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March 2026 in Review
March was a difficult month for most asset classes with geopolitical risk dominating the narrative and erasing much of what looked like a promising start to the year.
Commodities surged roughly 24% in the month as the clear outlier in an otherwise broadly negative table. The driver is no mystery. Iran effectively closing the Strait of Hormuz sent energy prices sharply higher, with knock-on effects across fertilizers, industrial inputs, and raw materials.
Bitcoin was the only other risk asset in positive territory, gaining 3.2%, although it remains down nearly 23% year-to-date. Cash edged up 0.3%, a small but meaningful contribution in a volatile environment.
From there, it gets ugly.
U.S. aggregate bonds fell 1.7% and international aggregate bonds dropped 2.1%, as rate cut expectations receded and inflation fears reemerged.
Stock markets bore the brunt of the selling. U.S. small caps declined 4.0%. The Dow Jones Industrial Average fell 5.2%, and U.S. total market stocks lost 4.9%. Real estate gave back 6.3%. The hardest hit to equities was in emerging markets and international developed markets, down 7.0% and 8.6%, respectively. Europe and Asia are more exposed to the energy disruption unfolding in the Middle East. Worth noting that both remain positive year-to-date and over the trailing year, reflecting the fundamentally strong environments abroad heading into this.
Gold sold off more than 11%, offering no hedge and lagging all asset classes tracked above.
Longer-term numbers remain generally constructive. Trailing 1-year and 3-year figures across most equity asset classes are still in great shape and above long-term averages.
Market Narratives
Iran, the Strait, and the Energy Shock
The conflict started on February 28, so I touched on it briefly in last month’s newsletter. It was immediately apparent that the threat was energy related. I thought that the U.S.’s production and energy independence would shield us more than the 1973 oil embargo. That’s all still relevant and true, but oil prices are set in a global market, so a supply shock in the Middle East impacts our prices nonetheless. The Strait is a physical chokepoint through which roughly 20 million barrels of oil per day transited in 2024, about 20% of globally traded oil, with 84% of those flows headed to Asian markets. It is likely the largest disruption in terms of barrels and percentage of spare capacity since World War II.
With that backdrop, oil prices surged faster than during any other conflict in recent history, with Brent crude crossing $100 per barrel for the first time since 2022 and peaking near $120 per barrel.
Oil prices and the stock market have been almost perfectly negatively correlated during this stretch (i.e., when oil is up, the market is down). That’s 38 out of the last 50 trading days, or the most inverse relationship between the two since United States Oil Fund (USO)’s inception in 2006.
The commodity ripple effects extend well beyond oil. Fertilizer prices are up sharply due to sulfur, urea, ammonia, and other exports. And liquefied natural gas supply to Asia has been severely disrupted.
Inflation, Rates, and the Fed’s Dilemma
The energy shock landed squarely on top of an already complicated inflation picture, and it may have meaningfully changed the calculus for the Federal Reserve and the interest rate market.
To give you an idea, the chart below shows where the futures market was pricing year-end federal funds rate (short-term interest rate) expectations at three points in time: 1 month ago (before the conflict), 1 week ago (in the thick of it), and as of today.
On February 27, the day before hostilities began, the futures market was pricing a 48.1% chance of at least three 0.25% cuts by year end, and a 78.9% chance of at least two. Rate cuts were the overwhelming base case.
A week ago, in the thick of the conflict with the Strait still closed and oil near its peak, those probabilities had collapsed to zero. In their place, a 20.1% chance of a rate hike had emerged. That kind of reversal, from pricing in aggressive easing to pricing in tightening, in a matter of weeks, is almost without precedent in the modern rate market.
As of April 1, the deescalation signals have pulled expectations back toward the middle. The market is now pricing a 74.7% probability of no change to rates by year-end, with 22.8% on one cut and less than 1% on a hike. That is a more rational landing spot, but it is a far cry from where things stood 1 month ago when two or three cuts felt like a near certainty.
Long-term rates told a parallel story. The 10-year Treasury yield rose nearly half a percentage point from its year-to-date low of 3.97% on February 27 to a high of 4.44% on March 26, before pulling back to 4.30% as of March 31.
