Quarterly report: Q1 2026

Performance ending March 31, 2026. Sources: Morningstar Direct, Bank of Canada and U.S. Department of the Treasury.

An early market rally quickly changed course

Stock markets entered 2026 on a strong footing, with the major North American benchmarks hovering near record highs in early January. Optimism centred on economic resilience and expectations for potential interest‑rate cuts, which helped extend gains from late 2025. In the quarter’s first few weeks, the TSX, S&P 500 and Dow reached multiple all‑time highs.

But as the quarter progressed, momentum faded. Simmering hostilities in the Middle East resulted in a large-scale, joint U.S.-Israeli military attack against Iran on February 28. The attack, which resulted in the death of Iran's Supreme Leader, triggered sharp market swings, oil price volatility and renewed inflation concerns. By March, uncertainty became a defining feature of markets, with several bouts of risk‑off sentiment leading to sustained pull-backs. The TSX lost 4.6% in March, despite hitting a record high on March 2. The Nasdaq shed 4.8%, the S&P 500 ended 5.1% lower and the Dow declined 5.4%. In the last full week of trading in March, the Nasdaq and the Dow fell into a correction, down just over 10% from their recent peaks.

Fears of an AI bubble and general weakness in the tech sector also factored into Q1 declines. The Magnificent Seven stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) lost a combined market value of over US$850 billion. Microsoft was the worst performer of the group, as its share prices fell over 23%.

The Middle East conflict dominated market sentiment

Geopolitical developments stood out as the primary driver of volatility in the back half of the quarter. Escalating military action involving Iran, Israel and the United States repeatedly disrupted investor confidence, particularly as tensions around the Strait of Hormuz raised fears of prolonged oil supply disruptions. Crude prices surged at several points in March, reaching levels not seen since 2023, before pulling back sharply on hopes of de‑escalation.

The abrupt energy price movements revived investor concerns that inflation could remain higher for longer. Technology stocks — already under strain from valuation concerns and questions around AI‑related spending — bore the brunt of the sell‑off, while commodity‑linked sectors provided intermittent support for Canadian equities. By quarter‑end, markets remained sensitive to headlines, with investors balancing cautious optimism against ongoing geopolitical and inflationary risks.

Central banks stayed cautious

With uneven progress toward steady inflation, volatile energy prices, and an unclear outlook for a Middle East resolution, central banks on both sides of the border held interest rates steady at their respective meetings in January and March. The Bank of Canada maintained its policy rate at 2.25%, emphasizing that while inflation had eased, recent oil price increases could push price pressures higher in the coming months. Governor Tiff Macklem reiterated that policy decisions would remain data‑dependent as the economy adjusts to a shifting global trade and energy landscape.

The U.S. Federal Reserve (the Fed) also held its benchmark rate steady in Q1 following several late‑2025 cuts. Incoming data painted a mixed picture: inflation cooled modestly early in the quarter, but stronger employment and renewed energy‑driven price pressures complicated the outlook. The Fed continued to signal the possibility of rate cuts later in 2026, though markets increasingly questioned the timing as inflation risks re‑emerged.

Q: Canada’s TSX outperformed the major U.S. stock indexes in Q1. Is this a short-term reaction to geopolitical factors, or does the Canadian market offer long-term diversification benefits?

A: Canadian equities outperformed in Q1. The S&P/TSX Composite index is heavily weighted toward energy, materials and financials, in contrast to the S&P 500, where technology represents roughly 25% to 30% of the index’s weight. As a result, the TSX tends to perform well during commodity upcycles and periods of elevated inflation. The geopolitical tensions in the Middle East lifted gold and crude oil prices, directly supporting Canadian corporate earnings.

The diversification case for Canada is also compelling. The TSX historically provides greater exposure to real assets, while its listings of Canadian banks, which are supported by a more conservative regulatory framework, have delivered relatively stable dividends and lower volatility across market cycles.

The takeaway: while near-term outperformance may moderate, Canadian equity exposure can continue to support portfolio resilience, income generation and protection against rising prices (inflation). This is particularly beneficial when U.S. equity performance is heavily concentrated in more volatile mega-cap technology companies.

Q: How have markets historically responded to geopolitical shocks, and what does that mean for long-term investors?

A: History suggests that geopolitical shocks tend to drive short-term market volatility, but typically result in limited long-term damage to stock markets. Losses associated with conflicts have frequently been followed by recoveries, as corporate earnings and economic fundamentals regain focus and geopolitical tensions ease over time.

Several consistent lessons stand out for long-term investors, including:

• Stay invested. Time in the market has historically been more effective than attempting to time the market, as missing recovery periods can meaningfully reduce long-term returns.
• Diversification matters.Periods of geopolitical stress highlight the risks of having all your eggs in one basket. While certain asset classes may benefit during specific market phases, broader diversification can help reduce overall portfolio volatility.
• Volatility can create opportunities. Historically, some of the strongest market days have followed closely after periods of stress. Sticking to a long-term investment plan improves the probability of success.

While geopolitical developments may dominate short-term headlines, long-term investment outcomes are driven by earnings, cash flows and disciplined portfolio construction.