Q1 2026 Market Commentary
In Homer’s Odyssey, Odysseus faced a distinct challenge as he sailed past the sirens. The danger was not that the sirens would force his ship off course, but that their song would tempt him to do it himself. Modern investors face a version of that challenge.
The pull today is not a mythical song; instead, it is a constant stream of headlines, commentary, and analysis, all arriving in real time and all demanding our attention. Before one story has had time to settle, the next has already taken its place. This creates a challenging environment for investors trying to maintain a grounded perspective and adds temptation to deviate from a thoughtful long-term plan.
That tension was on full display in the first quarter. The war in Iran gave markets a real shock to absorb, but it also unfolded in a media environment that magnifies every development, reaction, and prediction. Investors are not just responding to events themselves, but to a constant stream of interpretation layered on top of them.
Q1 In Review
Markets were down in Q1, with stocks declining in response to the war in Iran (which we wrote about here) as well as fears about AI’s potential to disrupt existing industries (see our perspective here). However, most markets were not impacted as dramatically as the headlines might suggest, and client portfolios benefited from diversification.[1]
- Large cap U.S. stocks declined by -4.3%. After multiple years of strong growth, large cap US companies stumbled in the first quarter as AI companies faced growth concerns and energy supply chains were disrupted.
- Small cap U.S. stocks grew by +3.5%. Smaller companies contributed growth to diversified portfolios this quarter, outpacing larger companies in both price growth and hiring.
- International stocks declined by -1.2%, while emerging markets declined -0.2%. These markets were the strongest drivers of growth last year, but the war in Iran disrupted that trend. Europe is particularly sensitive to energy price fluctuations, and a stronger US dollar (pushed higher by interest rate expectations) created a headwind.
- Short term bonds grew by +0.7%, and broad U.S. bonds declined by -0.1%. After early gains, bonds faced pressure as the Iran war sparked concerns about energy inflation leading to broader inflation. Expectations for two or more interest rate cuts from the Fed have evaporated, with markets currently forecasting an equal chance that we’ll see a rate increase versus a rate cut this year.
- Lastly, real estate exposure in client portfolios returned +3.3%. This asset class provided ballast within diversified portfolios as income remained steady and specialty sectors, including data centers, saw strong growth.
As the second quarter begins, the economic backdrop remains fairly resilient, and corporate earnings are expected to grow by +11% compared to a year ago.[2] That said, key questions remain around how sticky inflation and elevated energy prices will be, and whether the Fed will ultimately ease or tighten from here. Investors are also paying attention to whether geopolitical tensions will de-escalate and how that may influence confidence and future growth. Those are real risks, and they deserve attention. However, periods like this are also a reminder that not every headline warrants a portfolio response.
The Siren Song of Reaction
The central challenge for investors is no longer access to information – it is the sheer volume and velocity of that information. We live in an environment where every market move is instantly explained, every policy development is framed as pivotal, and every geopolitical development is accompanied by a chorus of forecasts about what may come next. Much of this commentary is thoughtful and well-intentioned. Much of it is not. Either way, the result can be the same: an apparent call to react.
This is where the story of Odysseus remains useful. He did not assume that clear thinking would come easily in a moment of temptation. He took precautions, famously tying himself to the mast and instructing his crew to fill their ears with beeswax to block out the sirens’ call. He understood that once the song was heard, judgment alone might not be enough.
A good investment plan serves a similar purpose. Thoughtful asset allocation, broad diversification, and disciplined rebalancing are not abstractions; they are practical safeguards against emotional investment decisions. These strategies help ensure our portfolios do not depend on any single market outcome or narrow investment theme, and help our clients maintain their intended course, especially when short-term noise becomes loudest.
Staying on Course
We do not expect the modern information environment to become quieter. If anything, the pace is likely to continue accelerating. New technologies will make information more available, more personalized, and more immediate. That may be helpful in some respects, but it will not necessarily make markets calmer. Faster information does not always produce better outcomes; often, it increases the temptation to react without adequate reflection.
Our team at North Berkeley works with clients to build thoughtful portfolios and financial plans designed to endure periods of uncertainty, distraction, and change. In a world full of siren songs, one of the most valuable things we can do is to help our clients with the preparation and perspective needed to stay on course.
Resources
[1] Morningstar, Inc. Performance reflects the following indexes: Large Cap US (S&P 500), Small Cap US (S&P 600), International Developed (EAFE Index), Emerging Markets (MSCI EM Index), Short Term Bonds (Bloomberg 9-12 Bond Index), Broad U.S. Bonds (Bloomberg Aggregate Bond Index), Real Estate (FSTE NAREIT Index).
[2] Markets Bracing for War Shock Are Ignoring Resilient US Economy. Bloomberg.