That move in the 10-year matters because it flows directly into mortgage rates, which climbed from a year-to-date low of 5.90% to a high of 6.49% over the same stretch before settling back to 6.40% (per 30-year fixed conforming mortgage index). For anyone with a pending refinance or a real estate transaction in process, March was not a comfortable month. The Fed controls the short end of the yield curve. The bond market controls the long end, and it spent March making its concerns about inflation clear.
Pullback in Context
Through March 30, the S&P 500 was down roughly 9.1% from its January 27 record high, taking 35 trading days to get there. By most measures, that is a fairly orderly selloff.
But with the market flirting with correction territory and the conversation turning to bear markets, it is worth putting the current pullback in historical context.
On average, since 1928, markets experience a 10% correction 1.1 times per year and a 5% mild pullback 3.4 times per year. Volatility is not the exception. It is the norm. As Morgan Housel put it, “volatility is the price of admission. The prize inside is superior long-term returns.”
With that context in the rearview mirror, the next logical question is whether this turns into something worse. Historically, since 1950, 5% pullbacks escalate to a 10% correction only about 25% of the time, and move into a full bear market only 12.4% of the time. That does not mean it cannot happen; it means the base case probability still favors a recovery, not a collapse.
What distinguishes bear markets from corrections historically is the presence of an underlying structural weakness acting as a multiplier. Think about the leverage of 2008 or the valuation excess of 2000.
This selloff has been almost entirely a valuation story, not an earnings one. That distinction matters more than it might seem. The forward price-to-earnings ratio of the S&P 500 has contracted nearly 16% from its peak, meaning the market is repricing risk, not reacting to deteriorating fundamentals.
Despite the typical pattern of estimates drifting lower as reporting dates approach, consensus earnings estimates for Q2 through Q4 2026 have continued to move higher. The Iran conflict has not impacted the numbers, yet with only a minor dip in the Q1 2026 estimate showing up last week.
Earnings and profit margins have been the dual tailwinds of this bull market for going on three years, and neither has shown signs of rolling over. Forward 12-month S&P 500 earnings are up 6.7% so far this year, with 3.6% of that coming since the war started. All 11 sectors have seen earnings estimates increase since February 28, with technology doing most of the heavy lifting. Forward profit margins have hit a new all-time high of 15.0%, up from 12.0% at the end of 2019.
It is difficult to build a strong bear case when earnings and margins are both at record highs. The risk is not that fundamentals are broken. The risk is that a prolonged closure of the Strait introduces enough uncertainty about demand destruction and input costs that analysts are eventually forced to revise estimates lower. We are not there yet, but Q2 earnings season will be the first real test.
Closing Thoughts
There is uncertainty in markets right now. The Iran conflict is not resolved, the Strait remains effectively closed as of this writing, and the economic consequences are still unfolding.
That said, March 31 and April 1 brought a genuine green shoot. Markets rallied solidly on growing signals that the U.S. may be moving toward a negotiated exit from the conflict. Nothing is guaranteed, and the situation remains fluid. But after weeks of relentlessly negative news flow, it is notable that the market’s first instinct on de-escalation was to move meaningfully higher. That tells you something about where sentiment had gotten.
A few things worth keeping in mind as we move through this.
Even if the Strait reopens soon, the energy shock will leave a mark. Supply chain re-normalization takes time, fertilizer and food pricing pressures will extend into planting season, and the insurance and logistics costs that repriced upward do not snap back overnight. A resolution is necessary but not sufficient for a full reset.
The rate picture has stabilized, but it has not cleared. The market has largely priced out near-term cuts, and that is probably the right call given the uncertainty. What has not been fully priced is a scenario where the Strait stays closed long enough to force earnings revisions. As we noted, Q2 earnings season will be the first real test of whether that holds.
The underlying picture remains better than the headlines suggest. Earnings at record highs. Margins at record highs. A selloff driven by multiple compression, not fundamental deterioration.
Thank you for reading.
