Financial markets experienced a challenging first quarter, marked by sharp changes in investor preferences, shifting macro expectations, and a significant escalation in geopolitical risk. The S&P 500 declined -4.6% in the quarter after three consecutive quarters of gains, and only the third quarterly decline since late 2022. In contrast, the S&P 500 Equal Weighted (S&P EW) ended the quarter up 0.2% highlighting the shift in investor preference away from mega-cap tech stocks. This divergence has been a recurring theme since late 2025, as investors began to reassess concentration risk, premium valuations, and the durability of earnings narratives tied to artificial intelligence investments.
International stocks were also challenged in the quarter as the MSCI EAFE Index closed down -1.9% in Q1. Bonds were down -0.2% in Q1 as measured by the Bloomberg US Intermediate Term Corporate Bond Index.
Equity performance in the quarter was characterized less by outright risk aversion and more by rotation to other opportunities. Many of the largest technology and software companies that had driven returns in recent years declined sharply. The broader software industry suffered amid growing concerns around AI disruption and the potential impacts to profitability. Uncertainty around return expectations justifying the large amounts of capital being used in data center investments impacted some of the largest tech companies.
Outside of technology, several cyclical and interest rate sensitive industries also struggled. Healthcare, large banks, consumer credit cards, investment banks, airlines, apparel, and building products all underperformed as investors weighed slowing hiring trends, higher long-term rates, and rising input costs.
At the same time, value and real-asset oriented sectors performed well. Energy was the standout performer, rallying sharply alongside a historic move in crude oil prices. Materials, utilities, consumer staples, and industrials also posted solid gains, as did REITs. This shift reflected both inflation hedging behavior and a renewed focus on cash flows, pricing power, and balance-sheet resilience.
At the end of February, markets were still pricing in the possibility of rate cuts this year by the Federal Reserve. By quarter-end, market expectations had shifted to a hold in short-term interest rates, extending as far as 2027 in some scenarios. The catalyst for this shift was persistently above-target inflation and a late-quarter surge in energy prices that raised concerns about renewed inflationary pressures.
Commodity markets delivered some of the most dramatic moves of the quarter. Gold rose for a fifth consecutive quarter, briefly reaching record highs in late January before pulling back.
The most significant development came late in the quarter with the sharp escalation of conflict in the Middle East. Disruptions to shipping traffic through the Strait of Hormuz pushed crude oil prices sharply higher. The surge in energy prices had ripple effects across fertilizers, metals, helium, and other globally traded inputs, reinforcing inflation concerns at a time when markets had been expecting easing financial conditions.
Bond markets were also impacted by market volatility. Through mid-quarter, interest rates had ground steadily lower on expectations of muted inflation and growth prospects. That all dramatically reversed due to the actions in Iran. Based on expectations of oil price-driven inflationary pressure, bonds globally sold off – leading to higher rates. The eyes of the markets remain squarely focused on Iran, including bond markets.
The first quarter served as a reminder that markets rarely move in straight lines. Similar to tariff concerns last year, tightening financial conditions, geopolitical shocks, and shifting narratives can impact market performance.
As always, if you have questions regarding your portfolio, please consult your financial advisor. We appreciate your continued trust in SG Long Financial and look forward to working with you in the future.
Rob Richardson,
CFA Chief Investment Office
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Important Disclosures
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