Part of: The 2026 Iran Crisis – Khan Capital’s hub on the 2026 Iran crisis and oil shock.
Khan Capital | March 2026
Key Takeaways
- The S&P 500 closed the first quarter down 4.6%: the benchmark’s weakest opening quarter in nearly four years, as the Iran war and a historic oil price shock dominated sentiment through March.
- March alone delivered a 7.8% monthly decline: the index narrowly avoided a formal 10% correction after a sharp 3% rebound on the final trading day of the quarter.
- Technology mega-caps bore the brunt of the selling: Microsoft closed the quarter down 23.4%, its worst quarter since the fourth quarter of 2008 and its worst start to any year since the company first went public.
- WTI crude registered the largest one-month gain in more than four decades: prices peaked above $117 per barrel before easing, as the Iran conflict and disrupted Gulf shipping lanes redefined the oil risk premium.
- The Federal Reserve held policy steady at 3.50% to 3.75%: the March FOMC signalled patience, leaving the first cut of 2026 dependent on how inflation evolves through the second quarter.
The first quarter of 2026 ended with the US equity market reeling from a combination of geopolitical shock, energy inflation, and a deep technology selloff. The S&P 500 closed 31 March at 6,528.52, down 4.6% on the quarter and off almost 8% in March alone, according to CNBC’s end-of-quarter market summary. The Q1 2026 market correction fell just short of a formal definition, but the damage beneath the headline index was severe, and the composition of the drawdown marked a clear break from the leadership patterns of the previous two years.
What began as an AI-driven volatility episode in January, when software stocks shed $400 billion in a single week, evolved into a broader reassessment of growth assumptions. By early March, US and Israeli strikes on Iran had introduced an acute geopolitical overlay. The closure of the Strait of Hormuz, disruption to tanker flows, and the reimposition of a significant oil risk premium compounded the existing concerns about stretched AI capex and elevated valuations.
The Quarter in Numbers
| Measure | Level / Change | Context |
|---|---|---|
| S&P 500 quarterly return | -4.6% | Worst first quarter since Q1 2022 |
| S&P 500 March return | -7.8% | Steepest monthly decline of the cycle |
| Microsoft quarterly return | -23.4% | Worst quarter since Q4 2008 |
| WTI crude high | ~$117 / barrel | Largest one-month gain in over 40 years |
| Fed funds target | 3.50% – 3.75% | Held steady at March FOMC |
| S&P 500 final-day move | +3.0% (31 March) | Strongest single session of the quarter |
The Tech Wreck Inside the Index
Beneath the S&P 500’s 4.6% quarterly loss, the dispersion between sectors was unusually wide. Technology and communication services carried most of the damage, while energy, defence, and gold miners ended the quarter in positive territory. The concentration of the drawdown in mega-cap technology is what separates the Q1 2026 market correction from a conventional broad-based selloff.
Microsoft’s 23.4% quarterly decline was the sharpest among the Magnificent Seven and marked the company’s worst three-month stretch since the fourth quarter of 2008. Concerns about the pace of AI monetisation, the sustainability of hyperscaler capex at recent levels, and the regulatory outlook for enterprise cloud combined to push the stock substantially lower. Other large-cap technology names followed a similar path, with software and semiconductor indices registering double-digit quarterly losses.
The rotation out of technology contrasts with the relative resilience of the defence, energy, and gold trio that has shaped much of 2026’s market leadership. Investors who entered the quarter already positioned for geopolitical risk captured most of the positive return available in the benchmark, while those who retained full Magnificent Seven exposure absorbed the bulk of the damage.
Oil and the Iran Premium
The oil market delivered one of the most extreme moves in its modern history during the first quarter of 2026. West Texas Intermediate crude, which had entered the year trading around $75 per barrel, peaked above $117 during intraday sessions in late March. The Strait of Hormuz disruption and the broader Iran conflict produced the largest one-month increase in crude prices in more than forty years, according to multiple data providers.
The second-order effects were equally significant. Airlines, transport, petrochemicals, and consumer discretionary names sensitive to fuel costs underperformed the broader market by a wide margin. Breakeven inflation expectations embedded in the US Treasury market rose sharply in March, pricing in the persistence of energy-driven inflation well into the second half of the year. These shifts directly complicated the Federal Reserve’s policy path.
The Fed on Hold
At its March FOMC meeting, the Federal Reserve kept its policy rate target at 3.50% to 3.75%, in line with consensus expectations. In the accompanying communications and press conference, Chair Jerome Powell acknowledged that the oil price shock may have temporary effects but made clear that the committee would wait for additional data before committing to any cuts. The Summary of Economic Projections maintained a median forecast of one rate cut in 2026, though market pricing has moved closer to no cut at all as oil prices remain elevated.
