Investment markets in review – Q1 2026

Pitcher Partners Investment Services (Melbourne) | The information in this article is current as at April 7, 2026.

Financial markets experienced an extraordinary first quarter of 2026. 

The end of 2025 set the stage for a modest economic recovery across most global regions, with inflation easing and markets expecting further rate cuts by the US Federal Reserve. The S&P 500 briefly touched 7,000 in January, fuelled by a positive US outlook and AI optimism. In February, fears of AI being a major disruptor to existing business models in the software industry eroded investor confidence and sparked a technology share price slump. The AI-driven concerns have consequently heightened fears related to private credit due to the market’s substantial lending exposure to software companies. More recently, geopolitical tensions dominated investor sentiment in March as the conflict in the Middle East continues to develop, sending shockwaves through markets as the global economy faces an inflationary shock triggered by a surge in energy costs. 

The economic implications of the conflict have been profound. Major supply restrictions have resulted in the second-biggest quarterly rise in oil prices this century, with both Brent and Crude oil pushing above US$100 per barrel, reflecting an increase of over 50% in March alone. Disrupted trade flows beyond energy are creating significant stress in supply chains across manufacturing, agriculture and consumer sectors. Energy quickly became the strongest performing sector, with the MSCI World Energy Index posting a staggering 36% return over the quarter.      

Elevated risks from the prospect of a drawn-out conflict have sparked a widespread sell-off across global equity markets, with most finishing the quarter in negative territory. The S&P/ASX declined 2.7%, despite a relatively strong earnings season that resulted in 65% of companies beating earnings expectations. In contrast, the UK FTSE was up 2.5%, held up largely by a rally in UK-listed energy companies. Japanese equities (+1.4%) also finished in positive territory, driven by further weakening in the Japanese yen that boosted the index’s large exporters.  

Central banks around the world are left in a bind, with monetary policy positioning now shifting towards stalling or even reversing their rate cutting cycles. Both the Federal Reserve and ECB kept interest rates on hold this quarter, opting to wait and assess the risk of inflation re-accelerating from the energy price shock. Consensus investor opinion for future rate settings have also reversed, with markets now pricing in no rate cuts (previously 2-3 rate cuts) in the US over the next 12 months. The RBA hiked rates in February and March, bringing the cash rate up to 4.10% as the economy continues to tackle higher than expected inflation and a resilient labour market. Further rate hikes are expected this year. Yield curves flattened across the board, with short-term yields catching up to yields on the long end (Aus 2 Yr 4.66% vs Aus 10 Yr 4.97%). Changing rate expectations, coupled with a flight to safe-haven currencies, drove considerable volatility across currency markets, with the US dollar reversing some of its weakness during March.  

Gold continued its push to historic highs in January as it broke through US$5,400/oz. However, this was soon followed by a period of increased volatility for the safe-haven asset, driven by rising yields and investors collecting profits. Gold finished the quarter up 8.1% at a price of US$4,668/oz.  

The Australian dollar appreciated by 3.4% against the US dollar over the period, closing the quarter at $0.69.  

Source: Morningstar, IRESS