Q1 2026 - Market Review
“There are years, even centuries, in which nothing happens, and there are days … into which a whole lifetime is compressed.”[1]
The first quarter unmistakably felt like the latter.
An extraordinary sequence of geopolitical developments unfolded in rapid succession. The period began with a highly unusual United States military operation that led to the exfiltration of Venezuela’s President Nicolás Maduro and his wife, Cilia Flores, to face trial in New York. The episode drew immediate comparisons to the 1989 removal of Panama’s Manuel Noriega on drug trafficking charges. Within days, the Trump administration shifted its focus to Greenland, raising the prospect of a potential intervention—an episode that further strained the cohesion of the North Atlantic Treaty Organization (“NATO”).
We have expressed concerns for some time regarding the potential long-term consequences of a second Trump presidency[2],[3]. One year after the staged humiliation of Ukrainian President Volodymyr Zelenskyy during a White House visit—an event we believe symbolically marked the end of Pax Americana—the transformation of the geopolitical landscape has only accelerated. This view was echoed by Canada’s Prime Minister Mark Carney in his World Economic Forum address, where he described a “rupture in the world order.”[4] Political analyst Chantal Hébert characterized it as one of the most consequential speeches delivered abroad by a Canadian prime minister in decades. Following Davos, Mr. Carney moved swiftly to recalibrate diplomatic relations with China and India after years of strained engagement.
Domestically, President Trump’s approval ratings continued to decline, particularly on trade and inflation. The administration’s atrocious handling of peaceful demonstration by Immigration and Customs Enforcement (“ICE”), including interactions that resulted in civilian deaths, further eroded public support and ultimately led to the dismissal of Homeland Security Secretary Kristi Noem. These developments also triggered operational disruptions within the Department of Homeland Security (“DHS”), as Transportation Security Administration (“TSA”) personnel—many of whom were working without pay—began calling in sick or resigning, resulting in widespread airport delays. Notably, these disruptions occurred while the administration continued with the controversial reconstruction of the White House East Wing into a pharaonic ballroom…
Monetary policy developments added another layer of uncertainty. In late January, President Trump nominated former Federal Reserve Governor Kevin Warsh to replace Chairman Jerome Powell, whose term ends in May. The nomination surprised markets, as Mr. Warsh’s reputation as an inflation “hawk” appeared inconsistent with the administration’s preference for lower interest rates. The announcement briefly strengthened the U.S. dollar and pressured precious metals before markets began to reassess the implications. More on this in the WARSH-OCK section below.
This shock, however, proved modest relative to what followed. After suspending Omani-mediated negotiations with Iran, the United States joined Israel on February 28 in launching large-scale airstrikes. The attacks resulted in the assassination of several high-ranking figures within the Iranian regime, including Supreme Leader Ayatollah Ali Khamenei and key negotiator Ali Larijani. While the initial strikes demonstrated overwhelming tactical superiority, Iran’s response—most notably the disruption of traffic through the Strait of Hormuz—highlighted its strategic leverage. We return to this dynamic in THE HORMUZ FACTOR section below.
Amid these developments, there were few moments of respite. The Milan-Cortina Winter Olympics and a widely discussed documentary/infomercial on the First Lady provided some distraction, though both were overshadowed by broader events.
Against this turbulent backdrop, financial markets delivered mixed results.
The S&P 500 Net Total Return Index declined 4.33% during the quarter[5], while the MSCI All Country World Index fell 2.57%. In contrast, the S&P/TSX Composite Index advanced 3.94%, driven largely by strength in energy and materials. This divergence reflected both rising commodity prices and significant weakness across several large U.S. software companies, many of which have come under pressure from rapid advancements in artificial intelligence (“AI”). More on this in THE GREAT SOFTWARE RESET section below.
Market breadth improved markedly. From 2023 to 2025, fewer than one-third of S&P 500 constituents outperformed the index each year. During the first quarter, roughly 70% did so. As a result, the equally weighted S&P 500 Index outperformed the capitalization-weighted index by its widest margin since the fourth quarter of 2020. This environment proved supportive for active management strategies.
Fixed income markets began the year on a constructive note, supported by expectations that AI-driven efficiencies would contribute to disinflation. However, sentiment shifted as hostilities in Iran reintroduced the risk of an inflationary oil shock. Over the quarter, the ICE BofA Canada Broad Market Index gained 0.30%, while the ICE BofA Global Government Bond Index and ICE BofA Global Corporate & High Yield Index declined by 0.51% and 0.59%, respectively. We expect fixed income markets to remain volatile in the near term as markets grapple with the opposing forces of fiscal expansion, rising energy costs, and a gradually softening labor market.
Commodities were the standout performers. Crude oil prices rose steadily from approximately $60 per barrel at the beginning of the quarter to over $100 by quarter end, with intraday spikes exceeding $115—the largest inflation-adjusted quarterly increase since the Iranian Revolution. Petroleum distillates such as diesel and heating oil also rose sharply. Natural gas prices increased significantly, particularly in Europe and Asia, following the destruction of a portion of Qatar’s liquefied natural gas (LNG) export capacity, which forced the country to declare force majeure on several contracts. Precious metals also advanced amid record volatility, including a one-day selloff in silver of a magnitude not seen since the early 1980s. Overall, the S&P GSCI Commodities Index jumped 40.02% during the quarter.
THE GREAT SOFTWARE RESET
The question of whether AI is overhyped has now been answered—it is not. If anything, its impact may have been underestimated.
