Navigating Volatility with Confidence and Perspective

A turbulent start to 2026

The first quarter of 2026 was a turbulent start to the year. Markets began on a strong note, but the outbreak of the conflict in the Middle East in late February sent energy prices sharply higher and injected fresh uncertainty across global markets. 

The S&P 500 declined 4.6% for the quarter, with the Magnificent 7 falling over 11%. Value stocks significantly outperformed growth, and energy was the standout sector, surging over 38%. Despite the turbulence, the quarter ended on a strong note, with the S&P 500 posting its best single-day gain since last May on the final trading day of March.

Three key themes shaping Q2 2026

1. Geopolitical uncertainty and energy markets

The conflict involving Iran has been the dominant force shaping markets in 2026. The effective closure of the Strait of Hormuz disrupted roughly 20% of the world’s daily oil supply, sending WTI crude from around $55 per barrel in December to over $101 by the end of March. Gasoline prices have climbed above $4 per gallon nationally.

However, the U.S. economy enters this shock from a position of strength as domestic oil production is much higher today than during past oil shocks. Gasoline represents just 1.9% of consumer spending, domestic oil production, and household and corporate balance sheets remain in strong shape. The key question going forward is whether geopolitical tensions ease and energy markets stabilize. If they do, some of today’s fears could fade just as quickly as they emerged.

2. Earnings remain strong and valuations have improved

Despite the turbulence, corporate earnings continue to deliver. Last quarter, 75% of S&P 500 companies beat earnings expectations, and the index posted its fifth consecutive quarter of double-digit earnings growth. Encouragingly, earnings growth is broadening beyond technology into financials, industrials, and energy.

The recent pullback has also improved valuations. The S&P 500’s forward price-to-earnings ratio has compressed from over 23x in late 2025 to roughly 19.1x, right in line with the 30-year average. Strong earnings and more reasonable valuations have historically been a recipe for solid forward returns.

3. Midterm election years: volatility is the norm, but history favors the patient

2026 is a midterm election year, and if the volatility we have experienced so far feels uncomfortable, history suggests we may need to buckle up for more. Midterm years have historically been the weakest of the four-year presidential cycle, averaging gains of less than 5%.

But what they are really known for is their intra-year volatility. On average, midterm years see a 17.5% peak-to-trough correction during the year, far more than any other year in the cycle. That is the challenging part. The encouraging part is what comes next: one year after the midterm-year low, stocks have averaged a gain of nearly 32%. That is a remarkable track record.

Looking at the data above, there is another interesting pattern: midterm year lows do not tend to happen early in the year. On average, the bottom has occurred around August 18, with a median date of September 29. This means the volatility we are experiencing right now could very well continue into the summer and fall before the typical recovery takes hold.

However, look at those returns one year after the low. We cannot use this as a predictor, but the message from history is clear: if we see the typical midyear pullback that midterm years are known for, it will be critically important to stay the course and not panic. Investors who have stayed invested through past midterm year corrections have been rewarded handsomely on the other side.

The bottom line

It is completely natural to feel uneasy when markets are volatile and the news cycle feels overwhelming. Geopolitical events, rising energy prices, and shifting Fed expectations are all real concerns. However, history consistently reminds us that these periods of discomfort are a normal part of investing.

Despite average intra-year declines of 14.2%, annual returns have been positive in 35 of the last 46 years.

Consumer sentiment sits near its lowest levels in years, yet history shows that when sentiment troughs like this, the S&P 500 has averaged a return of 24.1% over the following 12 months. Low confidence often means the bar for a better-than-expected outcome is lower, which can fuel strong recoveries.

The American economy remains dynamic and innovative. Companies continue to grow earnings. Household balance sheets are healthy. The fundamentals that drive long-term wealth creation are intact. The investors who stay diversified, stay disciplined and stay patient are the ones who will benefit most from the opportunities ahead. Please note past performance is not a guarantee of future results.