Market Overview
The first quarter of 2026 was a sharp departure from the momentum that carried markets through 2025. After three consecutive years of double-digit gains in U.S. equities and a historic 31.13% total return for the Canadian Markets (S&P/TSX Index) in 2025, markets entered the year poised for continued strength. Instead, the start of 2026 was a quarter defined by geopolitical shock, sector upheaval, and a swift repricing of risk.
The U.S.-Iran conflict, which escalated into open military engagement in late February, dominated the final weeks of the quarter. The effective closure of the Strait of Hormuz sent crude oil above $100 per barrel for the first time since 2022, rattling global supply chains and reigniting inflation fears that many had considered resolved. At the same time, a separate but equally consequential force was reshaping equity markets from within: artificial intelligence. Not as a tailwind this time, but as a disruptor. The growing realization that AI could undermine traditional software business models triggered a sharp selloff in the very companies that had led markets higher for the past two years.
The result was a quarter of pronounced divergence. Energy and materials surged. Technology and software sold off. Bonds were caught between competing forces: growth fears pulling yields lower and energy-driven inflation pushing them higher, finishing the quarter roughly flat. Gold continued to rally into the end of quarter. For diversified portfolios, Q1 reinforced a principle we continually emphasize as a portfolio management team at Raintree: the sources of return that dominate one period are no necessarily same ones that lead in the next. Portfolio construction and diversification, not market timing, is what carries investors through markets undergoing turbulence and structural change.
This commentary reviews the key drivers across Canadian, U.S., and international markets; summarizes fixed income conditions; provides fund and model portfolio results through March 31, 2026; and offers our updated outlook for the balance of the year.
Canadian Equity Market
Canadian equities started 2026 on a strong note, with the S&P/TSX Composite reaching a fresh all-time high above 33,000 in mid-January. Gold, energy, and the banks which are the pillars of the Canadian market all contributed early in the quarter. That changed in March when the Iran conflict rattled global markets. The TSX fell roughly 4.6% in March alone, though for the full quarter S&P TSX still gained 3.88% — a significantly better outcome than what U.S. and global benchmarks delivered.
Beneath the surface, the quarter was a tale of two markets. Gold and energy companies surged as commodity prices spiked, with gold briefly hitting a peak of 5600 USD per ounce, while oil climbed above $100 per barrel for the first time since 2022. Meanwhile, the Canadian technology subindex fell over 26%, swept up in the same global reassessment of software business models that punished tech stocks worldwide.
On the economic front, conditions remained mixed. Canadian GDP contracted 0.6% in Q4 2025, though early 2026 data showed modest growth resuming. The labour market softened, with unemployment rising to 6.7% by February. The Bank of Canada held its overnight rate at 2.25% in March, caught between two competing pressures: an economy that could use further support, and an oil-driven inflation impulse that makes cutting rates risky. Governor Macklem noted the Bank would “look through” the war’s near-term impact on inflation but cautioned that prolonged energy price pressure could change that stance.
For Canadian investors, the quarter was a reminder that our market’s tilt toward resources and financials can be a real advantage when global leadership shifts away from technology.
US Equity Markets
After three straight years of double-digit gains, U.S. stocks pulled back in Q1. The S&P 500 fell approximately 4.3% for the quarter, while the tech-heavy Nasdaq declined around 7%. It was the kind of quarter that felt worse than the numbers suggest, largely because the biggest, most recognizable names in the market were at the centre of the selloff.
Two forces were at work. The first was a shift in how markets view artificial intelligence. For the past two years, AI was seen as a rising tide that would lift most boats. In Q1, the narrative changed. Investors began to worry that AI could actually displace certain types of software businesses rather than simply enhance them. Companies that charge subscription fees for software tools, a business model that has driven enormous growth, suddenly looked vulnerable. This triggered a sharp rotation out of the technology sector and into more traditional parts of the market like energy, healthcare, and industrials.
The second force was the Iran conflict. The military escalation in late February sent oil prices surging, creating a difficult combination for markets: rising costs for businesses and consumers (which feeds inflation) alongside growing fears of an economic slowdown. That push-and-pull between inflation risk and recession risk made it a particularly challenging environment for central banks and investors alike.
