Economic and Financial Market Outlook Q2 2026

The Iran conflict and the effective closure of the Strait of Hormuz have transformed a constructive 2026 outlook into a scenario of slower growth, higher inflation and greater market selectivity.

• Brent crude rose from $61 to $118 per barrel in the first quarter, a 93% increase, prompting Marietta to cut its 2026 global GDP forecast to approximately 2.5% from the IMF’s pre-conflict 3.1% projection.
• US growth momentum had already weakened: fourth-quarter GDP was revised to 0.5% from 4.4% in the third quarter, 2025 job growth was revised to 181,000, long-term unemployment rose 21.5% to 1.8 million, and participation fell from 62.5% to 61.9%.
• Marietta lowered its 2026 US GDP forecast to 2.0%-2.5% from 3.0% and expects headline inflation to reach at least 3.5%, although a ceasefire could make the energy-driven setback temporary.
• The S&P 500 total return fell 4.3% in the first quarter and the Nasdaq declined more than 10% peak to trough, while the State Street Energy Select Sector ETF gained 37.9%; forward S&P 500 earnings are still expected by FactSet to grow more than 17% in 2026.
• Energy exposure makes international markets vulnerable: Deutsche Bank estimates Asia-Pacific countries take 86% of Persian Gulf crude exports excluding Iran, whereas China is relatively insulated by its diversified energy mix and strategic reserves.
• The 10-year Treasury yield moved from 3.96% before the strikes to 4.48% before ending the quarter at 4.32%; corporate spreads widened modestly, supporting a preference for high-quality short-to-medium maturity bonds.

Takeaway: Investors should favor selectivity, pricing power, durable earnings and high-quality shorter-duration bonds while recognizing that a rapid ceasefire could reverse much of the energy shock, whereas a prolonged conflict would worsen the downside risks to growth, inflation and international equities.