6 Charts That Define the First-Quarter Markets

Key Takeaways

• A quarter focused on waves from the AI boom and expected interest rate cuts changed to one driven by the Iran war and the oil price shock.
• In what became known as the AI loser trade, software stocks and others seen vulnerable to AI disruption fell, spurring a rotation away from technology names.
• The surge in oil prices has analysts lifting inflation forecasts, with stocks, bonds, and gold among the markets suffering losses.

Coming into 2026, the picture was mixed across financial markets. Investors wrestled with the uncertainties brought on by the wave of artificial intelligence technologies, but they found comfort in expected interest rate cuts from the Federal Reserve and other major central banks. Then came the Iran war.

The first quarter closed with oil prices in the United States approaching record highs and stocks staging a decline throughout March, trimmed on the last day of the month amid expectations that the war could soon be over. In the bond market, yields moved significantly higher than they were just a month ago.

Investors head into the second quarter with a cloudy outlook, beset by uncertainties around the Iran war. Economies around the world are coping with an energy shock that has revived inflation worries, opened the door to interest rate hikes instead of cuts, and raised concerns about slowing economic growth.

Here’s a look at how some of these trends played out during the first quarter.

The AI Loser Trade

For some two and a half years, starting in the spring of 2023, the AI technology revolution drove a huge bull market for stocks, especially technology names. But starting last fall, the tide started to turn. This was seen first in software stocks, and then in 2026, a rolling selloff hit a broad range of industries, including trucking, commercial real estate, and financial data. The concern is that AI will lower barriers to entry and upend longstanding businesses.

As the selloff spread to technology-adjacent and non-tech industries, software companies remained in the crosshairs, even contributing to mounting woes in the private credit market. These worries even hit Microsoft, which was in the vanguard of AI investments and integrating the technology into its products. Microsoft stock closed the first quarter down 23.4%, its worst quarter since the fourth quarter of 2008 and its worst start to any year since the company went public in 1986.

The Stock Market Rotation

One of the big questions at the start of 2026 concerned the staying power of the nascent rotation away from the stocks that had been leading the bull market since 2022. The AI trade had been a prime driver, lifting Big Tech and other large-company growth stocks. This trend led to historic levels of concentration in major market indexes such as the S&P 500 and returns being driven by a handful of names, especially Nvidia NVDA.

Starting in October 2025, there were hints of a rotation into value and small-company stocks, but it was too early to tell if this would be a sustained rotation away from the market’s previous leaders. It turned out that the rotation was sustained in the first quarter, first by the continued struggles in tech stocks, and then by the onset of the war, which ushered in a value-tilting energy rally (though some energy stocks have done better than others). For large growth stocks, the first quarter’s decline of 12.8% made for its worst quarter since the second quarter of 2022, when it lost 29.81%.

The Iran War Oil Shock

The world and the markets changed on Feb. 28, when the US and Israel launched attacks on Iran. Since then, all eyes have been on the Strait of Hormuz, through which 20% of the world’s oil is transported, along with critical shipments of liquefied natural gas. In the opening days, investors believed the war would be brief, and they made impact assessments assuming energy shipments would be moving through the Strait again in not much more than a month.

Over a month has passed, and not only is the war continuing and the Strait still closed, but there has also been significant damage to a key LNG facility in Qatar and a pair of major aluminum production plants. The LNG shutdown also raised worries about the production of helium, which is a key component in semiconductor chip manufacturing.

More broadly, rising oil prices have revived inflation fears. There’s the direct impact of the prices consumers will pay at the pump, as well as indirect costs, such as higher shipping costs. Down the road, we’re looking at higher food prices as farmers pass on increased fertilizer costs.

The OECD raised its inflation forecast for the Group of 20 countries (which includes 19 of the world’s largest economies) by 1.2 percentage points to 4.0%. Meanwhile, Goldman Sachs raised its overall 2026 inflation forecast for the US economy to 3.1%, based on the Personal Consumption Expenditures Index. The Fed targets a 2% inflation rate based on the PCE Index. JP Morgan analysts also upped their 2026 inflation forecast to 3.4% from 3.2%.

Gold Loses Its Shine

One of the more notable twists in the markets during the quarter came in the price of gold. During January, gold extended its huge rally from 2025. The precious metal gained roughly 25% from the start of the year as gold futures rose above $5,300. Gold bulls pointed to geopolitical uncertainty, ballooning fiscal deficits in major economies, and central bank buying as among the forces driving it higher. Then, at the end of January, gold prices collapsed, losing more than 13% in a matter of days. Silver, which had been on a massive rally of its own, plunged even further. Analysts blamed speculative players for the selloffs.

After stabilizing in February, gold took a surprising dive with the onset of the war. Gold has a reputation as a safe haven and a store of value amid inflation. But instead, traders have focused on the sudden potential for interest rate increases from the Fed, the Bank of England, and the European Central Bank as a negative. The net result is a white-knuckle round trip for gold investors.

Bond Yields Jump on Inflation Concerns

Even before the war started, Fed officials were seen as facing a difficult situation. Inflation was above the central bank’s 2% target, and yet the jobs market was showing signs of a significant slowdown. At the same time, the Fed has faced unprecedented political pressure from President Donald Trump, and a new chair is due to be seated in May.

Still, by February, the case for rate cuts in 2026 appeared solid, especially under Trump’s nominee for chair, Kevin Warsh. With the Iran war fueling new inflation worries, the forecasts for rate cuts have largely vanished, and bond traders are tilting toward the possibility of a rate hike.

In the bond market, this has meant higher yields and lower prices across the board. Just before the war started, the yield on the US Treasury 10-year note, which is the basis for many mortgage loans, had fallen below 4% to its lowest level since September 2024. But with the jump in oil, the 10-year yield is back to recent highs around 4.3%.

Among shorter maturities, which are more closely linked to Fed policy, there has been a similarly significant rise. The yield on the US Treasury note closed the first quarter at 3.79%, up from 3.40% before the war began.