Throughout the quarter, successive releases of advanced AI systems—particularly Claude™—created what increasingly appeared to be existential challenges for a wide range of industries. The comparison with DeepSeek™ is instructive. While DeepSeek™ demonstrated that certain tasks could be performed with less computational power, raising concerns about semiconductor demand, Claude™ highlighted the opposite: that greater computational capacity produces superior outcomes, reinforcing the case for continued investment in infrastructure.
This dynamic has driven a sharp increase in capital expenditure expectations, benefiting semiconductor and hardware companies while simultaneously placing significant pressure on software firms. The resulting divergence within the technology sector has been striking. Hardware and semiconductor companies recorded strong gains, while the software sector entered a deep and broad correction.
The effects extended well beyond technology. Industries ranging from consulting and cybersecurity to insurance, publishing, entertainment, and even real estate all felt the impact. The speed and magnitude of these shifts were not fully captured by traditional factor or style frameworks.
More fundamentally, this shift may represent a reversal of a long-standing market paradigm. For over a decade, asset-light, high-margin business models dominated. However, if AI enables intellectual labor to be replicated at near-zero marginal cost, competitive advantages built over decades could erode rapidly. This dynamic helps explain the nearly 25% decline in the MSCI World Software & Services Index during the quarter.
At the time of writing, the sector is showing signs of recovery. As is often the case following indiscriminate selling, certain valuations may have become overly compressed. We believe this environment underscores the importance of active management.
WARSH-OCK
On January 30, President Trump nominated Kevin Warsh as Chair of the Federal Reserve, bringing months of speculation to an end. The market reaction was immediate and pronounced.
In the weeks leading up to the announcement, assets associated with a U.S. monetary debasement narrative had performed strongly. The U.S. dollar weakened, equities rallied, precious metals appreciated, and short-term interest rates declined. Mr. Warsh’s nomination abruptly reversed these trends, as markets reassessed the potential for a more hawkish monetary policy stance.
However, this reaction proved temporary. Within days, markets stabilized as participants concluded that the Federal Reserve would maintain its institutional independence. Nonetheless, uncertainty regarding the future path of interest rates remains unusually elevated. Recent Federal Reserve projections reveal a wide dispersion of views among policymakers, with significant disagreement regarding the trajectory of rates through 2028.
This degree of uncertainty is atypical and unlikely to be resolved in the near term.
THE HORMUZ FACTOR
From early March through the end of the quarter, global markets were largely driven by one central question: When would the Strait of Hormuz reopen?
This narrow waterway, through which roughly 25% of global oil and a substantial share of LNG trade flow, became the focal point of global economic risk. Market movements increasingly reflected shifting expectations regarding the duration of the disruption.
When reopening appeared imminent, equities in energy-importing countries such as Japan, South Korea, and India rallied. Interest rates declined, and oil prices fell. Conversely, when prolonged closure seemed likely, energy-exporting markets—including Canada and Australia—outperformed, the U.S. dollar strengthened, and oil prices surged.
Beyond market dynamics, the episode highlights a geopolitical miscalculation of epic proportions. While the initial military strikes demonstrated tactical superiority, Iran’s response revealed its ability to exert asymmetric economic pressure. The closure of the Strait effectively transformed a military advantage into a strategic vulnerability. The broader consequences have been far-reaching. Relations with European allies have deteriorated, China has strengthened its diplomatic positioning, and Russia has benefited economically. Meanwhile, despite substantial losses, Iran’s leadership structure remains intact. Moreover, there has been no uprising in the streets of Tehran. There has been no mass defection of high-ranking Islamic Revolutionary Guards Corps (“IRGC”) officials and, in spite of the generalized destruction of civilian and military targets across the country, Iran still has its uranium stockpile and is still reportedly producing drones faster than they are launching them. In short, its capacity to disrupt the world order persists. Perhaps it is worth reminding the White House that we do not live in an Orwellian dystopia where calling it a victory suffices to make it so.
While the ultimate outcome of the conflict remains uncertain, markets appear to be looking beyond the immediate disruption. Oil futures suggest expectations of eventual normalization, supported in part by alternative supply routes such as Saudi Arabia’s East-West pipeline and expanded capacity in the United Arab Emirates that have been unlocked to allow between 25% and 30% to bypass the Strait danger zone. These measures have mitigated, though not eliminated, the impact of the Strait’s closure.
WAITING FOR SPACEX
The title of this section references Waiting for Godot, a famous play by Samuel Beckett, defined by anticipation without resolution. In this case, however, the long-awaited moment may soon arrive.
SpaceX confidentially filed for an initial public offering on April 1, 2026. While details remain limited, the company is reportedly seeking a valuation between $1.75 trillion and $2 trillion, which would make it the largest IPO in history.
Several structural factors could contribute to significant volatility following the listing. Among them are potential modifications to traditional lock-up provisions, which may allow insiders greater flexibility to sell shares. While this could reduce the risk of a large, concentrated sell-off after a standard lock-up period, it may also introduce sustained selling pressure early in the stock’s trading life.
At the same time, recent Nasdaq rule changes appear designed to accommodate large-scale listings. These include a shortened timeline for index inclusion and adjustments to float requirements, effectively increasing the weight of companies with limited public float. This could accelerate demand from passive investment vehicles, providing liquidity for insiders.
Together, these dynamics create a complex supply-demand environment that may amplify volatility in the early stages of trading.
Prediction markets currently assign a high probability of an IPO in the second half of 2026. Unlike Godot, it appears that SpaceX will indeed arrive.
Patrimonica’s Investment Team
[1] Adriaan Schade van Westrum, “The Devil”, 1908
[4] Davos 2026: Special address by Mark Carney, Prime Minister of Canada
[5] Local currency returns unless specified otherwise