Markets were choppy in March. Investors scrutinized mega‑cap tech’s last round of earning results for tangible AI payoffs, with continued criticism towards the high amount of spending on AI infrastructure and development. Investors also saw events at the end of February that caused heightened uncertainty going into the month. The US Supreme Court struck down IEEPA‑based tariffs and the administration pivoted to 10% global tariffs in response. There was also the start of the conflict in the Middle East, which drove a supply induced energy shock. Investors focused on worries about inflation and potential economic damage, over strong earnings and economic resilience. A material portion of the world’s energy and fertilizer supply that flowed through the Strait of Hormuz, came to a halt. Trends at the beginning of the year reversed. This included the reversal of the depreciation in the USD, as well as a retracement gold, silver, and international stocks.
We saw a broad base sell off in global bond markets over the month, echoing concerns from the conflict in the Middle East. The US Federal Reserve held rates steady in their meeting but stated the elevated inflation risk. Value outperformed growth stocks from the rotation out of mega-cap tech. Emerging markets had been outperforming global markets earlier in the quarter, but the energy shock erased the region’s year‑to‑date advance by the end of the month, with Asia’s most energy import based economies being hit the hardest.
Stocks and Commodities
The S&P 500 fell 4.98% in March. From the start of the year, investors have been questioning whether new AI capabilities would be a threat to software as a service (SaaS). Even as Q4 results were generally strong, investors demanded clearer payoffs from the hyperscalers’ increasing capex spend on AI. The effects of the Middle East Conflict brought higher treasury yields and a stronger US dollar, both negative for growth stocks. In the immediate aftermath, investors showed a quality bias that briefly made some mega‑caps resilient to the downward price pressure. However, by the end of March, the tech sector fell 3.8%, as shown by the MSIC US Technology Index.
The high weighting of energy in Canada’s TSX index gave Canadian equities a tailwind in March, with the energy sector ending the month with a gain of 8.2%. There was a big gap from the next best returning sectors, Utilities and Information Technology only landed up 0.4%. With the price appreciation we have also seen an increase in energy sector valuations. The sector stands at around 24x forward earnings, a big increase from the 10x valuation during 2022-2023. Heightened activity from Ottawa on defense spending, and higher expectations that energy infrastructure spending will increase justify these valuations, which is a big shift in sentiment from 2022/2023. Energy performance has offset headwinds from the decline in the price of gold, which also holds a big weighting in the TSX, as well as the economic headwinds from Canada’s recent population decline.
Japan’s TOPIX stock index had a great performance in the first few months of the year from a softer yen and the Liberal Democratic Party’s snap‑election landslide in early February. Investors took this win as a green light for pro‑growth policy. The index suffered a sharp reversal in March as the conflict in the Middle East started and the subsequent energy shock rippled through the region. Japan was vulnerable from being a major energy importer and relied on the supply coming from the Straight of Hormuz. The index fell -11.19% for the month, but because of its strong previous performance, ended the quarter at a moderate gain of 3.6%.
In Continental Europe, the MSCI Europe ex‑UK also retreated 9.4% in March, ending the first quarter down 2.3%, as energy security fears resurfaced. Benchmark Dutch TTF gas prices spiked to the highest since 2023 after attacks on Qatar’s Ras Laffan, and disruptions through the Strait of Hormuz, reviving concerns about economic growth and company margins.
In the UK, the FTSE All‑Share Index faired better than other international markets, losing only 7.2%, and finished the quarter up 2.4%, as its commodity‑tilted composition was lifted when energy equities outperformed, and a weaker pound to USD, from a flight to safety into the USD, added a tailwind to UK multinational companies. Stock performance from later in the month showed mining companies and energy names leading the index.
Emerging markets experienced the most notable reversal, declining 13.03% for the month and ending down 0.1% for the quarter. This was tracked by the MSCI Emerging Markets index. Before the conflict in the Middle East, AI enthusiasm and a strong demand for semiconductors helped Taiwan and Korea. Once the conflict broke out, there was a sharp change in sentiment as the region’s heavy dependence on energy flows from the strait caused a large headwind for Asian countries. As most of the crude and LNG moving through the Strait of Hormuz is destined for Asia, the shipping shutdown and infrastructure strikes disproportionately effected Asia’s energy supply.
