Macro & Market Views

1Q26 Market Overview: Goldilocks, Interrupted

1Q26 Market Overview: Goldilocks, Interrupted

While a number of broad equity indexes established new all-time highs early in the new year, rumors of war and the war itself weighed on investor sentiment.

Key Takeaways
  • Modest quarterly declines across financial markets belie a sharp selloff in risk assets that followed the outbreak of the war in Iran, which has shifted investor sentiment and prompted a physical supply disruption to global energy markets and increased inflationary pressures.
  • Markets globally are expecting tighter monetary conditions, but impacts will vary according to an individual economy’s reliance on imported energy and its ability to cushion the effects of higher energy prices via policy.
  • It appears to us that gold over the past two years had been steadily pricing in the risk of a such a large-scale geopolitical event as the war in Iran. The prospect of higher nominal interest rates in an inflationary environment has weighed on the price of gold since the war began.

 

Relatively benign first quarter declines belie the severity of the selloff experienced following the February 28 attack on Iran by US and Israeli forces. While the S&P 500 Index lost 4.3% for the period as a whole, it was down more than 9% from its peak. Similarly, the MSCI EAFE Index’s decline of 1.2% during the quarter obscures a peak-to-trough loss of more than 11%. After surging to a new all-time nominal high in January, gold gained 8.1% at quarter end.1

The war in Iran has altered the Goldilocks narrative, but April has seen a number of equity indexes bounce off their March lows as markets took advantage of less-bad news to rotate back into risk assets. However, we remain wary of a quick declaration of victory and a return to normal macroeconomic and market conditions.

Impulsive Behaviors

In recent quarters, we have repeatedly called attention to the very low risk perception evident in financial markets broadly, as corroborated by high equity market valuations, tight credit spreads and low implied volatility. As we entered the year, these Goldilocks conditions were not entirely without support. Corporate earnings expectations were strong, economic activity was picking up, and hyperscalers continued to direct massive levels of capex toward supporting their ambitions in artificial intelligence. At the same time, expectations of lower interest rates had investors looking forward to easier financial conditions.

The war in Iran has altered the Goldilocks narrative.

The primary economic disruption of the attack on Iran was the shock to the global energy supply chain. In addition to assaulting major Middle East energy hubs, Iran quickly moved to shut down the Strait of Hormuz, the narrow seaway between the Persian Gulf and the Gulf of Oman through which approximately 20% of the world’s oil and liquefied natural gas (LNG) supply passes along with a large range of petrochemical inputs and end products. Commodity prices responded violently, with oil and LNG prices climbing more than 50% and 85%, respectively. Fertilizer prices, too, have soared just in time for spring planting season in the northern hemisphere; the Strait handles a large share of the global seaborne fertilizer trade, while LNG is a key feedstock in nitrogen-based fertilizers.2

 

The primary economic disruption of the attack on Iran was the shock to the global energy supply chain.

By prompting what appears to be the largest-ever physical supply disruption to world oil markets, the war with Iran has sent a stagflationary impulse to the global economy that, the longer it persists, is likely to weigh on economic growth while adding to inflationary pressures. The severity of that shock will depend on its duration, each economy’s reliance on imported energy and energy-intensive inputs, and policymakers’ ability to cushion the effects of higher energy prices on households and businesses.

Global financial conditions have tightened somewhat, with lower equity prices, wider credit spreads and a stronger dollar, but the moves have been relatively modest on expectations that the disruption of energy flows will be short lived. However, infrastructure damage in the Gulf suggests disruptions could be longer than widely appreciated, and uncertainty remains high. Extended supply disruptions would result in significant demand destruction (which we are already seeing signs of in Asia through fuel rationing and flight cancellations), foodprice spikes and shortages of important industrial inputs such as helium and sulfur.

Signs of the war’s financial toll have just started to trickle into macroeconomic data releases. In the US, for example, the headline consumer price index for March increased to 3.3%, its highest level in nearly two years, driven by a significant increase in gasoline (up 18.9%) and fuel oil (up 44.2%) prices. Though food prices increased a more modest 2.7%, the energy shock is likely to further pressure a US agriculture sector already struggling with the impacts of trade and immigration policy and ultimately contribute to higher food prices.3

After entering the year with a dovish bias, markets are now expecting tighter monetary policy in most advanced economies despite the deteriorating macro backdrop. This largely excludes the US, where market expectations have moderated but still imply the Fed will lower rates marginally by year end.4 And while the US’s relatively balanced energy position should enable it to weather the economic impacts of the energy crisis better than many others, oil’s nature as a globally traded commodity and a key input into many goods makes some degree of inflationary pressure likely, in our view, and creates challenges for Federal Reserve rate cuts absent much tighter financial conditions or substantial labor market deterioration.

