First Quarter 2026 : Wars Over Oil & Wars Over Toil
The Iran War Turbocharges The Rotation Away From Tech and Into Materials, Energy, Industrials & Utilities and AI’s War On Work Punishes AI’s Perceived Targets
For equity and bond markets, Q1 2026 felt a lot like Q1 2022.
A long simmering war boils over (Russia-Ukraine in 2022, US-Iran in 2026), threatening the global supply of energy and other essential goods, causing fears of shortages, industrial shut-ins, reduced consumer spending and high inflation. Bond prices fall (and bond yields spike) to reflect the fear of higher inflation and equities fade amidst a weaker economic outlook and inflation potentially eating into corporate profit margins.
Iran War
Amidst stalled nuclear discussions, the United States and Israel launched a military campaign against Iran on February 28th. The United States and Israel vowed to eliminate Iran’s navy and air force and prevent Iran from ever attaining a nuclear bomb. After the first 2 weeks of conflict, these goals appeared to be largely achieved, although Iran still is in possession of near-weapons grade uranium and reportedly still has some nuclear processing/upgrading capability. The conflict is ongoing although ceasefire negotiations are taking place as we type.
Iran is a major oil exporter and controls half of the world’s most vital global shipping lane, the incredibly narrow Strait of Hormuz. Having attacked a number of commercial ships while they attempted to traverse the Strait and reportedly having laid mines in the Strait, Iran has successfully halted nearly all maritime traffic in the Persian Gulf. Because ~20% of the world’s oil supply and ~20% of the world’s LNG supply passes through the Strait each year, it is the world’s most critical global energy chokepoint, and any disruptions can have a material impact on global energy supply and prices. In addition to an energy supply bottleneck, energy assets (e.g. refineries, pipelines, oil and gas fields) in Iran and neighbouring countries have come under attack as the war turned more existential for Iran and extended beyond the borders of Iran and Israel. While the flow of ships passing through the Strait of Hormuz could return to normal if US-Iran negotiations are successful, the loss of energy production capacity in the Middle East is substantive and may end up having long-term effects on global energy prices. Update: as of April 14, the US military has established its own blockade of the Strait to allow some allied ships through, although the number of ships traversing the Strait remain well below normal.
Prior to the war, oil prices were trading at ~$67 per barrel (WTI), surged to as high as $119 per barrel (midday) during the first week of fighting, and finished the quarter at ~$101 per barrel. As of the time of writing, oil trades at $93 per barrel in hopes that an agreement can be made to cease the fighting and damage to energy infrastructure. The price of LNG followed a similar path as oil and LNG, along with natural gas prices in import-dependent regions (e.g. Europe, China, Japan), remain elevated as well.
Oil Price (West Texas Intermediate – WTI, End of Day Price)
April 1, 2025 to March 31, 2026
Higher energy costs lead to higher inflation, and this generally has a negative impact on global economic growth. More discretionary income spent on basic needs like gasoline and heating means less discretionary income spent on other items, which reduces total consumer goods consumed, negatively affecting economic growth. Significant damage to Middle Eastern energy infrastructure could mean energy costs may end up being elevated for some time and economic growth, particularly in places like Europe and Asia, could be curtailed until repairs to energy infrastructure is complete or new energy supply is brought online.
Equity markets have been volatile during this period of uncertainty, but downside has been limited, with many equity markets around the world still sitting in positive territory year-to-date. Equity market performance has largely varied based on each country’s energy dependence, with energy exporters (e.g., Canada, Brazil) outperforming and energy importers (e.g., China, Germany) underperforming. Performance going forward will largely be dependent on if and when the Iran war will end, whether the Strait of Hormuz remains blocked or not, and to who, and if further damage is done to energy infrastructure in the Persian Gulf.
