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Stalled upturn
March 2026 marked a clear shift in market sentiment. The positive momentum seen in equity markets at the start of the year has given way to a more cautious tone as geopolitical uncertainty in the Middle East, rising energy prices and higher inflation expectations have prompted investors to reassess risks. At the same time, it is important to recognise that markets are often driven in the short term by headlines and sentiment, while long-term returns are ultimately shaped by corporate earnings and investor discipline. In our asset allocation, equities remain overweight.
Regional differences stood out during the market decline
Global equities declined by around five per cent in March when measured in euros, with notable regional divergence. European equities fell significantly more (–8.1%) than their US counterparts (–3.6%), while emerging markets also saw a pronounced decline (–7.8%). A stronger US dollar and higher energy prices added pressure particularly in Europe and Asia, where economies are more reliant on imported energy. The US market proved relatively more resilient, reflecting the dollar’s safe-haven status, stronger energy self-sufficiency and the solid earnings performance of US companies.
Performance dispersion was also evident across sectors. The energy sector benefited from rising oil and gas prices, while information technology provided partial protection during the market downturn. Although many IT companies are growth-oriented, technology stocks were increasingly perceived as quality assets amid March’s volatility. By contrast, cyclical sectors such as basic materials and industrials came under pressure. Higher energy prices are expected to weigh on corporate profitability, and a prolonged price shock could affect both the timing and scale of corporate investment.
Central banks’ room for manoeuvre has narrowed
From a macroeconomic perspective, the environment has become more challenging. The energy shock has lifted inflation expectations and reduced central banks’ policy flexibility. Both the European Central Bank (ECB) and the US Federal Reserve kept policy rates unchanged in March, while clearly highlighting heightened economic uncertainty. The ECB revised down its euro area growth forecast for this year to below one per cent, while raising its inflation forecast to above 2.5 per cent. In the United States, growth is expected to remain slightly above two per cent, but persistent inflation is also limiting the scope for monetary easing.
Euribor rates moved clearly higher during March, and markets are now pricing in interest rate hikes by the ECB later this year. The central bank is closely monitoring inflation pressures, with a key question being how long the conflict involving Iran and the resulting energy shock will persist.
Corporate earnings expectations remain very strong
Corporate earnings prospects currently represent one of the most striking contrasts in financial markets. Despite increased economic uncertainty, analysts expect global equity earnings to grow by as much as 19 per cent this year. Earnings forecasts were revised higher even in March, despite the escalation of geopolitical tensions. These upward revisions, however, have been concentrated in a limited number of sectors, particularly energy, defence and technology linked to artificial intelligence.
Rising energy prices and cost inflation typically feed into corporate cost structures with a lag, making the first-quarter earnings season beginning in April an important test for current expectations. Markets are likely to remain sensitive to even modest changes in earnings guidance. Although equity valuations eased somewhat in March, they still offer limited room for disappointment. The forward price-to-earnings ratio for global equities has declined to 17.6, compared with close to 20 last autumn. Historically, average P/E levels have been closer to 15–16.
