Executive Summary
- Risk assets declined sharply as geopolitics outweighed fundamentals
- Macro de‑risking dominated as growth and value declined together
- Brent crude posted its largest monthly gain since the 1970s
- Falling 5‑year breakeven rates and rising real yields tightened financial conditions
- S&P 500 Q1 EPS is forecast to grow double digits for a sixth consecutive quarter
March marked a sharp inflection point for global markets, as geopolitical risk abruptly displaced economic resilience as the dominant driver of asset prices. After entering the month with constructive momentum, improving breadth, and rising confidence as evidenced by the S&P 500 Equal Weight Index sitting at all‑time highs, investors were forced to rapidly reprice risk following a significant escalation in the U.S.-Iran conflict. The resulting surge in energy prices reignited near‑term inflation concerns, drove Treasury yields materially higher, and triggered a broad, correlated selloff across risk assets.
Unlike prior episodes of volatility that were largely contained within specific styles or sectors, the March drawdown was notable for its scope and speed as markets shifted quickly from rotation to outright de‑risking amid higher inflation expectations, reduced policy flexibility, and slowing growth. Energy supply disruptions and the effective closure of key Middle Eastern transit routes drove one of the most severe monthly oil price shocks in decades, forcing investors to reassess the durability of disinflation progress and the forward path of monetary policy.
The inflationary impulse from energy reverberated across rates markets. Treasury yields rose sharply throughout March, with front‑end rates leading the move as investors pared back expectations for near‑term Federal Reserve cuts. The “bear flattening” occurred alongside heightened rate volatility as evidenced by the sharp reversal higher in the MOVE Index (chart below). Importantly, this repricing was not driven by an upside surprise in core inflation data, but rather by the market’s recognition that energy‑driven inflation shocks complicate the Fed’s ability to respond preemptively to any growth slowdown.
U.S. Equity Benchmarks
Against this backdrop where geopolitics overwhelmed fundamentals, the vast majority of industries struggled to absorb the shock. Major U.S. indices declined meaningfully, with selling pressure extending well beyond prior areas of leadership. Segments of the market that previously benefited from improving breadth (equal weight indices, midcaps, and cyclicals) also declined meaningfully as correlations rose and risk appetite diminished. The result was a rare month in which diversification across styles and market capitalizations provided limited protection. The broad U.S. equity benchmarks declined between 4.5% and 6%, with the S&P 500 Equal Weight Index down 6%.
Growth and value both moved decisively lower in March, underscoring that the month’s selloff was driven by macro de‑risking rather than style rotation. Large‑cap growth declined alongside value as the surge in energy prices and Treasury yields overwhelmed relative style considerations. Small‑cap growth and value similarly weakened, reflecting heightened sensitivity to funding conditions and rising uncertainty around inflation and policy. The sharp declines across these four buckets are a reminder that in periods of acute macro stress, diversification across styles offers limited insulation when the dominant impulse is risk reduction rather than reallocation.
Sector Performance
Sector performance amongst large and small caps was dominated by the energy complex, which stood out as the sole area of strength amid rising oil prices. Energy equities posted strong gains as crude prices surged, reflecting both supply disruptions and heightened geopolitical risk premiums. Outside of energy, the remaining ten large cap sectors finished the month lower, including both economically sensitive groups (Industrials, Materials, and Consumer Discretionary), as well as defensive (Healthcare and Staples).
Rates, Precious Metals, Bitcoin and Oil
Cross‑asset performance in March reinforced the market’s inflation‑focused response to geopolitical developments. Treasury yields rose sharply, led by the belly of the curve. The 2yr UST Yield rose 42 basis points (bps) to 3.79%, and the 10yr UST Yield rose 38bps to 4.32%.
The Bloomberg Commodity Index (+11.2%) had its strongest monthly gain since May 2009 due predominantly to the sharp rise in energy prices. Specifically, Brent Crude (+63%) registered its strongest gain since the 1970s and meaningfully outperformed WTI crude (+51%). Brent serves as the benchmark for two-thirds of the globally traded crude and accordingly reflects a much larger geopolitical risk premium tied to export availability, shipping insurance and rerouting risk.
Traditional inflation hedges failed to perform their historical role, which may suggest, in part, markets are less concerned about the longer-term inflation impact from the geopolitical conflict. While the greenback saw broad gains against most currency pairs, precious metals declined sharply (gold -11.6%; silver -19.9%) as the 5-year forward breakeven rate (below chart, upper panel) descended toward the lows seen during the tariff concerns of last Spring. Higher nominal rates amidst falling inflation expectations led to rising real rates (below chart, lower panel) which supported the U.S. dollar. However, the combination of higher rates, higher energy prices, and thus, tighter financial conditions created a challenging environment for risk assets, particularly given the limited ability of monetary policy to offset supply driven inflation shocks in the near term.
Looking Ahead
For the upcoming corporate earnings season, nine of eleven sectors are expected to report YoY earnings growth while all eleven sectors are expected to report YoY revenue growth, according to FactSet. The two sectors with expected earnings declines are Health Care and Communications Services. For S&P 500 companies, Q1 consensus estimates are forecasting 13% YoY EPS growth which would mark the sixth consecutive quarter of double‑digit earnings growth for the index and up from 12.8% growth expected at the start of Q1. On the top line, S&P 500 revenues are expected to increase 9.7% YoY, which is up from expectations of 8.2% at the start of Q1. From a valuation perspective, the forward 12‑month P/E for the S&P 500 sits near 19.9x, roughly in line with the five‑year average but still above longer‑term norms.
The market enters the next phase of the quarter on fundamentally sound footing, but with a heightened sensitivity to external shocks. The recent repricing across rates, commodities, and equities reflects an adjustment to a more complex backdrop rather than a breakdown in underlying trends. Corporate fundamentals remain supportive, yet the persistence of elevated energy prices and geopolitical uncertainty has increased the range of potential outcomes for inflation, policy, and risk assets in the near term. As a result, market behavior is likely to be more sensitive to headlines even as earnings continue to provide an important stabilizing force.
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