Market Commentary, Q1 2026

March 31, 2026

The first quarter of 2026 was marked by a continuation of key geopolitical themes experienced during 2025, specifically elevated global tensions due to conflict and trade disputes/tariffs. For impact portfolios, this reinforces the value of resilience-oriented exposure to solutions that reduce vulnerability to shocks (like energy efficiency, local supply chains and food system resilience) rather than simply being positioned to benefit from volatility. The onset of war with Iran triggered a sharp broad decline for global markets and a pronounced rise in volatility. In terms of sectors, energy companies were the strongest performer in the quarter as Brent crude oil prices surged 93% due to the war disrupting Middle East supply chains, which constitute ~30% of global oil supply and 20% of global liquid natural gas. Within the MSCI ACWI, the broad global equity benchmark, energy returned 36.3% for the quarter even as the index as a whole fell 1.7%. From an impact lens, this quarter highlights the tracking error that can arise from fossil fuel exclusions: oil and gas exposure prevented the broader index from experiencing a larger decline, but those gains were driven by supply disruption and higher energy prices rather than improved real-world outcomes. This reinforces the importance of clear impact guardrails and benchmark expectations, particularly when excluded sectors lead the market. The disruptions also strained supplies that depend on the region, including fertilizers and certain metals. These disruptions tend to show up quickly in food and agricultural input costs, with disproportionate impacts on lower-income households, heightening the relevance of impact exposure to sustainable agriculture, nutrient efficiency and natural capital stewardship. Within fixed income, global corporate bond markets posted very modest returns of 0.1%, with the US outpacing both Canada and Europe.

MACRO

As we commented last quarter, investors entered the year with a high degree of uncertainty as growth slowed and inflation declined. As a result, expectations shifted in Q4, with investors increasingly pricing in a more dovish interest-rate stance, particularly in the US due to the magnitude of the slowdown growth. However, this sentiment quickly shifted with the commencement of the Iran war which, alongside the continuing Russia war with Ukraine and elevated trade tensions, significantly strained global supply chains. As a result, investors began to closely scrutinize supply chains for weak points that could lift input costs, drain inventories and raise the prices that producers charge. Supply chain stress can also affect the continuity and affordability of essential services, making it important to monitor second-order effects on vulnerable households and communities. This shift towards much higher inflation expectations was quickly reflected in bond spreads, with US two-year Treasuries widening more than 45bps from just prior to the war to the end of quarter, effectively pricing in interest rate hikes. However, we believe the market reaction to be overdone, given that inflation is being driven by a supply shock rather than by excessive demand. This inverts the usual playbook: central banks raising rates sufficiently high enough to battle an energy shock could cause significant damage to an already weakened economy. As a result, the monetary support that public markets have leaned on for more than a decade is largely unavailable. Both central banks and investors are accordingly back on stagflation watch – the uncomfortable mix of rising prices and slowing growth with few tools available to effectively deal with the challenge. Active ownership and engagement will become essential tools to protect outcomes, especially in sectors tied to basic needs. The key variable that will set the tone for the balance of the year is timing regarding when supply disruptions resulting from the war with Iran will abate, which, at the time of writing this report (June 2026), remains highly uncertain.

In Canada, Q1 marked the second straight quarter of negative GDP growth, placing the country in a technical recession while growth in both the US and Europe missed consensus forecasts. Signs of financial stress have also entered markets, as evidenced by rising stress in the Canadian housing market with mortgage delinquency rates rising a surprising 52% YoY in Ontario and 35% in British Columbia. This also has direct implications for household stability and community cohesion, and strengthens the case for housing strategies focused on preservation and affordability protection (not just new supply) alongside careful attention to refinancing risk. In the US, the K-shaped economy, where the top 20% of income earners are thriving and the bottom half are struggling, became even more pronounced as tax rebates reflected in last year’s One Big Beautiful Bill Act were paid out disproportionately, benefiting high-income earners When looking at the US economy overall, economic numbers appear resilient but lower-income households are increasingly struggling to get by. As an example, these households increasingly relied on subprime credit to make ends meet with debt balances now reaching an all-time high of $18.2T in Q1. Offsetting this, both the Canadian and US labour markets proved more resilient than anticipated, particularly in the US, where recent data points rebounded and largely reversed the prior quarter's signs of weakness.

