Markets Commentary: First Quarter 2026

The later portion of the quarter was dominated by escalating tensions in the Middle East, with the Iran conflict disrupting global energy supplies and roiling markets. The resulting oil price surge also affected supply chains, trade and growth outlooks. The first quarter closed amidst a strong single-day relief rally after sustaining multiple bouts of uncertainty on issues related to war, AI stock pressures, the partial U.S. government shutdown and interest rate actions by central banks.

After presenting a brief overview of the global economy, this commentary covers Canadian, U.S. and international equity markets, as well as fixed income performance. We conclude with a look ahead.

Overview of the global economy

Economic data was generally stable given geopolitical turmoil.

The U.S. Job Openings and Labor Turnover Survey program of the Bureau of Labor Statistics showed little change at 6.9 million job openings in February, while January was revised upwards to 7.2 million. According to payroll processing firm ADP, private companies added 62,000 jobs in March, which is above the economic forecast of 40,000. The Conference Board Consumer Confidence Index survey edged up in March to 91.8 as pessimistic expectations eased again despite concerns over rising costs from tariffs and oil evident in inflation expectations. The U.S. dollar index as measured by DXY regained strength as a safe-haven asset in times of turmoil, up 2.4 percent for the month.

As of March 2026, Canada's unemployment rate held steady at 6.7% with a modest gain of 14,000 jobs, indicating a period of slow hiring following significant losses in February. The labor market showed signs of weakness, with job gains largely driven by "other services" (+15k) and natural resources (+10k), while private-sector employment remains pressured.

In Q1, the Bank of Canada maintained the overnight lending rate at 2.25 percent through Q1, following 25 basis point cuts in both September and October of 2025. The Bank of Canada remains on pause, with future direction dependent on geopolitical, trade and economic outcomes.

The U.S Federal Reserve (Fed) held the benchmark rate steady at 3.5–3.75 percent for the quarter. The Fed continues to closely monitor persistent inflationary pressures and moderating U.S. labour market growth. Follow-on comments from the Fed’s Federal Open Market Committee members indicated a wait-and-see approach regarding the Persian Gulf conflict’s impact on the economy that could signal as little as one possible rate cut during the year. Fed Chair Jerome Powell was quoted as saying that while inflation remained “elevated” he still expects lower rates later in the year.

Canadian equity market

The Canadian Equity Market advanced 3.94 percent in the first quarter of 2026, as measured by the S&P/TSX Composite Index. Year-over-year returns for the index remain exceptionally strong at 34.83 percent amid issues of geopolitics, tariffs and inflation.

Driven by the conflict in Iran, the Energy sector was the top performing sector for the quarter, producing a return of 30.08 percent in Q1. This was followed by the Utilities sector, returning 11.24 percent, and the Materials sector, returning 10.70 percent for the quarter. The Information Technology sector was the largest detractor in Q1, producing a negative return of -22.50 percent.

U.S. equity markets

The U.S. equity market declined -4.33 percent in the first quarter of 2026, as measured by the S&P 500^® Index in U.S. dollars. This equated to a loss of -2.60 percent in Canadian dollar terms.

U.S. markets ended the quarter on a surge, with the final trading day seeing sharp gains following a period when major indices were either in or approached correction territory. The market experienced macro-related volatility as the VIX jumped to 31 percent in the last week before settling down to 25 percent at quarter end.

International equity markets

International equity markets were relatively flat for the quarter. EAFE produced a local currency return of 0.15 percent for Q1. Year-over-year returns for the index remain significantly positive at 17.38 percent. EM produced a positive return of 2.12 percent in local currency in Q1.

Fixed income markets

Canadian bond market returns were marginally positive for the quarter. The FTSE Canada Corporate Bond Index produced a return of 0.14 percent in Q1. The FTSE Canada Government Bond Index increased at 0.26 percent and the FTSE Canada Universe Index produced a positive return of 0.23 percent in Q1.

U.S. fixed income markets were flat in the first quarter, with the Bloomberg U.S. Aggregate Index down -0.05 percent in U.S. dollars. The U.S. Treasury yield curve flattened as yields rose across the spectrum from 2-years to 30-years amid mounting global risks and anticipation of ongoing restrictive monetary policies.

Global bond yields rose following the surge in energy prices, as central banks signaled possible interest rate action to curb related inflationary pressures. Investment-grade corporates, high yield and asset-backed securities spreads widened in the later portion of the quarter as part of the flight to quality.

Looking ahead

The quarter’s volatility reflected escalated uncertainty about energy prices, inflation trajectories and global growth. With key inflation data still pending and geopolitical risks elevated, future direction will likely depend on further developments in the Middle East and central bank responses to energy-driven price pressures and resulting economic headwinds.

While equities remain highly sensitive to headline news and ongoing volatility is anticipated over the near term, resilient corporate earnings and consumer sentiment, along with central banks that are highly focused on price stability, provides some positive perspective.