The Fed’s hold is the logical response to a backdrop in which inflation remains above the 2% target and the labour market is slowing, but neither has moved decisively enough to force a policy change. With the next FOMC meeting scheduled for late April, the second-quarter data on core CPI, payrolls, and gasoline pass-through will be pivotal. A continuation of elevated energy prices would likely extend the hold, while a retreat in oil combined with weaker jobs data could reopen the case for a first cut in the summer. The detailed policy logic is set out in Fed Holds Amid Iran War: Walking the Tightrope.
Asian Markets and Global Spillovers
The Q1 2026 market correction was not confined to the United States. Asian indices sold off heavily in sympathy, with South Korea’s Kospi falling 4.47% in a single session during the late-March turbulence. Japan’s Nikkei 225 declined 2.38% on the same day, closing at 52,463.27, and mainland Chinese markets tracked lower as oil import costs weighed on sentiment across the region. For energy-importing Asian economies, the combination of a strong US dollar, elevated crude, and weak global trade growth produced one of the most challenging quarters since the post-pandemic recovery.
The Rebound That Saved the Headline
The final trading day of the quarter delivered a sharp reversal. The S&P 500 rose nearly 3% on 31 March to close at 6,528.52, its strongest single-session performance in weeks. The move was driven by easing headlines around Iran, a partial retracement in crude prices, and positioning flows ahead of month-end and quarter-end. Without the final-day bounce, the index would have ended the quarter closer to a formal correction threshold.
The durability of that rebound is the central question for early April. Historically, deep opening quarters have been followed by varied outcomes over the remainder of the year, with recovery scenarios dependent on the nature of the initial shock and the policy response. The current setup involves an ongoing conflict, unresolved energy disruption, and a Federal Reserve unwilling to cut until inflation pressures recede, which is a more complex backdrop than typical post-correction rebounds of the past decade.
What to Watch in Q2
Three variables will shape whether the Q1 2026 market correction stabilises or extends. First, the trajectory of oil prices, which remains tied to the Iran conflict and any shift in the status of the Strait of Hormuz. Second, the April Federal Reserve decision and the tone of Chair Powell’s press conference, which will clarify whether the central bank is leaning towards patience or acknowledging cumulative weakness in activity data. Third, the first-quarter earnings season, which will test whether the technology selloff reflected overdone pessimism or a genuine reset of AI-driven growth expectations.
The SpaceX IPO filing announced at the start of April adds another dimension: a major primary market event landing into a volatile secondary market will test both institutional appetite for risk and the depth of capital available for large equity offerings in the current environment. For investors, the second quarter will likely hinge less on any single datapoint than on how these three threads interact over the coming weeks.
Sources: CNBC: Stock Market Today – Q1 Close · Bloomberg: US Stocks Rebound at Quarter End · Reuters: Microsoft’s Worst Quarter Since 2008 · Bloomberg: Oil Prices and the Strait of Hormuz · Federal Reserve: FOMC Calendars · Reuters: Asian Stocks Fall on Oil and Iran
Related Reading: The January AI selloff that set the tone for the quarter is chronicled in Tech Volatility in 2026: Software Stocks Drop $400B in a Week. The energy dimension of the drawdown, driven by the closure of the world’s most important oil chokepoint, is covered in Oil Above $100: Strait of Hormuz Closure and the Energy Crisis of 2026, while the sector rotation that rewarded defensively positioned investors through the quarter is laid out in Defence, Energy, and Gold: The 2026 Geopolitical Portfolio For the post-quarter shift in Fed rhetoric, see The Return of the Hawk: How the Fed’s March Minutes Shattered the Soft Landing Consensus.. The Federal Reserve’s response to the twin pressures of geopolitical risk and sticky inflation is examined in Fed Holds Amid Iran War: Walking the Tightrope, and the first major primary market event of the second quarter is the subject of SpaceX Files for the Largest IPO in History: Inside the $1.75 Trillion Listing. The trade policy dimension of the market’s challenges continued into Q2 with the announcement of 100% pharmaceutical tariffs in Trump’s 100% Pharmaceutical Tariffs: Liberation Day One Year On. Bank earnings season has provided a further data point on the quarter, detailed in our Q1 2026 bank earnings analysis. See also Khan Capitals’ May 2026 coverage: $725bn hyperscaler AI capex cycle; FOMC 8-4 split and the Q1 stagflation print; Apple after Cook: Ternus and the AI question; BoJ stagflation revision and the Iran-driven oil shock. For our latest analysis, see the US Iran peace deal and the unwinding of the 2026 risk premium. The half is placed in full context in the best quarter since 2020. The war premium returned in July, when attacks in the Strait of Hormuz broke the US-Iran truce. For the fundamentals, start with how GDP releases work. See also the accounting behind the AI build-out.
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Related Reading: see Tesla Q1 2026 earnings reckoning. For continuing coverage on this theme, see our analysis of Wall Street’s Volatility Dividend: Q1 2026 Bank Earnings Deliver Record Capital Markets Quarter.
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