From Conflict to Opportunity: How Q1 2026 Reshaped Global Markets

Global markets, using the MSCI AC World Index as proxy, were trending up in the low to mid-single digit range until the end of February as earnings growth remained positive and the interest rate environment remained benign with a downward bias. International markets were especially strong with EAFE & Canada up in the high single digit range while the US market was roughly flat. 

However, sentiment quickly turned negative as the US and Israel initiated military operations striking Iran on the weekend of Feb 28.  At its lowest, global markets were down high single digits with the US was down approximately6%, and Europe and Japan and were down 8% and 11 respectively. Oil rose +78% to almost $120/bbl at its peak and steadily climbed higher throughout the month of March. Bond yields rose worldwide +30-40bps at the 10yr tenor, while gold declined from a high of above $5,300 to a low of about $4,200. 

Iran’s retaliation against the US/Israel strikes included missile & drone attacks across neighbouring gulf states including some of Iran’s allies and a stoppage of oil & gas flow through the Strait of Hormuz. The strait represents approximately 20% of global production. Most of these barrels flow to China (representing approximately 1/3 of the total), India, S Korea, Japan, Rest of Asia/Oceania and Europe - ie mainly countries without significant domestic supply. Some experts note that because some Mideast oil & gas refineries were damaged, repairs and restarting production could take months even if the flow through the Strait of Hormuz was restored immediately. Thus, these countries faced prospects of severe energy disruption akin to the Covid supply shock. 

Even though the US is self-sufficient in oil & gas, the increased prices were also a burden on consumers in North America. Central banks globally shifted from an easing stance to putting expected rate cuts on hold as uncertainty around the duration of higher energy prices clouded the outlook on inflation.

Towards the last week of March though market declines started to stabilize as expectations for the US to seek an end to the conflict, the so called “TACO trade” (Trump Always Chickens Out), began to take hold. 

Three Other Factors Influencing the Markets

Three other factors were key influences in the markets during the first quarter, all of which had something to do with AI:

1.       The dramatic rise in AI data center capex and the question of whether such investment will generate an acceptable return

Total capex spend by the four major hyperscalers is estimated to surpass $600bn in 2026 or more than triple their level in 2023. Such spending is leading to dramatic rises in the share prices of DRAM Dynamic Random Access Memory chip) makers, electric utilities and gas turbine producers while the share prices of major hyperscalers started to soften towards the end of January. Hyperscalers make up some of the larger weights in market indices.      

2.       The threat of AI cannibalizing various aspects of the global economy.

One area that has already been negatively impacted by AI is software. Whereas steady monthly subscription revenues enjoyed by SaaS (software-as-a-service) companies were seen as a gold standard for the durability of business models, they have now come under attack due to the perception by investors that they can be totally replaced by AI. This impact is felt by all subscription model companies including information services and even some payment companies with their share prices declining YTD by over 30% 

3.       The headwind facing the private credit space and more broadly the alternative asset management industry.

It has come to light that some of the loans made by some private credit funds were issued to software startups which were similarly impacted by the AI cannibalization theme. Because some of these funds were sold to retail clients which tend not to have the same patience or investment horizon of the traditional institutional investor base, there were numerous reports of these funds seeing redemption requests in the 20-30% range. Because of the illiquid nature of private investments, most of these funds have restricted redemption to the typical 5% limit. It did not help that at least 3 major financial fraud cases also surfaced within the past year, raising questions around the quality of the loans in the relatively opaque world of private credit. Shares of alternative asset managers fell precipitously since the start of 2026 as a result 

Looking Ahead

In the second week of April, Trump announced a ceasefire which changed the mood of the markets yet again. Even though no firm deal has been agreed upon so far, the direction of travel is clear -  Trump is trying to engineer a de-escalation. With that, the market returned to its former fixation on everything AI with semiconductors rallying to a new high.

Going forward, energy prices and inflation will likely settle around a more elevated level compared to the world before the US/Israel/Iran conflict, if for no other reason than the increased uncertainty. Consumers in Europe and Asia will feel the burden suggesting slower growth ahead.

Repairs to the damaged Mideast energy infrastructure are estimated by some to cost tens of billions. Countries not blessed with fossil resources will accelerate LNG access and also renewables. Gulf  Cooperation Council countries are apparently working on alternate export routes to the Hormuz bottleneck.

We will look to reposition the portfolio to benefit from these new dynamics while continuing to focus on companies with strong Free Cash Flow and dividend growth supported by strong competitive positions, good execution and superior capital allocation.

Sources: Yardeni, JEF, BMO, RBC, Bloomberg, commentary from individual company meetings.

Patrick Lau is a Portfolio Manager with Cumberland Investment Counsel Inc.(CIC). The Kipling Funds are only available for sale to investors who meet the definition of “accredited investor” as set forth in National Instrument 45-106 Prospectus and Registration Exemptions, or non-individuals who will be investing a minimum of $150,000. Please consult your advisor to determine your qualification status.

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