Gold Prices Puzzle but Persevere

We have noted in the past that gold can sometimes serve as a proverbial canary in a coal mine, sensing potential dangers before they are perceived by the financial markets more broadly. With the benefit of hindsight, it seems to us this prognostic ability may help to partially explain gold’s substantial appreciation over the past two years.

Essentially, it appears to us that gold had been steadily pricing in the risk of a large-scale geopolitical event—one that ultimately came to fruition when war broke out between the US/Israel and Iran. Notably, gold surged 14% in January alone as the drumbeats of war grew louder, even before advances in assets likely to benefit most directly from eventual disruptions to energy supply, such as the stocks of integrated oil majors and—with a lag to the equities of oil majors—spot oil prices.5

Given gold’s reputation as a perceived safe haven during challenging times, however, some have expressed disappointment with its subsequent selloff. In our view, such disappointment overlooks the fact that the price of gold had more than doubled over the preceding two years in response to rising geopolitical risk; a correction upon the realization of a priced-in risk is not surprising and consistent with the pattern observed during similar supply shocks in the Middle East in the 1970s. In the near term, the prospect of higher nominal interest rates in an inflationary environment may also weigh on gold. Over the longer term, however, it is real rather than nominal interest rates that have historically been the more important driver of gold prices.

Short-Term Windows for Long-Term Values

“Never let us be elated by the fatal hope of the war being quickly ended by a devastation of their lands,” warned Thucydides in his recounting of the Peloponnesian War, a conflict that lasted for 27 years.6 And while the Iran conflict seems unlikely to stretch on for three decades, we’d be wary of a quick declaration of victory and a return to normal conditions.

 

We are wary of a quick declaration of victory and a return to normal conditions.

For example, while hopes of a nearer-term resumption of energy flows through the Strait of Hormuz were temporarily bolstered by the April 8 announcement of a cease fire, the subsequent US naval blockade of ships entering or exiting Iranian ports raised new questions about supply conditions across a range of key commodities. Further, a hostile Iran with the ability to weaponize the Strait at a moment’s notice may result in a persistent price premium for commodities dependent upon this shipping route. Meanwhile, the additional financial strains of the war are likely to add to many of the challenges already facing sovereign balance sheets worldwide.

In such an uncertain environment, market volatility would not be surprising. However, such volatility may offer opportunities to acquire high-quality companies at market prices temporarily dislocated from their “intrinsic values.”7

1. Source: FactSet; data as of March 31, 2026.
2. Source: Center for Strategic and International Studies; data as of April 1, 2026.
3. Source: US Bureau of Labor Statistics; data as of April 10, 2026.
4. Source: Bloomberg; data as of April 8, 2026.
5. Source: Bloomberg; data as of March 31, 2026.
6. Thucydides, History of the Peloponnesian War.
7. “Intrinsic value” is based on our judgment of what a prudent and rational business buyer would pay in cash for all of a company in normal markets.

The information contained in this material is provided by First Eagle Investment Management, LLC (“FEIM”) and its global subsidiaries (collectively, “First Eagle”). FEIM is an investment adviser registered with the US Securities and Exchange Commission (SEC). Registration with the SEC does not imply a certain level of skill or training.

This material is for informational purposes only and reflects prevailing conditions and the judgment of the author(s) as of the date of publication, all of which are subject to change. This material should not be relied upon as investment advice; it does not constitute a recommendation to buy or sell a security or other investment; and it is not intended to predict or depict the performance of any investment. This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or consider the specific objectives or circumstances of any investor. We consider the information in this material to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of appropriateness for investment.

Prospective investors should inform themselves and consult with an investment, tax or legal professional as to any applicable legal requirements, taxation and exchange control regulations in the countries of their citizenship, residence or domicile that may be relevant prior to investing.

