Q2 2026 Economic and Investment Outlook: War, Oil, and What It Means for Your Portfolio
By: Brian Seay, CFA | Founding Partner — Capital Stewards
The Iran conflict added a layer of uncertainty to an economy that was already sending mixed signals. With a ceasefire now announced — though not yet fully implemented — investors are left wondering what comes next for markets, oil prices, and their portfolios.
In our latest outlook episode, I walk through where the economy stands heading into the second quarter, what the Iran crisis means for asset prices going forward, and the practical steps long-term investors should be taking right now. You can watch or listen to the full discussion on Youtube or your favorite podcast platform. Below are the key takeaways:
Markets Took a Hit in Q1 — But History Offers Perspective
The S&P 500 declined more than 9% during the worst of the conflict before recovering to finish the first quarter down roughly three and a half percent for the year. International stocks outperformed U.S. large caps, and gold — despite all the headlines about drawdowns — was actually the strongest performing asset in Q1, finishing up about 8%. Bonds ended the quarter roughly flat as interest rates rose on fears of an oil-driven inflation cycle.
When moments like these shake investor confidence, it helps to look at the long-term record. Over the past 30 years — a stretch that includes the tech bust, the Global Financial Crisis, COVID, and now this conflict — the S&P 500 has averaged nearly 10% per year. Gold has returned just over 9% annually. Even over the last decade alone, which included the 2022 sell-off, stocks averaged 14% per year.
Investors who stayed committed to a well-diversified plan through past crises came out ahead. This time is unlikely to be different.
The Economy Was Already on Thin Ice Before the War
Before the conflict even started, the U.S. economy was showing signs of strain beneath the surface. Real GDP growth was slowing, tracking around 1.6% in the first quarter. The ISM manufacturing and services surveys looked healthy at headline level, but the underlying details revealed that growth was driven by deliveries on old orders and inventory restocking — not new demand.
Outside of AI-related capital expenditure, business investment is projected to be negative this year. That concentration is a concern. The economy needs broader sources of growth to sustain momentum.
On the consumer side, the picture is similarly fragile. Retail sales are growing at about 3%, but with inflation running at a similar rate, consumers are simply paying more for the same amount of goods. The personal savings rate has fallen to roughly 4% — about half of its pre-COVID range — and real income growth sits at just 1.75% after adjusting for inflation.
The income gap continues to widen. Higher-income wage growth is running around 4%, while lower-income wage growth is just 1.4%. Spending by the lower third of households actually contracted in mid-2025 and remains nearly flat heading into 2026. The economy desperately needs inflation to cool and real incomes to rise.
The labor market tells a similar story. Job creation briefly went negative in mid-2025 and has since recovered to roughly breakeven on a rolling three-month basis. We're producing enough jobs to tread water, but not enough to build momentum. Wage growth continues to decline, which suggests the labor market remains loose despite the headline payroll numbers.
What the Iran Ceasefire Means for Oil and Inflation
The economic damage from the Iran conflict came primarily from the effective closure of the Strait of Hormuz. Insurance costs made it impractical for shipping to transit the strait, pulling an estimated 12 to 15 million barrels per day of oil and refined products off the global market.
With the ceasefire in place, I expect oil prices to trend back toward the $80 range — elevated from the mid-$60s where prices sat before the conflict, but well below the worst-case scenarios. Markets will maintain a risk premium for some time, and rightly so. As of this writing, oil has not yet resumed flowing through the strait. If the deal unravels, prices could spike above $125 a barrel quickly, since markets never fully priced in a prolonged closure.
On the inflation front, core PCE currently sits around 2.83%. The March headline numbers will be higher — closer to 4% — as the oil shock works through the data. However, most of that spike should fade over the next few months as oil prices decline. Tariff impacts are also expected to diminish in the second half of the year, and housing inputs to inflation are now falling meaningfully. The one persistent area to watch is services inflation, which may keep overall inflation from dropping below 2% for a while. Our longer-term view is that inflation will average closer to two and a half percent as the economy finds its footing.
Where We See Opportunity From Here
The market rotation that began in Q1 has created some meaningful shifts worth paying attention to.
Large-cap tech multiples have compressed as investors demand evidence of profitable AI-driven growth rather than paying for potential. Many of these stocks are now trading closer to their long-term average valuations, which creates a healthier foundation for future returns. Meanwhile, smaller companies, value stocks, and international markets have all outperformed — a trend I expect to continue as the U.S. dollar depreciates from its safe-haven highs.
Gold remains an effective diversifier, particularly in the kind of low-growth, sticky-inflation environment we've been discussing for the past several quarters. Central banks that sold gold during the crisis to raise dollars are likely to resume their diversification programs now that tensions have eased.
In fixed income, the 10-year Treasury yield has reset to around 4.25%. As the economy cools and the oil-driven inflation spike fades, longer-term bonds should begin to outperform. We favor higher-quality, more liquid fixed income positioning than we have over the past couple of years.
Real estate is also worth a closer look for investors who can find properties at prices that reflect today's rate environment. Rates trending lower should provide a tailwind, but discipline on entry price remains essential.
Practical Steps for Investors
The through-line across all of this is straightforward: have a plan, trust the plan, and make thoughtful adjustments rather than sweeping changes driven by headlines.
Reconfirm your time horizon so that short-term events don't drive long-term decisions. Rebalance your portfolio — large market swings can quietly shift your allocation far from your target. Diversify equity exposure beyond the largest U.S. tech names, incorporating small caps, value, and international markets. And lean into quality fixed income as rates present genuine opportunity for the first time in years.
If you have questions about how any of this applies to your situation, I'm always happy to talk. Start a conversation when you’re ready!