War in the Middle East and Market Resilience

The first quarter of 2026 was marked by an unusually high number of significant geopolitical events, including:

The extent to which such events influence global equity markets depends largely on two factors: how unexpected the events are and the degree to which they affect corporate profitability. Notably, international equities continued to outperform U.S. equities during the first quarter of 2026—a trend we previously identified as emerging last year.

Across all major regions, relatively low-priced companies—commonly referred to as “value stocks”—outperformed broader market indices. The chart below illustrates the growth of $1 million invested at the beginning of the quarter in U.S. large-company equities versus a diversified portfolio of global value stocks (U.S. and international, across both large and small companies) over the 64 trading days of the quarter.¹

Several points are worth highlighting:

At first glance, it may seem counterintuitive that global equity markets produced even modestly positive returns during a quarter characterized by significant geopolitical shocks—particularly those affecting energy markets. However, context is critical.

The following chart from Avantis Investors provides a broader view of key economic and market indicators from the beginning of 2020 (the onset of the COVID-19 pandemic) through the end of Q1 2026.

In this 7.25-year context:

The CBOE Volatility Index (VIX), a widely followed barometer of expected near-term market volatility, peaked at 35.3 during the quarter (following the outbreak of the Iran conflict) and ended at 25.3. Neither level is especially notable when viewed in historical context.

A more concerning development is the level of longer-term interest rates. The 10-year Treasury yield currently stands at 4.3%, near the upper end of the range—potentially signaling expectations of persistently higher inflation and interest rates.

Among all indicators, energy prices warrant the closest attention. Both Brent and WTI crude oil prices are near the upper end of their range for the period, comparable to levels observed in early 2022 following Russia’s invasion of Ukraine. Rising energy costs tend to compress corporate margins and, in turn, weigh on equity prices—helping to explain the negative performance of U.S. stocks during the quarter. However, as a net exporter of oil, the U.S. also benefits from higher energy prices through increased profitability in the energy sector, which helped partially offset these broader market pressures.

Looking ahead, the trajectory of oil prices—and the broader implications of the Iranian conflict—remains uncertain. As of this writing, the U.S. and Iran have entered a two-week ceasefire.

According to the Federal Reserve Bank of St. Louis,³ WTI crude oil has averaged approximately $70 per barrel over the past 7.25 years. Current futures markets anticipate a price of roughly $74 per barrel by year-end.⁴ While market expectations often diverge from realized outcomes—particularly in the face of unforeseen events—they remain the most objective aggregation of available information at any given time.

Economist John Cochrane notes that both demand- and supply-side adjustments help mitigate the impact of rising oil prices.⁵ On the demand side, energy consumption can shift toward “substitutes” such as natural gas, nuclear, and renewables. On the supply side, higher prices (such as $100 per barrel) incentivize production from previously uneconomical sources.

In short, markets, companies, and economies demonstrate a remarkable capacity for adaptation in an ever-changing global environment. This adaptability is one of several reasons why investment decisions should not be driven by current events—particularly during periods of heightened uncertainty.

No one can reliably predict how geopolitical conflicts, energy markets, or global equities will evolve. For this reason, we continue to emphasize the importance of adhering to a disciplined investment plan, especially when uncertainty feels most acute.