executive Summary
- Risk assets fell sharply as geopolitics overshadowed fundamentals
- Macro de-risking dominates as growth and value decline simultaneously
- Brent crude posts its biggest monthly gain since the 1970s
- The decline in 5-year breakeven rates and the rise in real yields have tightened financial conditions
- S&P 500 Q1 EPS projected to grow by double digits for sixth consecutive quarter
March marked a sharp inflection point for global markets, as geopolitical risk suddenly displaced economic resilience as the dominant driver of asset prices. After entering the month with constructive momentum, improving breadth and growing confidence, as the S&P 500 Equal Weight Index sits at an all-time high, investors were forced to rapidly reassess risk exposure following a significant escalation in the US-Iran conflict. The resulting surge in energy prices reignited near-term inflation concerns, pushed Treasury yields substantially higher, and triggered a broad, correlated selloff in risk assets.
Unlike previous episodes of volatility, which were largely contained to specific styles or sectors, the decline in March was notable for its scope and speed as markets shifted from a bullish rotation to full de-risking amid higher inflation expectations, reduced policy flexibility and slower growth. Energy supply disruptions and the effective closure of key Middle Eastern transit routes led to one of the most severe monthly oil price shocks in decades, forcing investors to reassess the sustainability of disinflation progress and the path forward for monetary policy.
The inflationary impulse from energy resonated throughout rates markets. Treasury yields rose sharply throughout March, with front-end rates leading the move as investors lowered expectations of near-term Federal Reserve cuts. As shown by the sharp reversal in the MOVE index (chart below), the “bear flattening” coincided with increased rate volatility. Importantly, this reevaluation was not driven by a reverse 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.
US Equity Benchmark
In this backdrop, while geopolitics impacted fundamentals, most industries struggled to absorb the shock. Major US indices declined meaningfully, with selling pressure extending well beyond former leadership areas. Market segments that had earlier benefited from the correction in breadth (equal weight indices, midcaps and cyclicals) also declined meaningfully as correlations increased and risk appetite declined. The result was a rare month in which diversification across styles and market capitalization provided limited protection. Broader U.S. equity benchmarks fell between 4.5% and 6%, with the S&P 500 equal-weight index falling 6%.
Both growth and value bottomed out decisively in March, suggesting that the month’s selloff was driven by macro de-risking rather than style rotation. Large-cap growth declined along with value as rising energy prices and Treasury yields weighed on relative style considerations. Small-cap growth and value similarly weakened, reflecting increased sensitivity to funding conditions and growing uncertainty around inflation and policy. The sharp declines in these four segments are a reminder that in periods of intense macro stress, diversification across styles provides limited insulation when the dominant impulse is risk reduction rather than reallocation.
sector performance
Sector performance among large and small caps was dominated by the energy complex, which emerged as the only area of strength amid rising oil prices. Energy equities recorded strong gains on the back of a surge in crude oil prices, reflecting both supply disruptions and increased geopolitical risk premiums. Outside of energy, the remaining ten large cap sectors closed the month lower, including both economically sensitive groups (Industrials, Materials and Consumer Discretionary), as well as defensive ones (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 due to the flattening of the curve. The 2-year UST yield rose 42 basis points (bps) to 3.79%, and the 10-year UST yield rose 38 bps to 4.32%.
The Bloomberg Commodity Index (+11.2%) had the strongest monthly gain since May 2009, mainly due to a sharp rise in energy prices. In particular, Brent crude (+63%) recorded its strongest gain since the 1970s and meaningfully outperformed WTI crude (+51%). Brent serves as the benchmark for two-thirds of globally traded crude oil and accordingly reflects very large geopolitical risk premiums associated with export availability, shipping insurance and rerouting risks.
Traditional inflation hedges failed to play their historical role, suggesting that, in part, markets are less concerned about the long-term inflation impact from 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 (bottom of chart, upper panel) slid toward the lows seen during last spring’s tariff concerns. Higher nominal rates amid falling inflation expectations led to a rise in real rates (bottom of chart, lower panel) which supported the US dollar. However, the combination of higher rates, higher energy prices and, thus, tighter financial conditions has created a challenging environment for risk assets, particularly given the limited ability of monetary policy to absorb supply-driven inflation shocks in the near term.
looking ahead
According to FactSet, for the upcoming corporate earnings season, nine out of eleven sectors are expected to post year-on-year earnings growth, while all eleven sectors are expected to post year-on-year revenue growth. The two sectors with expected income declines are health care and communication services. For S&P 500 companies, Q1 consensus estimates are projecting 13% year-over-year EPS growth which would mark the sixth consecutive quarter of double-digit earnings growth for the index and would be higher than the 12.8% growth expected at the start of Q1. At the top level, S&P 500 revenues are expected to rise 9.7% year-over-year, up from the 8.2% expected at the start of Q1. From a valuation perspective, the forward 12-month P/E for the S&P 500 sits around 19.9x, which is roughly in line with the five-year average but still above long-term norms.
The market is entering the next phase of the quarter in a fundamentally strong position, but with increased sensitivity to external shocks. Recent revaluations in rates, commodities and equities reflect adjustments to a more complex backdrop rather than a deterioration in underlying trends. Corporate fundamentals remain supportive, yet elevated energy prices and persisting geopolitical uncertainty widen 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 if earnings continue to provide an important stabilizing force.
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