2026 Valuation Reset

Key Performance Metrics:

The S&P 500 declined 4.3% in Q1 2026, its worst quarter since Q3 2022, while the Nasdaq 100 fell 5.8%. However, the S&P 500 Equal Weight Index gained 0.7%, with US small-caps leading at +3.5%, international developed equities up 2.8%, and US mid-caps rising 2.6%. Commodities surged, with crude oil up 84.0%, broad commodities +24.4%, gold +8.6%, and silver +5.8%.

Geopolitical and Economic Drivers:

Escalating tensions involving the US, Israel, and Iran drove market volatility, particularly following the effective closure of the Strait of Hormuz, which handles 80% of oil destined for Asia. Brent and WTI crude prices peaked above $119. The disruptions affected not only energy but also fertilizers, jet fuel, and industrial metals.

Federal Reserve Policy:

The Fed held rates steady at 3.50–3.75% in March, the second consecutive hold in 2026. February payrolls declined 92,000 versus expectations, unemployment rose to 4.4%, and core PPI remained elevated at 3.9%. The CME FedWatch Tool prices a 99% probability of another hold in April, with rate cuts off the table.

Stagflation Concerns:

Rising energy prices and persistent inflation have sparked stagflation fears globally. Eurozone inflation jumped from 1.9% to 2.5% in March, while PMI data showed weakening growth. Markets now expect two rate hikes from the Bank of England, reversing earlier cut expectations.

Investment Opportunity:

The S&P 500's NTM P/E multiple compressed 17% while earnings growth expectations improved. Historical data shows above-average returns following such dislocations, with median three-month gains of 7% versus 2% long-term averages, suggesting favorable risk/reward for equities.