Q1 2026 Market Outlook: Navigating in Stormy Seas 

By Liz Levy, CFA, Managing Director of Investment Research — not written by AI!

To paraphrase a meme joke making the rounds, what a year the last three months have been — or even, really, the last three weeks. While recently we have been noting how much politics has been influencing markets, this quarter, we are in a world where politics and geopolitics are driving the market, and the market seems to be influencing the politics in turn, as well as millions of people’s lives. Our challenge during this wild ride: how to orient our portfolios for an even-wider-than-usual set of potential outcomes.

We will get into more details below, but we want to highlight how we are positioning our clients’ portfolios for these uncertain markets, which will not be a surprise or new message. We continue to manage portfolios with a “barbell” strategy, with concentration at both ends of the risk spectrum, and a moderately defensive overall positioning. Our intention is to build portfolios that will participate with the market should it rebound, as we expect the market would on definitive news of a lasting ceasefire in Iran. But we are also seeking to provide some shelter from the storm if the war and fossil fuel blockade persist or expand. This is consistent with what we have been saying for the last few quarters — we are continuing to focus on building resilient portfolios crafted for the long term, comprised of high-quality companies that meet our social and environmental standards, while being mindful of dual-sided potential economic or geopolitical threats and opportunities.

Taking Stock

Before we investigate our potential paths forward, let’s look at what has happened. The overall U.S. stock market, measured by the S&P 500, fell by 4.6% during the first quarter. Virtually all of that occurred in March, as the benchmark was basically flat until the war started.

Before the attack on Iran, the market was dominated by a conversation that I think we will be revisiting often over the next few years about the role of artificial intelligence (AI). The particular debate early this year was about the impact of AI on software, and the extent to which the business models of current software companies will be made obsolete by AI — and software stocks were pummeled. At the same time, investors had fears about the capital spending commitments that large companies like Microsoft, Oracle, Alphabet, and Meta were making to build data centers. Through February, on the eve of the invasion, while the S&P was essentially flat year to date, a fund tracking the “Magnificent Seven” tech and AI stocks had fallen roughly 7%, and a fund tracking the software industry fell nearly 23%.

Reasonable people can disagree on what the future impact of AI on software will be, but there is not going to be one, final answer. Software companies, and all other businesses, will adapt to the use of AI over the next few years, and the uses and applications are likely to evolve in ways that we can’t yet know.

Questions and fears about AI got pushed to the side when the war started. The key question for the duration of this war has been how long it is going to last, which is another way of asking how long oil prices will stay elevated. Oil prices began rising slowly immediately following the invasion, and they really picked up steam mid-March as it became apparent that there would be no immediate resolution. While tracking “oil prices” became a shorthand way of referring to everything that was or was not flowing out of the Strait of Hormuz, the reality is a bit more complicated.

While oil futures are a financial product, oil is a physical product, and so are all the other petro products like natural gas that were all unable to transit through the Strait of Hormuz into the global market. By the end of the quarter, the oil that had been in transit earlier in the month was essentially used up, leading to shortages in many parts of the world—although not the U.S. The European Commission urged its citizens to work from home to conserve oil, gas filling stations were limiting containers to being halfway filled in Nepal, and Thai government workers were asked to use the stairs instead of escalators to conserve energy. The movement of all sorts of goods and products around the world became much more challenging—and much, much more expensive. My local NPR station noted several times that the price of raspberries in Boston rose 40% between January and late March due to rising energy prices and shipping costs, becoming an oddly specific example of the cascading effects of the war.

Trump has long let his preference for lower interest rates be known, but energy commodity prices don’t care about his preferences. Eurozone March inflation data was released on March 31 and increased to 2.5% from 1.9% in February. With U.S. inflation expected to show a similar, albeit smaller, leap, the prospect of interest rate cuts has largely been taken off the table for 2026; according to data from FactSet on April 1, there is less than a 25% chance of a cut by the end of the year.

What’s Next?

Last quarter, I posited questions about the long-term implications of the moment we are in—wondering if Trump would attack Cuba next (still on the table) or keep focused on Greenland (back in the news on April 1, sadly not a joke). The bigger question for investors is what implications the instability of our government will have on U.S. interest rates and demand for U.S. dollars, stocks, and bonds.

I still have those questions, but in the meantime, the stock market seems to want to climb. The strong underpinnings of the U.S. economy that we’ve noted previously still exist — February economic data released in March painted a generally robust pre-war picture of health. And the slightest indication that the war might be ending has repeatedly led investors to bid up stocks, including their biggest gain in months on March 31.

However, even if the war ends tomorrow, an April 2 research note from J.P. Morgan estimated it would take about two months for transit in the Strait of Hormuz to revert to its pre-war activity level. In addition, global liquified natural gas production will be impacted for several years by the infrastructure damage sustained during the fighting. And no matter when the attacks and transit resumes, no one really knows what the long-term impacts of such elevated fossil fuel prices will mean for demand destruction, inflation expectations, interest rates, or global or national GDP growth. As we indicated in the beginning, there is a wider range of possibilities than usual right now. When markets are this volatile and outcomes this uncertain, the best course for long-term investors is to stick to one’s long-term plan. So, we continue to invest for the long term in high-quality companies with solid business models. We do have some exposure to companies that will help us keep up with the market if the rosier scenarios play out, and we are overall positioned slightly defensively if they do not.

After spending so much virtual ink on the impacts of fossil fuel commodity prices, I feel the need to insert an editorial note: I can’t think of a better demonstration of the need to transition away from fossil fuel dependence to a renewables-based energy system than what is happening right now. The Prime Minister of Spain, Pedro Sanchez, has made the same point, as he noted that his country’s massive investments in wind and solar since 2019 have helped insulate Spain from the massive energy shocks hitting globally. Other European countries are hearing that message and vowing to decrease their reliance on fossil fuels. Even some Asian countries, heavily reliant on imported fossil fuels, are rethinking their energy systems and looking to nuclear and renewables, with Indonesia ready to break ground on new solar and geothermal projects.

That is sort of a grim silver lining, but it’s silver, nonetheless. The last few months have been challenging for Americans committed to peace, equity, justice, and sustainability. Our grounding in these values continues to guide every investment decision we make on behalf of our clients. Even in uncertain times, we remain focused on using your financial assets to drive positive change—through proxy voting, shareholder advocacy, and impact investing. I’m proud of the work we’re doing together now more than ever.

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Liz Levy is responsible for researching publicly traded equities and managing client portfolios, having joined Clean Yield in June 2024. She brings more than 20 years of experience in Sustainable Investing. She is a Chartered Financial Analyst and is passionate about aligning investment portfolios with values, with deep experience in managing divested, fossil fuel-free, and clean energy investments.