RFA Q2 Outlook Report

U.S. Equity Market: Q1’26 Review & Outlook for Q2’26

Executive Summary

The US equity market entered 2026 under the shadow of a severe energy shock and global uncertainty. A late-February Middle East escalation (Iran–Israel conflict and the effective closure of the Strait of Hormuz) sent Brent crude ~35–50% higher in Q1, driving a surge in inflation expectations and stagflation fears abroad. In Europe, PMI surveys and official forecasts flagged near-stalling growth (~1%) and sharply higher inflation.

In the US, core growth and inflation pressures also lingered. After a robust Q3’25 (+4.4%), GDP slowed markedly; BEA figures show Q4’25 growth just +0.7% (q/q annualized). Analysts’ early Q1 forecasts averaged ~2–3% annualized growth, but surging energy prices and persistent service inflation suggest actual growth

decelerated further. Inflation remained above target – core PCE was ~2.7–2.9% in late 2025– and the February–March oil spike kept producer price gains elevated (March PPI +4.0% y/y, highest in 3 years). Fed officials signaled that these shocks have raised inflation risks and delayed rate cuts; contracts now price no Fed easing until mid-2027. The labour market stayed historically tight (unemployment ~4.3% in March).

Against this backdrop, US equities fell in Q1: the NASDAQ and S&P500 were down roughly 7–5% while small-caps held flat. Energy was by far the top sector, with a ~+36% return on the oil-price surge (compared to broad equities’ decline), and other cyclicals (Materials, Industrials) posted modest gains. Defensive sectors (Staples, Utilities) were mildly positive. In contrast, rate-sensitive Financials and Consumer Discretionary each fell ~9–10%, and Technology slid ~–9%. Fund flows mirrored this shift: US equity ETF inflows slowed sharply in March as geopolitical risks rose, with a notable rotation into Value over Growth (Value ETF flows outpaced Growth for the first time in years) and Energy ETFs topping all sectors for net inflows.