This material does not constitute an offer or solicitation in any jurisdiction where or to any person to whom it would be unauthorized or unlawful to do so.

All investments involve the risk of loss of principal.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

A principal risk of investing in value stocks is that the price of the security may not approach its anticipated value or may decline in value. “Value” investments, as a category, or entire industries or sectors associated with such investments, may lose favor with investors as compared to those that are more “growth” oriented.

There are risks associated with investing in foreign investments (including depositary receipts). Foreign investments, which can be denominated in foreign currencies, are susceptible to less politically, economically and socially stable environments, fluctuations in the value of foreign currency and exchange rates, and adverse changes to government regulations.

Investment in gold and gold-related investments present certain risks, and returns on gold related investments have traditionally been more volatile than investments in broader equity or debt markets.

Diversification does not guarantee investment returns and does not eliminate the risk of loss.

A Goldilocks economic scenario refers to an economy in which the level of growth is neither strong enough to promote inflation pressures nor weak enough to suggest recession may be near.

Consumer price index (CPI) (Price) measures inflation as experienced by consumers in their day-to-day living expenses by capturing the average change over time in the prices paid for a representative basket of consumer goods and services. A price-return index only measures price changes.

MSCI EAFE Index (Net) measures the performance of large and midcap equities across developed markets countries around the world excluding the US and Canada. A net-return index tracks price changes and reinvestment of distribution income net of withholding taxes.

S&P 500 Index (Gross/Total) measures the performance of 500 of the top companies in the leading industries of the US economy and is widely recognized as a proxy for the US market as a whole. A total-return index tracks price changes and reinvestment of distribution income.

Indexes are unmanaged and do not incur management fees or other operating expenses. One cannot invest directly in an index.

The information presented does not reflect the performance of any fund, strategy or account managed or serviced by First Eagle, and there is no guarantee that investors will experience the type of performance reflected. There is no guarantee that any market forecast set forth in this material will be realized. There is no guarantee that any historical trend referenced herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. The mention of specific securities is not a recommendation or solicitation to buy, sell or hold any particular security and should not be relied upon as investment advice.

Availability of the products or services described may be restricted by law in certain jurisdictions. This material may not be distributed, published or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

Regional Legends

United Kingdom: Napier Park Global Capital Ltd.is authorized and regulated by the Financial Conduct Authority (FRN: 541427).

Middle East: This material is for information purposes only and has not been, and will not be, registered with or reviewed or approved by any regulator located in the Middle East. It does not constitute or form part of any marketing initiative, any offer to issue or sell, or any solicitation of any offer to subscribe to or purchase, any products, strategies or other services, nor shall it, or the fact of its distribution, form the basis of, or be relied on in connection with, any contract resulting therefrom. In the event that the recipient of this material wishes to receive further information regarding any products, strategies or other services, it shall specifically request the same in writing from an authorized financial adviser.

Canada: This material is for information purposes only and has not been, and will not be, registered with or reviewed or approved by any regulator located in the Middle East. It does not constitute or form part of any marketing initiative, any offer to issue or sell, or any solicitation of any offer to subscribe to or purchase, any products, strategies or other services, nor shall it, or the fact of its distribution, form the basis of, or be relied on in connection with, any contract resulting therefrom. In the event that the recipient of this material wishes to receive further information regarding any products, strategies or other services, it shall specifically request the same in writing from an authorized financial adviser.

FEF Distributors, LLC (“FEFD”) (SIPC), a limited purpose broker-dealer, distributes certain First Eagle products. FEFD does not provide services to any investor but rather provides services to its First Eagle affiliates. As such, when FEFD presents a fund, strategy or other product to a prospective investor, FEFD and its representatives do not determine whether an investment in the fund, strategy or other product is in the best interests of, or is otherwise beneficial or suitable for, the investor. No statement by FEFD should be construed as a recommendation. Investors should exercise their own judgment and/or consult with a financial professional to determine whether it is advisable for the investor to invest in any First Eagle fund, strategy or product.

First Eagle Investments is the brand name for First Eagle Investment Management, LLC and its subsidiary investment advisers. First Eagle Alternative Credit and Napier Park are brand names for the two subsidiary investment advisers engaged in the alternative credit business.

©2026 First Eagle Investment Management, LLC. All rights reserved.