The Stock Market Just Had Its Worst Quarter in Years—And Some ‘Pretty Rough’ Days. Can It Turn Around?

Stocks just posted their worst quarterly performance since 2022, with the S&P 500 dragged down by the war in Iran, which has added soaring oil prices to a heap of pressures on the economy.
Unlike last year's tariff tantrums when investors enthusiastically bought the dip, traders are cautiously watching developments in the Middle East, which has kept the major stock indexes in a slow and steady downtrend.
It’s been one year since “Liberation Day” rewrote the Wall Street playbook. Investors are being put to a different test in 2026.
The S&P 500 is down nearly 5% since the start of the year, making the first quarter the index's worst since 2022, with the losses coming entirely after the U.S. and Israel launched strikes on Iran in late February. The ensuing conflict has disrupted oil production, processing, and shipping across the Middle East, causing oil prices to skyrocket. Economists and investors fear higher energy costs will fuel inflation, which was creeping higher before the war began, and weigh on an already wobbly labor market.
Around this time last year, the stock market had a meltdown when President Donald Trump revealed his sweeping “Liberation Day” tariffs. After a week of panic, Trump backtracked and the notion of the “TACO trade”—short for “Trump Always Chickens Out,” suggesting that he will adapt policy to market pressure—was born.
Investors got a taste of the TACO on Tuesday when stocks soared, notching their best day in nearly a year following reports that President Trump may be willing to withdraw from the war in Iran without fully reopening the Strait of Hormuz, the vital chokepoint at the center of the current energy crisis.
But prior to Tuesday, investors weren't buying the White House's assurances of a short, tidy war. “Unfortunately, it doesn't look like the tariff trade is going to be exactly proxied in 2026,” said Gina Martin Adams, chief market strategist at HB Wealth, in an interview with Investopedia late last week.
Why This Matters
The U.S. stock market and economy have proved resilient in recent years, weathering unpredictable shifts in trade policy throughout 2025, as well as years of elevated inflation and interest rates. But the war in Iran, now entering its second month, could be the bull market's biggest test yet.
Adams described the market’s decline over the weeks leading up to Tuesday's rally as “death by 1,000 cuts,” an uncomfortable scenario for investors who’ve grown accustomed in the past year to sharp sell-offs and sharper rebounds. “Even though we've had a couple of pretty rough downside days,” said Adams, “the recovery days are not emerging.”
Trading in recent weeks has offered ample signs that investors are cautious. Last Monday, when stocks jumped on news of negotiations to wind down the war, retail investors sold the rally. According to market analytics firm S3 Partners, trading patterns in Cboe Volatility Index (VIX) options contracts suggest both long and short investors are risk-averse.
“Short investors covering, long investors taking profits,” S3 analysts wrote last week.
The Iran war is just one of the factors that has investors anxious. Concerns about AI-driven disruption in the software industry, which hammered sector stocks in the first two months of the year, have taken a back seat to the war, but they haven’t dissipated. Investors will be scrutinizing earnings reports in April for clarity on how software companies are navigating the environment.
Software companies are "going to have to confirm what the market is now saying, and that is, ‘Oh, it's not going to be that bad,’” said Adams.
The financial sector is another group Adams will be following closely throughout earnings season. Financial stocks lagged the market heading into the Iran war as investors grappled with worries about the private credit industry’s lax underwriting standards, excessive leverage, and exposure to AI-threatened software businesses.
“Financials, historically, are a pretty good indicator of market direction,” said Adams. “If the companies come out and speak very positively about the outlook, there does appear to be a really strong opportunity for recovery there. If they don't, then we'll continue to see this sector operate as a drag on the market.”
Despite the tangle of risks hanging over markets, many on Wall Street remain optimistic. Analysts expect the S&P 500 to rise nearly 30% over the next year, according to a FactSet aggregation of company stock price targets. If those targets prove accurate, analysts see tech stocks rising more than 40% to lead a rally across every sector except energy, the only one to have advanced in the past month.
Morgan Stanley analysts in a note on Monday said there is “growing evidence the S&P 500 correction is getting closer to its ending stages,” citing compressed multiples, strong earnings growth, and an increase in oil prices viewed as subdued when compared with past oil shocks that pushed the economy into recession.
“Our baseline is that concerns over AI disruption, private credit and geopolitics reflect real and material risks, but ones that will nonetheless fall short of derailing the current growth cycle,” wrote Barclays analysts in a note last week. The firm raised its full-year S&P 500 earnings estimate and its year-end target for the index, citing “a secular growth engine in Technology that shows few signs of stopping.”
Update—March 31, 2026: This story has been updated to reflect the close of markets on Tuesday.