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What Drove the Quarter — and What Didn’t
January felt like a different year. The S&P 500 hit 6,976 on January 27 — an all-time high. AI optimism was still running strong. Then February 28 happened. The U.S. and Israel launched coordinated strikes on Iran. Within 72 hours, oil markets, rate expectations, and the entire Q1 narrative had reversed.
The war shut down the Strait of Hormuz, choking off roughly 20% of global oil supply. Crude surged more than 50%. Gas prices crossed $4 nationally. The inflation outlook, which had been improving, reversed. The Fed, which investors expected to cut rates, went silent. By March 20, the S&P had broken below its 200-day moving average for the first time in 214 sessions and posted four consecutive weekly losses.
The story most people missed: the S&P 500 fell, but the market underneath it reshuffled in a way we haven’t seen since 2022. Energy stocks posted their best relative quarter in over two decades. Occidental Petroleum gained 58%. APA rose 74%. Valero climbed 52%. Meanwhile, the Magnificent Seven — the names that carried everything in 2025 — fell 11.3% as a group. Software collapsed 22.6%. Airlines lost 13%. The money didn’t disappear. It moved.
The number that doesn’t match the mood: earnings estimates are still rising. Analysts expect 13.2% year-over-year earnings growth for Q1 — up from 12.8% at the start of the quarter. If that holds, it would mark the sixth consecutive quarter of double-digit earnings growth. Corporate profits have not cracked, even as prices did. The damage so far has been mostly a valuation compression — the forward P/E on the S&P 500 dropped from 22.0 at year-end to 19.8 today. That’s below the five-year average for the first time since 2022.
What matters for Q2: The war’s trajectory is the single biggest variable. If the Strait of Hormuz reopens, oil drops fast, inflation pressure eases, and the Fed can act. If it stays closed, the stagflation risk that markets spent March pricing in becomes a real scenario. Thursday’s session captured the tension perfectly — the Dow swung 600 points intraday on a single report about Iran and Oman drafting a shipping protocol.
One last data point for the long weekend. Since 1976, the S&P 500 has finished Q1 in negative territory 15 times. In roughly two-thirds of those years, the index ended the full year positive. And here’s an odd coincidence: the S&P dropped exactly 4.6% in Q1 2025 — the same loss as this quarter, to the decimal. That year finished up 16.4%. History doesn’t repeat that cleanly on purpose. But the pattern is worth sitting with over the long weekend, especially if your instinct right now is to do something drastic.
Q1 is done. The scoreboard is clear. Earnings haven’t cracked. Valuations have compressed. And the biggest variable heading into Q2 isn’t the Fed or earnings season — it’s a shipping lane.
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