MW Investors brace for more stock-market volatility, as wild first quarter ends with biggest rally in a year
By Christine Idzelis and Joseph Adinolfi
Last-day gains didn't stop the S&P 500 from tallying its worst first quarter since 2022 as the Iran conflict, private-credit worries and the AI 'scare trade' weighed on stocks in March
U.S. stocks capped off a rough first quarter with the S&P 500's best day since last May.
The past three months have been a tumultuous stretch for investors - and with so much uncertainty still surrounding the conflict in Iran, head-spinning developments in markets could continue.
The blowback from what some have called the artificial-intelligence "scare trade" had left the S&P 500 SPX with a marginal decline in February, as shares of so-called HALO stocks - an acronym that stands for "heavy assets, low obsolescence" risk - helped pick up some of the slack from struggling tech shares.
But the losses really kicked into gear in March. The S&P 500 fell 5.1% this month as Iran effectively closed the Strait of Hormuz, a critical chokepoint for the global trade in energy, fertilizers and other critical commodities. Surging crude-oil prices (CL00) (BRN00) have weighed on stocks, as well as bonds and even precious metals.
See: Investors have nowhere to hide as financial markets groan under the weight of the Iran conflict
The result? The worst monthly showing for the S&P 500 index in a year - and the worst first-quarter performance since 2022, when a punishing bear market was just getting underway. The S&P 500 finished the first quarter down 4.6%, according to FactSet data.
But things ended on an upbeat note, with the S&P 500, Nasdaq Composite COMP and Dow Jones Industrial Average DJIA all booking on Tuesday their biggest percentage gains since May 12, according to Dow Jones Market Data. The Dow surged 1,125.37 points, or 2.5%, while the S&P 500 rose 2.9% and the technology-heavy Nasdaq surged 3.8%.
"Investors have had to deal with a lot of activity this quarter. From the AI scare trade, to the Supreme Court throwing out the tariffs, to now this conflict in Iran - it's been almost nonstop activity for the past three months," said Joseph Ferrara, an investment strategist at Gateway Investment Advisers, during an interview with MarketWatch.
Sam Klar, portfolio manager with the GMO Domestic Resilience ETF DRES, said the S&P 500 appeared to sketch out a "reverse check mark" pattern during the first quarter, as stocks have been caught in a steady grind lower. January performance was solid and February was weak, but March has been pretty rough, he said during an interview with MarketWatch.
But there has been substantial dispersion beneath the surface of the index, Klar noted. As of Tuesday's close, more than 64% of stocks in the S&P 500 were outperforming the index, according to a MarketWatch analysis of FactSet data.
Industrials names really took off in January and February. But they hit a wall in March, with the sector XX:SP500.20 falling 8.5%. The worst-performing sector in the first quarter was financials XX:SP500.40, which fell 9.8% as fears about lax lending standards in the private-credit space weighed on shares of asset managers. Consumer discretionary XX:SP500.25 and information technology XX:SP500.45 saw the next biggest quarterly drops, with each sector down more than 9%, according to FactSet data.
A rotation away from Big Tech briefly helped boost small-cap stocks earlier this year, but the Russell 2000 RUT also struggled in March as investors started to see further interest-rate cuts from the Federal Reserve as an increasingly remote possibility.
"There's been some serious torque in this market," Klar said.
"March has been obviously pretty nasty" for stocks, said Scott Wren, a senior global market strategist at Wells Fargo Investment Institute, in a phone interview.
March losses spread quickly across the market - although some on Wall Street, including Nomura's Charlie McElligott, have pointed out that investors owned substantial downside protection heading into the month, which has helped limit stocks' losses. While the Dow and the Nasdaq have both dipped into correction territory, the S&P 500 remained 6.4% below its Jan. 27 record high of 6,978.60 on Tuesday, Dow Jones Market Data showed.
Nearly all of the S&P 500's 25 industry groups finished lower this month, with only energy XX:SP500.1010 posting a gain over the stretch, according to Dow Jones Market Data. Oil prices finished the quarter above the key $100 a barrel level.
"The market is absolutely locked in on the Iran conflict, pretty much solely at this point," said Mark Hackett, chief market strategist at Nationwide, in a phone interview.
Strong gains for shares of oil and gas companies helped push the State Street Energy Select Sector SPDR ETF XLE up 37% this quarter, its best quarter since the first three months of 2022, FactSet data showed.
At the same time, shares of the iShares Expanded Tech-Software Sector ETF IGV, which tracks software stocks, slumped more than 24% during the first quarter - its worst quarterly performance since the fourth quarter of 2008, FactSet data showed.
Big Tech stocks also had a rough go of it. The Roundhill Magnificent Seven ETF MAGS holds members of the "Magnificent Seven," a cohort of elite tech and tech-adjacent names that includes Apple $(AAPL)$, Microsoft $(MSFT)$, Google parent Alphabet $(GOOGL)$ $(GOOG)$, Nvidia (NVDA), Amazon.com (AMZN), Tesla $(TSLA)$ and Facebook parent Meta Platforms (META). The ETF plunged 12.2% in the first quarter, its worst quarterly performance since losing 15.7% in the first three months of 2025, according to FactSet data.
Despite President Donald Trump's latest de-escalatory comments concerning the Iran conflict, the Cboe Volatility Index VIX, seen as Wall Street's "fear gauge," remained above 25 as of Tuesday's close. That is one sign that investors remain laser focused on the disruption of oil-shipping traffic through the Strait of Hormuz.
The Cboe Volatility Index is well above its year-to-date low of about 14.5 in January, and surged nearly 69% in the first quarter - marking its biggest quarterly jump since the first three months of 2020, when the COVID crisis sparked anxiety in markets.
Investors have good reason to remain cautious despite Tuesday's monster quarter-end rally. Since the start of the Iran conflict, stock-market gains driven by hopes of de-escalation have tended to fade by the end of the week, Hackett noted. Individual investors have started to exit the market over the past week, driven by worries that the conflict's resolution is becoming "more opaque," he added.
While uncertainty surrounding the Iran conflict has been anathema to stock prices, investors still have some reason for optimism. Wall Street analysts have continued to raise their earnings forecasts for members of the S&P 500.
Wells Fargo's Wren said that he is expecting that S&P 500 corporate earnings will continue to increase this year, even if the U.S. economy slows. "Everything depends on the strait being open" to the free passage of oil, gas and fertilizer components, he said. "We're not expecting this to drag on six months."
Recent losses in the stock market reflect "growing unease" over the Iran conflict, although investors may be finding some reassurance in the notion that "political incentives" tied to the midterm elections in the U.S. this year should be a motivating factor toward finding a resolution, said James McCann, senior economist at Edward Jones, in a phone interview.
"The market wants to see progress in mitigating the tail risks around this conflict," he said. High oil prices make it hard for stocks to stage a lasting rebound, McCann said. They also create problems for the Federal Reserve, which must now worry about a rebound in inflation just as the U.S. labor market was showing signs of strain.
The stock market is "starting to price in maybe stagflation-lite," said Keith Lerner, chief investment officer at Truist Advisory Services, in a phone interview. "You basically have an environment where the economy is somewhat slowing" and the Fed is potentially "on the sidelines" keeping its benchmark rate steady on inflation risks, he said.
-Christine Idzelis -Joseph Adinolfi
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(END) Dow Jones Newswires
March 31, 2026 19:05 ET (23:05 GMT)
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