Q1 2026 Review: Rotation Beneath the Surface

Q1 2026 is officially in the books, and at first glance, it was a challenging quarter for investors. The S&P 500 declined about 4.5%during the first three months of the year, making it the index’s weakest quarter since 2022.1 After three consecutive years of double-digit gains, a pullback like this naturally prompts an important question: what changed?2

Our view is that Q1 was less about a broad-based market breakdown and more about a meaningful shift in leadership. While headline index performance was negative, the quarter appeared to reflect a reassessment of where future growth may come from rather than a uniform retreat from risk.3 Periods like this are an important reminder that index-level performance can sometimes obscure what is actually happening beneath the surface. Even in a weak quarter, dispersion across sectors, industries, and individual securities can be significant.

A portion of the weakness came from the same large-cap growth companies that had led markets higher in recent years. But one of the more notable developments unfolded within software. As the conversation around agentic AI accelerated, investors began reassessing whether some traditional software models could face greater disruption than previously expected.4 That does not mean software is no longer attractive as a category, nor does it suggest that all companies will be affected equally. It does suggest that markets are beginning to differentiate more carefully between business models, competitive positioning, and long-term durability. In our view, this is a healthy reminder that strong prior performance alone is not a sufficient investment thesis, particularly when innovation is reshaping competitive landscapes so quickly.

At the same time, capital appeared to move toward a different part of the AI ecosystem: infrastructure. Rather than rewarding software broadly, investors showed increased interest in the physical systems that support AI adoption — including servers, networking, data centers, storage, and power-related infrastructure.5 That shift reflects a broader recognition that AI is not only a software story; it also requires significant investment in the underlying backbone that allows these technologies to operate at scale. Markets often move ahead of certainty, and while it remains unclear which parts of the AI ecosystem will ultimately capture the most durable economics, Q1 suggested that investors are broadening their focus beyond the most obvious beneficiaries.

Outside of technology, energy was another area of relative strength during the quarter. Rising oil prices, driven in part by geopolitical tensions and supply concerns, provided a tailwind for the sector even as the broader market came under pressure.6More broadly, Q1 served as a reminder that market leadership can change quickly when economic and geopolitical conditions shift. Sectors that had not been in favor can begin to outperform when fundamentals improve or when investor expectations reset.

Tesla offered another example of the tension between near-term fundamentals and long-term market narratives. The company reported Q1 2026 deliveries of 358,023 vehicles and production of 408,386 vehicles, meaning production exceeded deliveries by just over 50,000 units during the quarter.7 Under normal circumstances, that kind of gap might weigh more heavily on investor sentiment. However, Tesla is often evaluated by the market through a wider lens that includes autonomy, AI, robotics, and other future initiatives. That does not mean current fundamentals are unimportant. It simply highlights that, at times, markets may place substantial weight on long-term expectations.

The broader takeaway from Q1 is that markets did not simply move lower — they repriced. Leadership shifted, assumptions were challenged, and investor attention moved toward areas perceived to be better positioned for the next phase of growth.3 Importantly, repricing is a normal part of market behavior. It can create discomfort in the short run, but it can also create opportunity as valuations adjust and expectations become more realistic.

For long-term investors, that is an important reminder. Markets are constantly evolving, and leadership rarely remains concentrated in the same areas indefinitely. Periods like this can be uncomfortable, but they also reinforce the value of discipline, diversification, and a long-term perspective. In our view, successful investing is less about reacting to short-term headlines and more about maintaining a thoughtful process, understanding risk, and staying focused on long-term objectives. While volatility can test conviction, it also reinforces why portfolio construction should be grounded in asset allocation, risk tolerance, and time horizon rather than short-term market narratives.

Footnotes

1 The S&P 500 fell 4.6% in Q1 2026 on a price-return basis, which Nasdaq Dorsey Wright described as the index’s worst quarterly return since Q3 2022. S&P Global Market Intelligence separately reported a -4.3% total return for the quarter, which is why “about 4.5%” is a balanced public phrasing.

2 S&P Dow Jones Indices reported the S&P 500 returned 16.39% in 2025 after gains of 23.31% in 2024 and 24.23% in 2023, confirming three consecutive years of double-digit annual gains.

3 Market commentary from early April 2026 broadly characterized the quarter as one of rotation, with leadership shifting away from some prior winners and toward more cyclical and commodity-linked areas.

4 Reporting in early 2026 highlighted investor concern that advances in agentic AI could pressure parts of the traditional SaaS model, contributing to a reassessment of valuations across some software companies.

5 Reuters reported that Alphabet expects 2026 capex of $175 billion to $185 billion, focused on servers, data centers, and networking equipment. Separate reporting estimated that Amazon, Alphabet, Meta, and Microsoft together could spend roughly $625 billion to $650 billion on AI infrastructure in 2026.

6 Oil prices moved above $100 per barrel in March 2026 amid geopolitical disruption and supply concerns. Multiple Q1 market summaries described energy as a relative area of strength during the quarter.

7 Tesla Investor Relations reported Q1 2026 production of 408,386 vehicles and deliveries of 358,023 vehicles, implying a production-delivery gap of 50,363 vehicles.

Disclosure:
This commentary is for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security. Past performance is not indicative of future results. All investing involves risk, including the possible loss of principal.