Valuation Reset Amid Geopolitical Shock. Uncertainty Persists but Opportunities Are Emerging

S&P 500 Posts Worst Quarter Since Q3 2022

Amid heightened Iran tensions, growing stress in private credit, and a rotation out of AI-related names, large-cap equities struggled in Q1 2026. The S&P 500 Index declined 4.3%, marking its worst quarter since Q3 2022, while the tech-heavy Nasdaq 100 Index fell even further, down 5.8%. Meanwhile, the S&P 500 Equal Weight Index eked out a modest 0.7% gain. Despite a difficult March, other rotational pockets were able to hold onto gains for the quarter as US small-caps led (+3.5%), followed by international developed equities (+2.8%) and US mid-caps (+2.6%). Bonds were mixed as Treasury Inflation Protected Notes and the US Aggregate Bond Index were up marginally (+0.3% and +0.1%, respectively) while high yield credits and municipal bonds fell (-0.4% each). Commodities produced strong positive returns as crude oil rose 84.0%, broad based commodities increased 24.4%, gold was up 8.6%, and silver gained 5.8%.

Fed Holds Firm, Inflation Persists, and Uncertainty Rises

The Federal Reserve held the federal funds rate steady at the March FOMC meeting in an 11–1 vote, maintaining the target range at 3.50–3.75%. This marks the second consecutive rate hold in 2026. The lone dissent came from Governor Christopher Waller, who favored a 25 bps cut. The decision was supported by a mixed but cautious economic backdrop. The February employment report showed Nonfarm Payrolls declining by 92,000, versus expectations for a gain, while the unemployment rate ticked up to 4.4% compared to the unchanged 4.3% estimate. At the same time, inflation data came in stronger than expected, with February PPI (Producer Price Index) readings hotter than forecasted across the board, leaving annualized core PPI at 3.9%. Fed officials and markets have also faced elevated uncertainty amid ongoing developments in the Middle East. “We see the current stance of policy as appropriately restrictive, and we will continue to monitor incoming data and the balance of risks, including geopolitical developments,” stated Fed Chairman Jerome

Powell. Looking ahead to April, the CME FedWatch Tool is pricing in another hold with a 99% probability. Although small, the remaining probability has shifted to a hike, with a cut now off the table.

Geopolitical Tension

Over the course of March, geopolitical risk emerged as a dominant market theme, driven by escalating tensions among the United States, Israel, and Iran. The conflict intensified from initial shipping disruptions from the effective closing of the Strait of Hormuz to direct strikes on critical infrastructure, driving significant volatility across commodity markets. Brent and WTI crude oil prices surged, reaching highs above $119 during the month, largely due to the effective closure of the strait. Approximately 80% of the oil and LNG transiting through the strait is destined for Asia, and key regional exporters, including Saudi Arabia, Kuwait, Qatar, Iraq, and Iran, play a critical role in global energy supply. Beyond crude oil and LNG, refined products such as jet fuel also saw sharp price increases. Meanwhile, nitrogen-based fertilizers (including urea and ammonia), other key agricultural inputs, and industrial metals like aluminum and nickel experienced heightened volatility, as supply bottlenecks and shipping delays disrupted global markets and pushed up costs across food, energy, and industrial supply chains.

Stagflation Fears Rise

Although markets rallied on the final day of March amid signs of potential off-ramps to end the war, some economic damage may already be underway. Concerns about stagflation, slowing growth combined with persistent inflation, have resurfaced as rising energy prices and higher bond yields have created a difficult environment for central banks. Despite pulling back from recent highs, 2-year yields globally have moved higher as investors scale back expectations for near-term rate cuts. For instance, markets are now pricing at least two rate hikes from the Bank of England this year, a shift from earlier expectations one to two cuts before the war began. Similar tightening is expected from the European Central Bank, as Eurozone headline annualized inflation jumped from 1.9% in February to a flash estimate of 2.5% in March, marking one of the largest monthly increases since 2022. At the same time, the S&P Global flash PMI data indicated weakening private sector growth across the Eurozone in March, with cost pressures rising alongside moderating output. In the US, although the economy is generally viewed as less vulnerable given its net energy exporter status and lower reliance on the Strait of Hormuz, March flash PMI data also showed slowing business activity coupled with elevated input price pressures. This raises the question of whether stagflation pressures will remain concentrated in international markets or persist in the US as well.

Opportunity for US Equities Amid P/E Derating

Over the past month, the S&P 500 has experienced a notable valuation derating, with its NTM P/E multiple compressing by as much as 17%. At the same time, consensus NTM EPS growth expectations have moved higher, highlighting a disconnect between valuations and earnings amid both AI-related and geopolitical tensions. Morgan Stanley Research notes that forward returns have historically been above average when NTM P/E drawdowns exceed 10%, earnings growth is inflecting higher, and earnings revisions breadth remains positive. In the following month, the market historically delivered positive returns 69% of the time, with a median gain of 3%, compared with an all-days average of 1% since 1996. Extending to three months, the positive hit rate rises to 75%, with a median return of 7%, versus a long-term average of 2%. Looking further out, six- and twelve-month positive hit rates are 81% and 69%, respectively, suggesting the risk/reward skews favorably. Moreover, unlike past oil shocks, Brent crude has not surged as sharply, and earnings growth is currently accelerating and positive, whereas it was decelerating and negative in prior recessionary periods. Despite the ongoing conflict, this backdrop points to a potentially attractive entry point for equities.

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Warranties & Disclaimers

As of the time of this publication, Astoria Portfolio Advisors held positions in SPYG, SPY, SPYV, SPDW, SPMD, SPSM, SPEM, SPBO, SPAB, MUB, IEF, SPIP, GLD, SLV, USO, and BCI on behalf of its clients. There are no warranties implied. Past performance is not indicative of future results. Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. The returns in this report are based on data from frequently used indices and ETFs. This information contained herein has been prepared by Astoria Portfolio Advisors LLC on the basis of publicly available information, internally developed data, and other third-party sources believed to be reliable. Astoria Portfolio Advisors LLC has not sought to independently verify information obtained from public and third-party sources and makes no representations or warranties as to the accuracy, completeness, or reliability of such information.  Astoria Portfolio Advisors LLC is a registered investment adviser located in New York. Astoria Portfolio Advisors LLC may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements