A Strong Start, Then a Sudden Shift
The first quarter of 2026 began on a strong note. Across equities, fixed income, and alternatives, markets moved higher through the early part of the year, supported by resilient economic data, steady earnings, and continued investor optimism. For a time, it appeared that the positive momentum from late 2025 would carry into the new year.
That narrative changed abruptly at the end of February.
Escalating geopolitical tensions culminated in a major conflict involving Iran, triggering a sharp and immediate shift in market sentiment. Volatility increased, risk assets pulled back, and global markets began to reprice a more uncertain environment. Disruptions to global trade and energy markets added further complexity, reinforcing concerns about inflation and global growth.
What had been a steady, constructive start to the year quickly turned into a more volatile and unpredictable landscape. Importantly, however, the strength seen earlier in the quarter helped cushion the impact. While many major benchmarks ultimately finished in negative territory, diversified portfolios — supported by alternatives and select areas of equities — remained positive.
The first quarter serves as a reminder of how quickly conditions can change, and why maintaining a diversified, well-balanced portfolio remains critical when unexpected events reshape the market environment.
Equities: Leadership Shifts
Equity markets delivered a volatile and uneven quarter. Broad benchmarks declined, with the S&P 500 falling -4.3% and the MSCI All Country World Index down -3.2%. Beneath the surface, however, the story was far more nuanced.
Leadership shifted meaningfully. Value outperformed growth, and international equities outpaced domestic markets — a notable change from recent years. Small-cap value was a standout (+8.61% as represented by the Avantis Small Cap Value Fund), while emerging markets* (+3.6%) and international strategies** (+3.0%) also contributed positively.
In contrast, leadership shifted away from the highest-valued segments of the market. The “Magnificent 7” — which had driven much of the market’s gains in recent years — declined approximately 11% during the quarter, while the remaining S&P 500 constituents were roughly flat. This divergence highlights an important theme we continue to preach: valuation matters. After an extended period of outperformance, this pullback can be viewed as a healthy rotation rather than a deterioration in fundamentals, as investors broadened their focus beyond a narrow group of market leaders.
Against this backdrop, DWM’s Core Equity composite† generated a positive return of +1.2%, outperforming major benchmarks. This result highlights the benefit of diversification across styles and geographies — particularly during periods when market leadership broadens.
Fixed Income: More Than Meets the Eye
At first glance, fixed income markets appeared relatively stable. The Barclays U.S. Aggregate Bond Index was basically flat, while global bonds*** lost a little ground (-1.1%) . However, these headline figures mask a more dynamic quarter.
Bond markets began the year with solid gains before reversing course as inflation concerns resurfaced and interest rate expectations shifted. At the start of the year, markets expected one or two rate cuts; today, expectations have shifted to virtually none.
In this volatile environment, DWM’s Core Fixed Income composite† generated a positive return of +0.22%, modestly outperforming the major benchmarks . One of our favorite holdings, JP Morgan Strategic Opportunities Fund, a flexible income-oriented strategy, led performance with a 0.8% return, reinforcing the role of active management in navigating shifting rate conditions.
Fixed income continues to serve as both a stabilizer and a source of return — even in a more uncertain policy environment.
Alternatives: A Strong Start Led by Gold
Alternative investments were a clear bright spot in the first quarter. The Wilshire Liquid Alternatives Index gained +3.5%, while DWM’s Liquid Alternatives composite† outperformed with a return of +4.6%.
Gold, as represented by the iShares Gold Trust, was a standout performer, rising +8.60% for the quarter. As our largest allocation within alternatives, it played a meaningful role in overall portfolio performance. Its strength reflects continued demand driven by geopolitical uncertainty, inflation concerns, and central bank activity.
Other strategies also contributed, including the Victory Market Neutral Income Fund (+6.9%) and the Standpoint Multi-Asset Fund (+7.1%). Overall, alternatives provided both diversification and, in many cases, positive returns, reinforcing their role as active contributors within portfolios.
Putting It All Together
While individual asset classes delivered mixed results, outcomes varied widely depending on how portfolios were positioned. Many investors — particularly those heavily concentrated in the S&P 500 and the Magnificent 7 — experienced negative returns during the quarter as leadership shifted.
In contrast, investors with true diversification — not only across asset classes, but also within them — had the opportunity to generate positive results in the first quarter. This divergence underscores a key point: diversification is not just about managing risk, but about improving outcomes when market leadership rotates.
The chart below highlights the wide dispersion in returns across major asset classes during the first quarter.
1Q26 BENCHMARK RETURNS
What’s Next: Navigating an Uncertain Environment
While the near-term outlook is uncertain, there are several encouraging signs worth highlighting.
Corporate profitability remains strong, with S&P 500 profit margins near record highs. At the same time, global economic activity remains resilient, with broad-based strength across both developed and emerging markets. On the consumer side, the average income tax refund for 2025 hitting people’s bank accounts around now should provide an additional tailwind, supporting spending in the months ahead. And who knows – maybe there will even be a tariff rebate at some point!
Taken together, these factors suggest that the underlying foundation of the economy remains solid.
That said, the path forward is far from clear. The recent geopolitical conflict involving Iran has introduced risks that are difficult to quantify and could have lasting implications for global markets.
Even if tensions ease in the near term, the effects are unlikely to fade quickly. Higher energy prices may keep inflation elevated, limiting the Federal Reserve’s ability to cut rates and keeping policy tighter for longer. With gasoline prices approaching $4 per gallon, the strain is being felt unevenly — reinforcing the “K-shaped” economy, where lower-income households bear a disproportionate share of rising costs. In this environment, both equities and fixed income face headwinds, as rising inflation can increase correlations between the two asset classes and reduce the benefits of traditional diversification.
In periods like this, trying to time markets becomes especially challenging — and often counterproductive.
Staying the Course
In uncertain environments like this, the focus should remain on staying invested, staying diversified, and staying disciplined.
The first quarter of 2026 reinforces why. While many concentrated portfolios struggled, diversified investors were better positioned to navigate shifting market leadership.
At DWM, our approach remains consistent: build diversified portfolios, rebalance thoughtfully, and position clients to navigate a wide range of outcomes — not just the ones expected.
Brett M. Detterbeck, CFA, CFP®
DETTERBECK WEALTH MANAGEMENT
* represented by the DFA Emerging Markets Fund, ** represented by the Goldman Sachs International Equity Fund, *** represented by the Barclays Capital Global Agg Bond Index
†Performance shown reflects composite results of multiple client accounts managed in accordance with DWM investment models. Composite results are presented to illustrate strategy performance and may not reflect the performance of any single client account. Actual client results may vary due to differences in timing, cash flows, fees, and account-specific factors. Past performance is not indicative of future results.