Performance of
US (SPY, Light Blue),
Canada (EWC, Green),
China (FXI, Orange),
Germany (EWG, Dark Pink),
Brazil (EWZ, Cyan)
December 31, 2025 to March 31, 2026
While the US equity market as a whole has underperformed, performance has varied widely within the US equity market. For example, the Magnificent 7 – Microsoft, Nvidia, Apple, Amazon, Google, Meta, and Tesla – have accounted for 92% of the S&P 500’s downside so far in 2026 (as of March 31st), meaning the other 493 stocks in the S&P 500 are responsible for only 8% of the downside. This is due to stocks in the Materials, Energy, Industrials & Utilities sectors generating positive returns which mostly offset the losses incurred by stocks in other sectors.
AI’s War on Work
Throughout 2025, investors rotated out of the technology sector, with a few exceptions like AI leaders Alphabet and Broadcom, and into what is now known as HALO (Heavy Assets, Low Obsolescence) stocks, like those in the metals & mining, energy, industrials & utilities. The basis of this investment strategy is that companies with significant physical infrastructure will be spared from AI disruption.
The ‘AI Scare Trade’ kicked into high gear in early 2026 following the release of Claude Cowork (“AI tools for knowledge workers”) making website design, software development, and financial, legal, or other data analysis easier and without expensive ‘pay-per-seat’ subscription costs. Investors feared that companies that offer these services could be disrupted by new entrants utilizing AI tools that can offer the same services but with fewer employees, thereby undercutting incumbents on price. These tools as well as tools launched by other AI companies incited concerns about how AI could negatively affect companies operating in previously unscathed sectors like logistics/transportation, insurance, real estate services and financial services.
Many stocks operating in the sectors noted above now trade at multi-year low valuations and could present opportunities if investors are wrong about the severity of the negative impact related to AI. In the short-term, the most likely course of events is that well-heeled companies will utilize AI to cut jobs and boost efficiency and profit margins, and potentially gain a competitive edge relative to peers, supporting stock prices (see Block cutting 40% of its workforce). Longer-term, especially as AI’s capabilities improve, it seems likely that a small number of individuals with strong industry knowledge could utilize AI to create new organizations to compete with, and potentially beat, larger companies that still have too much overhead for the post-AI world. History has shown that new technology only temporarily displaces workers and may require them to attain new skills to find new, gainful employment but there is concern that this time may be different. Unlike previous technological revolutions that automated blue-collar manual labor and typically had regional economic fallout, AI is targeting white-collar, cognitive and creative tasks globally and at an unprecedented speed, scope and scale. Time will tell how quickly new jobs can be created to employ those who fall victim to AI.
The Economy: Current State and Outlook
Last quarter, we noted that global GDP growth was subdued in 2025 because higher tariffs and ongoing trade uncertainty continued to hinder long-term investment. An uncertain trade environment remains in 2026 and will likely continue to keep global GDP growth under wraps. Reflecting this weak outlook, North American labour markets started the year on their backfoot with the US adding just 205,000 new jobs and Canada losing almost 95,000 jobs in Q1. Upcoming USMCA trade negotiations, which are expected to occur in mid-2026, are sure to add to uncertainty for many businesses across North America.
US Non-Farm Payrolls (US Employment Gains/Losses in Thousands)
5 Year History to March 2026 – Trade Uncertainty Holding Companies Back
Canada Employment Change (Gains/Losses in Thousands)
5 Year History to March 2026 – Trade Uncertainty Really Holding Companies Back
The effect of the recent oil market disruption is expected to last for years, so higher energy prices are likely here to stay. Higher energy prices will slow global GDP growth in 2026 and beyond, though some countries will benefit (e.g. Canada, Brazil) at the expense of others (e.g. China, Germany, Japan). Investment in AI should continue to support economic growth in the US irrespective of the energy market turmoil, but will likely create labour market disruption as noted above.
