Q1 2026 in Review and Q2 Market Outlook

The “AI Loser Trade,” the stock market rotation, and the Iran war were the themes that dominated stocks, bonds, and other financial markets during the first quarter. The result was a down quarter for many, with both stocks and bonds mostly in the red, but with pockets of gains in formerly out-of-favor corners of the equity market.

As the second quarter of 2026 gets underway, what’s the outlook for the stock and bond markets? Which stock sectors are most attractive? What should investors do from here? Below are insights and perspectives from analysts and specialists about market performance, individual stocks, sectors, and mutual funds.

Q1 2026 Market Performance and the Economy

As the year began, investors wrestled with the implications of the artificial intelligence boom. But unlike years past, when the AI boom helped drive the bull market in tech stocks, the focus in the first quarter was on the companies that could be hurt by AI as these technologies lower barriers to entry and threaten to upend long-dominant business models.

Then came the last week of February, when the onset of the Iran war led to surging oil prices and injected an entirely new level of uncertainty into global financial markets. The net result: falling stock markets and rising bond yields.

But it wasn’t all bad news for diversified portfolios. After several years of the biggest stock returns concentrated among a relatively small number of large growth companies (especially in tech), lagging sectors rallied as investors rotated out of those top performers.

In the bond market, yields started going down at the beginning of the year, only to be pushed higher across maturities. Even before the war-driven jump in oil prices, inflation was on the high side, raising doubts about how quickly the Federal Reserve would deliver expected interest rate cuts. By quarter’s end, the war ended expectations for any rate cuts in 2026, driving yields upward.

Here is our look at the market and economy’s biggest trends from the first quarter of 2026, plus a deeper dive into first-quarter stock market performance among sectors and individual stocks.

6 Charts That Defined US Markets in Q1

How AI worries and the war with Iran transformed the markets.

5 Winners and Losers From Another Rough First Quarter for Investors

Good news: Bad first quarters don’t necessarily portend bad years.

Q1 Stock Market: Down, but Plenty of Sectors in the Green

Tech and growth stocks stumbled as investors continued to rotate into value, small caps, and dividend stocks.

These Stocks Drove the Market’s Losses in Q1 2026

Microsoft, Nvidia, Apple, and other tech names weighed on market performance, while energy stocks surged.

For Bonds, a Tug of War Between Rising Inflation and Slowing Growth

Bond yields rose across the market in the first quarter as the oil price spike renewed inflation concerns.

Q2 Stock Market Outlooks and Top Stock Picks

Each quarter, Morningstar’s equity analysts offer their takes on the overall market, how to position portfolios, and the outlook for sectors and individual stocks.

Q2 2026 Stock Market Outlook: Don’t Panic, Readjust

Use the volatility to your advantage; where to harvest gains and where to redeploy.

33 Undervalued Stocks to Buy in a Volatile Market

Investors can capitalize on market volatility with this new list of Morningstar’s top analyst picks for the second quarter of 2026.

Stock Sector Outlooks: Morningstar’s Top Q2 Picks Across the Market

Morningstar analysts provide their sector outlooks and views on the best stocks to buy.

Q1 2026 Mutual Fund Performance and Top Picks

For mutual fund investors, the first quarter presented a mixed bag. Within the stock market, growth funds stumbled, but value funds shone. Among bond funds, strategies more sensitive to interest rates were in the red, as were emerging-market funds and those with generally riskier holdings.

Here’s a closer look at first-quarter performance across funds and exchange-traded funds:

How the Largest Stock Funds Did in Q1 2026

It was a mixed picture, as the slide in tech stocks tripped up some of the most widely held funds.

Tech Giants Lose Their Grip as Market Leadership Broadens in Early 2026

Foreign, value, and defensive stocks stand out for mutual funds.

How US Fixed-Income Funds Navigated a Turbulent Q1

Here’s how a few of our favorite bond funds fared.