Key Takeaways
- Energy and commodities surged in the first quarter, driven largely by geopolitical tensions, including the conflict in Iran.
- Markets rotated away from high-growth tech into value, defensives, and resource-linked sectors.
- Technology lagged as AI-driven stocks and broader valuations faced increased scrutiny and profit-taking.
The first quarter of 2026 marked a decisive shift in global equity markets, as investors rotated away from growth-driven sectors that had been leading the rally and into commodities and defensives. A key catalyst was rising geopolitical tension—particularly the Iran war, which played a central role in driving commodity prices higher and investor positioning. The shift defines a market being reshaped by macroeconomic pressures, valuation adjustments, and shifting investor priorities.
Unlike the broad-based rallies seen in previous years, where returns were highly concentrated, the first three months of 2026 were characterized by pronounced divergence across sectors. While energy and resource-linked industries delivered outsize gains, technology and consumer-facing sectors lagged significantly.
Overall, the quarter highlighted a market in transition. Sector leadership was no longer concentrated, and macroeconomic realities dictated performance. Analysts say that for investors, this evolving landscape may demand a more selective and balanced approach.
Energy and Materials Lead the Rally
At the top of the performance ranking, energy stands out as the clear winner, with the Morningstar Global Energy Index up 35.08% in euro terms during the first quarter. That is the sector’s strongest start to a year on record, and at a pace that, if sustained, could rival its 2022 annual gain of 42.82%. For contrast, the broader Morningstar Global Markets Index slipped 0.9% over the same period.
The sector’s strong returns—well ahead of all other industries—were driven by a combination of higher commodity prices, supply-side constraints, and global uncertainty triggered by the Iran war. Investors rotated decisively into oil and gas producers, attracted by strong cash flows and pricing power. Major constituents like Exxon Mobil XOM, Chevron CVX, and TotalEnergies TTE posted gains ranging from 39% to 47%, underscoring the strength of the rally.
That dynamic also helps explain why energy continues to play a strategic role in asset allocation. “Within portfolios, energy stocks can provide a hedge against oil price shocks, and perform well in inflationary environments,” says Nicolò Bragazza, associate portfolio manager at Morningstar Wealth. However, he cautions that “investors need to balance these characteristics with their cyclicality.”
Materials and basic resources followed closely, benefiting from the broader commodity upswing. Basic materials stocks can be a hedge against inflation, as the value of natural resources tends to increase when inflation rises. Meanwhile, industrials should benefit from increased capital spending in key growth areas like electricity capacity, construction around the artificial intelligence-related infrastructure buildout, and defense.
Defensive Sectors Regain Appeal
Defensive sectors like utilities, telecommunications, and healthcare also delivered solid returns. They tend to offer relative stability amid volatility and were sought out by investors during the uncertainty caused by the Iran war.
This renewed interest in defensives signals a more cautious investor stance. With uncertainty surrounding inflation and growth, market participants appear increasingly willing to trade some upside potential for earnings visibility and lower volatility.
Bragazza says this is precisely where defensive sectors prove their worth. Their recent performance “is a testament to their useful role in portfolios,” particularly as they can provide “less correlated sources of returns.” Even within this group, nuances are emerging. While healthcare has underperformed so far this year, Bragazza says it “remains among the most attractive” sectors and continues to represent “an interesting hunting ground for both stock-pickers and index investors.”
Technology and Consumer Sectors Lag
The weakest performers in the quarter are concentrated in growth-oriented and consumer-sensitive sectors. Technology, which had dominated market leadership in the last three years, appears near the bottom of the chart. The sector faced headwinds from elevated valuations, profit-taking, and growing scrutiny over the sustainability of high growth expectations. This was particularly evident in AI-related stocks, where crowded positioning led to sharper pullbacks as investors reassessed near-term monetization prospects and long-term growth assumptions.
This shift reflects a broader recalibration. “The tech sector has to live up to strong growth expectations, and any small change in the narrative can cause significant moves in stock prices. Investors need to be vigilant when strong expectations are baked into prices, as downside risks often increase,” Bragazza says.
Among the biggest laggards in the Morningstar Global Technology Index during the quarter were companies like Microsoft MSFT and Palantir PLTR. Microsoft fell 21.8%, Palantir was down 16.1%, and Nvidia NVDA and Apple AAPL both slipped 4.7%.
Consumer discretionary stocks also underperformed, reflecting pressure on household spending as inflation eroded real incomes. Meanwhile, financials struggled amid uncertainty about interest rates and a less favorable lending and margin environment.
Taken together, the clustering of these sectors at the lower end of the rankings underscores a broader market shift away from duration-sensitive assets and consumption-driven growth themes toward sectors better positioned for a more uncertain macroeconomic environment.