The spike in energy prices has thrown a wrench into the interest rate outlook with markets going from pricing in multiple interest rate cuts in North America in Q4 to pricing in multiple interest rate hikes in Q1. Despite higher energy prices presenting an obstacle for global economic growth, central banks will be hesitant to further stoke the inflationary fire by cutting interest rates.
All that said, despite notable damage to Middle Eastern energy infrastructure and a possible shortage of certain fossil fuels in the short-term, throughout history, energy producers have shown that they are quick to respond to disruption and new supply will arrive if energy prices remain elevated. Further, while it is unclear the full extent of damage to Middle Eastern energy transportation and refining capacity, OPEC+ is widely accepted to have millions of barrels of oil production capacity available that can be brought to market with relatively minor additional investment. Because of this energy supply waiting in the wings, if we see some sort of resolution to the Iran war in the coming weeks/months allowing transportation through the Strait of Hormuz to resume, we will likely avoid a long-term impairment to global energy supply.
How To Position Portfolios Going Forward?
The Iran war turbocharged the rotation away from tech and into materials, energy, industrials and utilities but higher energy costs complicated the uniformity of the rotation. While many of these ‘non-tech’ stocks performed quite well prior to the war, stocks in these sectors in Europe and Asia underperformed after the start of the war as the prospect of higher energy prices in these energy importing countries impaired their profit outlooks.
As these trends usually go, we would expect to see continued follow-through in the rotation out of tech stocks due to the uncertain and long-term payoff related to AI-related spending and the resulting negative impact on near-term cash flow and earnings for these companies. Since investors need somewhere to go other than tech, we’d expect the HALO (Heavy Assets, Low Obsolescence) stocks to keep performing well although which stocks perform especially well will depend on the energy price outlook and each individual company’s sensitivity to energy prices – for some it is especially good (energy stocks) and for others it is not so good (materials, industrials, consumer-facing). Higher energy prices and higher expected inflation has increased interest rate uncertainty which could add another layer of uncertainty going forward, especially for companies with heavy debt loads. As is always true, but is especially true now, is that the risk profile of all companies should be viewed individually as none share exactly the same risks.
As for the ‘AI Scare Trade’, we would expect to start seeing a divergence between those actually threatened by new AI companies and those who can use AI or partner with AI companies to cuts costs and/or improve their service/product offerings to help increase market share within their industries.
As the rotation should continue this is generally positive for Canada, international markets (though watch for energy price sensitivity), small- and mid-cap stocks, both in the US and abroad (though watch for energy price sensitivity), and lower valuation stocks relative to higher valuation stocks. Energy prices may dictate performance by sector and geography in the short-term. Maintaining some exposure to big tech and AI is important given their large weighting in the global investment universe, but being pickier about what you own is important. The perceived AI winners could change quickly so being nimble could make a big difference going forward.
Higher energy prices, uncertain economic growth, higher expected inflation, and therefore the potential for rising interest rates, make many fixed income securities less attractive than just a few short months ago. Canadian perpetual preferred shares and high yield bonds look a lot riskier now that we’ve gone from expectations of interest rate cuts to interest rate hikes and credit spreads have widened due to rising economic uncertainty. Shorter term and higher quality fixed income securities appear to be the way to attain traditional fixed income exposure to mitigate portfolio risk and satisfy income needs.
In the Alternative investment world, we are starting to see a wider variance in return and volatility. Mortgage investment corps (MICs) and public credit funds have continued to pay consistent income with little volatility though many funds holding long-lived assets in the private equity and private credit segments have come under pressure. Fund manager selection is key, and we are starting to see the value of picking experienced fund managers.
Maintaining a well-diversified portfolio tailored to your risk tolerance is the best way to avoid major negative surprises and participate, if not capture the majority of upside provided by asset markets over time. You can be sure that we are tracking all market developments and are making portfolio adjustments to manage risk and pursue returns as investment opportunities arise.
If you ever have any questions or concerns about your portfolio or the investment markets in general, please feel free to reach out to us.
Sincerely,
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