Commodities have been the market leader over the first quarter of the year, with the Bloomberg Commodity Index finishing off the month with a return of 24.5%. This was mainly attributed to the rise in energy prices. As the Straight of Hormuz closed, around 10 million barrels a day were cut off from world supply. IEA called this the biggest modern‑era supply disruption. An emergency release of 400 million barrels was implemented to ease the stress, but it couldn’t prevent a record‑scale monthly rally for global crude oil prices. Physical products like jet fuel also spiked, going up even more than was expected in the futures market. LNG was affected after attacks in Qatar. The shock additionally rippled through global agriculture from an increase in the cost of freight, war‑risk insurance, and a fertilizer supply bottleneck that shifted the upcoming planting season towards less nitrogen‑intensive crops. Gold is usually seen as a strong asset to hold during times of market stress, but it pulled back, dynamics such as the market prioritizing cash and other instruments to uphold short term liquidity needs, a reaction from higher rate expectations, and a more valuable US dollar, overrode it’s usual trading dynamics.
Bonds
UK Gilts started the year performing well, with optimism around fading domestic inflation and expected Bank of England rate cuts. The sentiment changed from the energy shock, causing the Bloomberg UK Aggregate Bond index to end the month down 3.6%, in local currency terms. The UK’s high natural-gas sensitivity was exposed and pushed the Bank of England’s Monetary Policy Committee into a more hawkish posture at it’s March meeting. The meeting ultimately showed the Bank of England staying on hold with rate hikes, but included comments from Swati Dhingra, a member of the Bank of England’s Monetary Policy Committee, alluding to the possibility of needing to hike rates in the future. Comments that marked a notable shift in fiscal support for households also fueled the increase in yields.
Across the Eurozone, sovereign bonds also slipped by 3% in March, tracked by the Bloomberg Euro Aggregate bond index. While the European Central bank held rates in March, staff projections indicated inflation hitting 3.1% in Q2 and officials emphasized they could move “meeting-by-meeting”, a stance that markets read to mean rate hikes were being considered.
Japanese Government Bonds fell 1.7%, with the long end of the curve leading the selloff. Investors priced in a looser fiscal stance under Prime Minister Sanae Takaichi, after February’s snap election, and the Bank of Japan keeping near-term hikes on the table. The bank cited that they were primarily concerned about upside inflation risks. The yen depreciated against the USD from the flight to safety and the continued lower interest rate differential between Japan and the US.
Canadian bonds ended the month down 2%, tracked by the ICE Canada Broad Market Bond Index. Long dated bonds underperformed, retracing 3.6%, while the front of the curve only took a 0.9% loss. Corporate and Federal government bonds paired losses, down 1.7% and 1.8% respectively. After strong economic data releases at the end of last year, the start of 2026 proved to be softer, with the Labour Force Survey showing anemic hiring. This led to an easing in rate hike expectations. The expectations spiked up again, however, when the Middle East Conflict started, as inflation pressure was expected from higher oil prices. The economic situation remains uncertain, which put the Bank of Canada in a wait and see mode, holding rates steady at the March meeting.
US Treasuries ended the month the same as Canadian government bonds, decreasing -1.8% in March. Both the US and Canada are structurally less vulnerable to energy spikes as Europe and parts of Asia. The US also had a soft labour market report. This helped tamper inflation pressure. These factors supported the FOMC’s decision to hold rates steady at it’s March meeting. They reiterated an outlook consistent with a single 2026 rate cut expectation, siting the need for further disinflationary progress. US bond markets reacted to the meeting by largely pricing out 2026 cuts. Short-term bond rates rose to a seven-month high, with the 2‑year US treasury yield moving above the effective funds rate of 3.5-3.75% to close out March at 3.78%.
Conclusion
March showed an otherwise resilient global economy being rattled by a volatile geopolitical backdrop. While the base case is for near term de‑escalation in the Middle East, given strong incentives for key actors to step back, the outlook for both inflation and economic growth remain uncertain. This month highlighted the importance for investment portfolios to be built with proper diversification and protection against shocks that can cause inflation or an economic slowdown.
