By Hannah Erin Lang and Jack Pitcher
The stock market ended the first quarter on a high note, with all three major U.S. indexes posting their best showing of 2026 on the last day of March.
For weeks, the U.S. war with Iran had weighed on markets, dragging stocks to their worst quarter in nearly four years. But on Tuesday, investors got a glimpse of a potential off-ramp for the conflict -- and they pounced.
President Trump told aides that he is willing to end the war without fully reopening the Strait of Hormuz, the narrow waterway that handled roughly a fifth of global energy flows before the conflict. Stock gains accelerated throughout the day, with headlines circulating that Iran, too, could be open to ending the conflict.
"I call this a 'Hormuz Hope' rally," said David Kotok, co-founder of Cumberland Advisors. "Market agents think this is a turning point."
The S&P 500 rose 2.9% on Tuesday. The Nasdaq composite led gains, surging 3.8%. The Dow Jones Industrial Average advanced 2.5%, or 1,125 points.
It was still a grim quarter for stock investors. The tech-heavy Nasdaq fell into correction territory on March 26, meaning it had fallen 10% below its recent high. A day later, the Dow Jones Industrial Average (a benchmark for the real economy) joined it. Despite Tuesday's rally, the Dow and the S&P 500 still suffered their worst quarter in nearly four years.
Flashback to December: Economic growth was accelerating, the Federal Reserve appeared poised to make further interest-rate cuts, and markets had moved past the uncertainty created by the U.S.'s disputes with its international trading partners. Together, they offered the potential for double-digit returns, and investors came into 2026 confident the rally was about to sweep up many of the stocks that sat out the rise of Big Tech, Nvidia and the AI boom.
"We had a perfect backdrop for a broadening -- all the stars aligned," said Michael Kantrowitz, chief investment strategist and head of portfolio strategy at Piper Sandler. "Then this just put a huge pause in it."
What changed was war in the Middle East. Since Feb. 28, when the U.S. and Israel launched a series of strikes on Iran, oil prices have surged 63%, gold is tumbling and bond yields have climbed sharply. The S&P 500 has erased all of its gains for the past seven months.
In March, the market did experience a broadening many investors had foreseen, though not in the direction most wanted: 10 of the S&P 500's 11 sectors fell this month, by an average of 6.2%. Energy was the lone exception.
For the quarter, the S&P 500 fell 4.6% and the Nasdaq dropped 7.1%. The Dow industrials slid 3.6%.
The war has jacked up the price of oil and snarled supply chains for a variety of other important commodities, from aluminum to urea. That has raised the prospect of higher inflation and upended bets that the Federal Reserve will move to cut interest rates this year. Before the conflict broke out, roughly a month ago, traders priced in a nearly 80% chance that the Fed would cut rates twice by the end of the year. Now, those odds have dropped to less than 5%.
Stock indexes posted relatively modest declines in the opening week of the war, reflecting expectations that any disruption to oil exports through the Strait of Hormuz would be short-lived. As that disruption enters a second month, Wall Street is having to confront a darker scenario.
"If a prolonged conflict means that we never get any more oil out of the gulf, we will absolutely have a global recession," said David Kelly, chief market strategist at J.P. Morgan Asset Management. "But I think both the U.S. administration and the Iranians will at some stage want to find an off-ramp."
As stock declines accelerated in the back half of March, the worst rout in Treasurys since April meant investors who hoped their bond portfolios would serve as a hedge found little relief.
BlackRock's Larry Fink, head of the world's largest investment firm, sounded the alarm on the high stakes of the Iran conflict last week. If Iran is accepted back into the global trading community after the fighting, the resulting supply would lower and stabilize global energy prices, Fink told the BBC. But if Tehran remains a threat, he fears years of oil prices well above $100 a barrel.
"The $40 oil implication is one of abundance and growth," Fink said. "The other one is an outcome of probably stark and steep recession."
By some measures, stocks are still on solid footing: Analysts are projecting a sixth-straight quarter of double-digit earnings growth for S&P 500 companies during the first three months of 2026, according to FactSet. And some investors are impressed stocks haven't fared even worse this month, given the circumstances.
Individual investors have still been buying stocks on a net basis, though the pace of their purchases has cooled from prewar averages, estimates from Citadel Securities and Vanda Research show.
But the pressures on markets are mounting, and in recent days traders have found it more difficult to shrug off the conflict the way they did in the days following the initial attack, when they seemed to follow the TACO, or "Trump-Always-Chickens-Out," playbook learned during last April's tariff drama.
"Despite all the TACO hopes, it seems folks are increasingly realizing that it takes two to TACO these days," Bob Elliott, chief executive of Unlimited Funds, wrote to clients on Sunday.
The recent volatility has minted some winners -- stocks in the S&P 500 energy sector are up 37% this year, on track to notch their best quarterly performance on record. Other 'asset-heavy' industries like materials also outperformed, as investors look for companies that would be tough for AI to disrupt.
And many analysts are sticking to their original targets of modest stock-market gains for the year ahead. But those projections rest on the assumption that the conflict in the Middle East is relatively short-lived -- and the impact to the global economy is still contained.
That has all resulted in a multi-week period during which traders and money managers are even more glued to their screens than usual.
They are scanning headlines and the president's social-media accounts, and try to stay ready in case they need to cancel orders should the market turn suddenly.
"It's a single-variable market," Piper Sandler's Kantrowitz said. "If oil doesn't go down, the market won't go up -- period."
On the last day of the quarter, benchmark U.S. oil prices fell. And stocks rallied.
Write to Hannah Erin Lang at hannaherin.lang@wsj.com and Jack Pitcher at jack.pitcher@wsj.com
(END) Dow Jones Newswires
March 31, 2026 17:17 ET (21:17 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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