Despite the weak price action, corporate earnings have held up well. S&P 500 earnings growth for Q1 is estimated at 13.0% year-over-year. That would mean the sixth consecutive quarter of double-digit growth for the US markets. The challenge is that U.S. stocks entered the year at roughly 22 times forward earnings, a valuation that leaves little room for disappointment. When sentiment shifted, prices adjusted quickly even as the underlying business fundamentals remained solid.
International & Emerging Markets
International markets held up better than the U.S. in Q1, continuing a trend that began in 2025. Developed international stocks (MSCI EAFE) declined modestly but both were well ahead of the S&P 500’s -4.4% decline.
A few factors explain this. International markets carry far less exposure to the large technology companies that drove the U.S. selloff. A weaker U.S. dollar also helped, making international investments worth more when converted back. And valuations outside the U.S. remain considerably cheaper, giving international stocks more of a cushion when sentiment turns negative.
In Europe, growth was sluggish but inflation continued to ease, allowing the European Central Bank to keep policy supportive. Japan remained a bright spot, benefiting from corporate reforms, rising wages, and a currency environment that helps its exporters compete globally.
Emerging markets came into 2026 off a very strong 2025, when the MSCI EM Index gained 33.6%, representing its best year relative to developed markets since 2017. Earnings expectations for EM companies in 2026 remain well above developed market forecasts, supported by AI-related investment in Asia and improving business practices across China, South Korea, and India. The Iran conflict introduced volatility in March, particularly for countries that import oil, but the broader picture for emerging markets remains constructive.
For our portfolios, Q1 reinforced the value of holding international exposure. When one region struggles, others can help offset the impact. We remained slightly overweight international markets in our geographic allocation through the end of the quarter.
Fixed Income Market Summary
Fixed income markets in Q1 reflected the competing tensions that defined the quarter: weakening growth expectations pulling yields lower, and rising energy-driven inflation risk pushing them higher.
Canadian bond yields fell meaningfully during March as the Iran conflict intensified and investors sought safety in sovereign debt. The 10-year Government of Canada yield settled near 3.47% by quarter-end, retreating from the spikes seen earlier in March when the Strait of Hormuz disruption was most acute. This decline in yields provided some support for bond prices, though the quarter overall was mixed for broad fixed income benchmarks.
Credit markets entered 2026 with spreads at or near all-time tight levels. This was a condition we flagged in our Q4 commentary. While spreads have widened modestly in response to geopolitical uncertainty and growth concerns, they remain historically compressed. This is worth monitoring: tight credit spreads offer limited compensation for taking on default risk, and they leave little buffer if economic conditions deteriorate further. We continue to favour a cautious posture on corporate credit exposure and prefer to take incremental risk through duration rather than credit quality at this stage of the cycle.
The Bank of Canada’s decision to hold at 2.25% in March underscored the policy dilemma facing central banks globally. Domestic economic data which include a Q4 GDP contraction and a softening labour market, would ordinarily support further easing. But the oil price shock complicates that picture, raising the risk that cutting rates could amplify inflationary pressures. The Bank adopted a notably more reactive tone in its March statement, replacing language about the current rate being “appropriate” with a commitment to “respond as needed” — a shift that signals heightened uncertainty about the path forward.
In the U.S., the Federal Reserve faces a similar challenge. Markets are currently pricing roughly two rate cuts for 2026, though expectations have become more volatile. Fed Chair Powell noted that inflation expectations remain anchored and suggested the central bank would look through the energy price spike if it proves temporary but acknowledged that a prolonged conflict could change that assessment.
Looking ahead, fixed income continues to serve an important function in the diversified models portfolios we offer clients. Starting yields are materially higher than they were during the ultra-low-rate era, providing stronger income generation and a larger cushion against the kind of market price volatility that was on full display this quarter.
Raintree Fund Performance
All four Raintree Funds finished Q1 in positive territory. This was a strong relative outcome in a quarter where the S&P 500 fell 4.37% and global equities ex-Canada declined 0.55%. March was a difficult month across the board as the Iran conflict drove a broad selloff, but the earlier gains from January and February provided enough of a buffer to keep each fund positive for the quarter. Alternative Strategies and Core Equity led, while Core Fixed Income quietly outperformed its benchmark by a wide margin. The tables below show results through March 31, 2026.
