It was supposed to be a banner year for Wall Street. Now investors are just hoping to avoid a global recession triggered by a historic run-up in energy prices.
U.S. stocks are set to deliver their worst quarter in nearly four years. The tech-heavy Nasdaq composite lurched into correction territory on March 26, meaning it had fallen 10% below its recent high. A day later, the Dow Jones Industrial Average (a benchmark for the real economy) joined it.
Flashback to December: Economic growth was accelerating, the Federal Reserve appeared poised to make further interest-rate cuts and markets had moved past the uncertainty created by U.S. disputes with its international trading partners. Together, the trends pointed to the potential for double-digit returns, and investors came into 2026 confident the rally was about to sweep up many of the stocks that sat out the rise of Big Tech, Nvidia and the artificial-intelligence boom.
“We had a perfect backdrop for a broadening—all the stars aligned,” said Michael Kantrowitz, chief investment strategist and head of portfolio strategy at Piper Sandler. “Then this just put a huge pause in it.”
For the first two months of the year, there were encouraging signs. While some tech stocks stalled, investors flocked to overlooked corners of the market, enticed by lower valuations and the idea that the economy would heat up.
There were some reasons for concern. Fears that AI could disrupt industries such as software have dragged down stocks in the once-hot industry, and many investors are watching the private-credit market closely for additional cracks. But on the whole, the U.S. stock market kept grinding higher.
What changed was war in the Middle East. Since Feb. 28, when the U.S. and Israel launched a series of strikes on Iran, oil prices have surged 55%, gold has been sinking and bond yields have climbed sharply. The S&P 500 has erased all of its gains for the past seven months.
In March, the market did experience a broadening many investors had foreseen, though not in the direction most wanted. Through Monday, 10 of the S&P 500’s 11 sectors were down this month, by an average of 8.3%. Energy was the lone exception.
The war has jacked up the price of oil and snarled supply chains for a variety of other important commodities, from aluminum to urea. That has raised the prospect of higher inflation and upended bets that the Fed will move to cut interest rates this year. Before the conflict broke out, traders priced in a nearly 80% chance that the central bank would cut rates twice by the end of the year. Now, those odds have dropped to less than 2%.
Stock indexes posted relatively modest declines in the opening week of the war, reflecting expectations that any disruption to oil exports through the Strait of Hormuz would be short-lived. As that disruption enters a second month, Wall Street is having to confront a darker scenario.
“If a prolonged conflict means that we never get any more oil out of the gulf, we will absolutely have a global recession,” said David Kelly, chief market strategist at J.P. Morgan Asset Management. “But I think both the U.S. administration and the Iranians will at some stage want to find an off-ramp.”
As stock declines accelerated in the back half of March, investors who hoped their bond portfolios would serve as a hedge found little relief. The worst rout in Treasurys since last April’s tariff chaos means a traditional 60% stocks and 40% bonds portfolio is performing almost as poorly as holding stocks alone.
BlackRock CEO Larry Fink sounded the alarm on the high stakes of the Iran conflict last week. If Iran is accepted back into the global trading community after the fighting, the resulting supply would lower and stabilize global energy prices, Fink told the BBC. But if Tehran remains a threat, he fears years of oil prices well above $100 a barrel.“The $40 oil implication is one of abundance and growth,” Fink said. “The other one is an outcome of probably stark and steep recession.”
By some measures, stocks remain on solid footing: Analysts are projecting a sixth-straight quarter of double-digit earnings growth for S&P 500 companies during the first three months of 2026, according to FactSet. And some investors are impressed stocks haven’t fared even worse this month, given the circumstances.
Individual investors have still been buying stocks on a net basis, though the pace of their purchases has cooled from prewar averages, estimates from Citadel Securities and Vanda Research show.
But the pressures on markets are mounting, and traders are finding it more difficult to shrug off the conflict the way they did in the days following the initial attack, when they seemed to follow the TACO, or “Trump-Always-Chickens-Out,” playbook learned during last April’s tariff drama.
“Despite all the TACO hopes, it seems folks are increasingly realizing that it takes two to TACO these days,” Bob Elliott, chief executive of Unlimited Funds, wrote to clients on Sunday.
Investors are now scrutinizing the strength of a U.S. economy that has proved resilient despite a sluggish job market. The oil shock threatens to drag on growth, raising energy costs for consumers and businesses.
“The main risk is you had an economy that was a little wobbly heading into Q1,” said Steven Blitz, chief economist at TS Lombard. “Now, you’ve put an energy tax on it.”
The recent volatility has minted some winners—stocks in the S&P 500 energy sector are up 39% this year, on track to notch their best quarterly performance on record. Other “asset-heavy” industries such as materials also outperformed, as investors scout for companies that would be tough for AI to disrupt.
And many analysts are sticking to their original targets of modest stock-market gains for the year ahead. But those projections rest on the assumption that the conflict in the Middle East is relatively short-lived—and the impact to the global economy is still contained.
The war has meant that traders and money managers for weeks have been even more glued to their screens than usual.
They are scanning headlines and President Trump’s social-media accounts, and try to stay ready in case they need to cancel orders should the market turn suddenly.
“It’s a single-variable market,” Piper Sandler’s Kantrowitz said. “If oil doesn’t go down, the market won’t go up—period.”
Write to Hannah Erin Lang at hannaherin.lang@wsj.com and Jack Pitcher at jack.pitcher@wsj.com