Raintree Funds – Returns (as of March 31, 2026)
Reference Indices – Returns (as of March 31, 2026)
Key Takeaways:
- Core Equity returned 1.21% for the quarter despite a sharp March drawdown. A deliberate overweight to Canadian equities (representing a larger allocation of our equity purchases than all other markets combined in Q1) proved to be the right tactical asset allocation decision, as Canadian Equities gained 3.88% while US Equities fell -4.37% and global equities -0.55%. Canada’s resource and financial sector tilt provided meaningful insulation from the technology-led selloff that hit U.S. and international markets.
- Alternative Strategies led the funds at 1.49% for the quarter, continuing to demonstrate its value as portfolio with a more absolute return stream during periods of equity market stress. Performance was partially offset by some of our event-driven managers with equity exposure, but the mandate delivered on its diversification objective.
- Enhanced Yield continued to provide with steady income generation offset by equity sensitivity within the fund. The fund has seen a meaningful rebound into the beginning of Q2 as conditions have stabilized. Together, Enhanced Yield and Alternative Strategies continued to serve their intended role as a return stream less correlated to other asset classes.
- Core Fixed Income returned 0.58% for the quarter, meaningfully outperforming its benchmark the Canadian Bond Universe (XBB) which gained just 0.07%. With XBB down nearly 2% in March alone, the fund’s relative resilience underscores the value of active management within fixed income, particularly in an environment where inflation and growth risks are creating volatility in yields.
Model Performance
Model portfolio performance was positive across all mandates in Q1, with returns ranging from approximately 0.15% to 1.30%. As expected, higher-equity and alternative models delivered stronger results. Growth and Growth Plus led the way, benefiting from the strong start to the year in January and February that provided enough cushion to absorb March’s selloff. Flex+ generally led within each risk tier, reflecting a higher Core Equity allocation.
Income+ delivered more modest returns across all profiles, which is consistent with its mandate. It is designed for capital preservation and steady income. On a trailing one-year basis, the results across all models remain strong, with Growth and Growth Plus portfolios returning roughly 16–23% depending on the sleeve.
Detailed Q1 and one-year performance by model is shown below.
Visual: Q1 Performance by Model
Visual: One-Year Performance by Model
Our Positioning
We are not making dramatic shifts in response to Q1’s volatility. Our portfolios were positioned for many of the dynamics that played out this quarter. That said, we continue evaluate allocations as the geopolitical environment evolves.
Core Equity: Our overweight to Canadian equities proved its value in Q1, with Canada meaningfully outperforming the U.S. and global benchmarks thanks to its commodity exposure. We will continue to evaluate this positioning but remain inclined to maintain our tilt toward Canada and international markets, particularly if the Iran conflict stabilizes or moves toward resolution. More broadly, our equity portfolio is well positioned for a continued broadening of market leadership. We carry significant small-cap exposure, are well diversified across geographies, and are underweight technology — a combination that served us well this quarter and one we believe remains appropriate looking ahead.
Core Fixed Income: Core Fixed Income outperformed its benchmark in Q1, and we expect to continue weighting new assets toward short-duration and core government bonds rather than corporate credit. The reason is straightforward: credit spreads remain tight, meaning investors are not being paid much extra for lending to corporations instead of governments. Until that changes, we see better value in the safety and flexibility of government bonds.
Alternatives and Enhanced Yield: Alternative Strategies continued to be a robust and resilient source of return, providing diversification through real assets and market-neutral exposure, both of which offer meaningful inflation protection. Given the volatility seen in Q1, we increased our allocation to market-neutral strategies during the quarter. Enhanced Yield continued to generate consistent income, and the outlook has improved heading into Q2 as the equity-exposed portion of the portfolio has stabilized following the March selloff.
Final Thoughts
Q1 2026 was a reminder that markets do not move in straight lines and that the factors driving returns can shift quickly and dramatically. The quarter tested the resolve of investors who had grown accustomed to technology-led gains and benign volatility. It also validated the principles that guide our approach: diversification across geographies and asset classes, disciplined rebalancing, and portfolio construction that prioritizes resilience alongside growth.
We believe the current environment, while uncertain, is one that favours well-constructed portfolios with broadly diversified equity exposure and real assets to mitigate equity volatility and to hedge against potential inflation shocks. The selloff has created pockets of value. Earnings fundamentals remain supportive. The broadening of market leadership, a development we are well positioned for, is now underway.
If you have any questions about this commentary or your portfolio, please don’t hesitate to contact your advisor or our team. We’re here to help, and we appreciate your trust in Raintree Wealth Management.