PUBLIC EQUITIES
It was generally a negative quarter for global equities, although markets with significant exposure to upstream fossil fuels and commodities faired well. This highlights the risk of “benchmark drift” in resource-heavy indices: Canada’s market structure can deliver strong headline returns while embedding sizeable externalities. As an example, the S&PTSX was up 4% while the MSCI ACWI declined 2.9%. Technology stocks were particularly hit hard, with the NASDAQ down 4.5% given that growth-oriented stocks tend to be more sensitive to changes in interest rate expectations. Of note, the Magnificent 7 stocks (Apple, Amazon, Google, Meta, Microsoft, NVDA, Tesla), which have driven a significant portion of global market returns over the past few years, were collectively down an average of 10.5% during the quarter. Meanwhile European equities, which were up 7.5% in early 2026 prior to the Iran war, ended the quarter down 0.9%, marking a sharp reversal given the region’s significant exposure to Middle East supply chains and energy. In terms of fundamentals, earnings growth generally rebounded in Q1, outpacing analyst estimates by a remarkable 12.8% (based on MSCI ACWI constituent reports) while sales growth largely came in line with expectations.

Valuations across global markets contracted meaningfully following the market pullback, combined with increased earnings growth expectations. As a result, US public equity markets (based on the S&P500) ended the quarter with a forward price-to-earnings multiple of 19x, down from 22x at the end of 2025, while global markets (based on MSCI ACWI) ended with a 16.5x multiple, down from 19x. While valuations have improved, US public equity markets remain at high valuation levels relative to bonds, particularly when comparing earnings yields to bond yields, which imply a 160bps premium for taking equity risk.

Stripping away the Magnificent 7 (which traded at a forward price-to-earnings multiple of 24x and the end of the quarter) and frothy AI-related stocks provides a much more compelling valuation scenario including for global equities. This can be an opportunity set beyond a narrow AI narrative toward areas more directly linked to real-economy outcomes, such as health, utilities, efficiency and solutions that lower system costs. By comparison, Rally’s Dividend Model strategy, which is more defensive and value oriented, traded at just 15x forward earnings while also providing a 4.5% annualized yield. Defensiveness is most compelling when linked to essential services and reduced negative externalities, particularly for regions with high cyclical commodity exposure such as Canada where dividends can be reliant on high-emitting sectors. We interpret the significant earnings yield spread between growth and value-oriented stocks as reflective of continued euphoria regarding tech companies associated with AI and a main reason fears of an AI bubble continue to persist (at the time of writing this report, these companies have rebounded significantly). We believe investors should be prudent in managing public equity allocations to avoid over exposure to richly valued impact-oriented AI stocks, particularly if bond yields remain elevated for a prolonged period or if earnings growth rates decline. Impact-oriented AI requires tighter underwriting: clarity on responsible AI governance (privacy, bias, security), workforce effects and energy footprint should be treated as part of impact risk management.

PUBLIC FIXED INCOME
The Bloomberg Corporate Investment Grade Bond Index was modestly positive in Q1, up 0.1% with relatively strong performance in the US of 1.3%, though this was driven largely by positive currency effects (rising US dollar relative to CAD). Conversely, European corporate bonds fell 1.2%, marking the second straight quarter of decline. Of note this quarter was the impact on Treasuries of the war with Iran, particularly on the shorter end of the curve, with the US two-year yield increasing 35bps and the 10-year increasing 19bps. This caused a general flattening of the yield curve, reversing the curve steepening trend last quarter as investors began pricing in rising risks of inflation. In Canada, T-bill spreads also widened but by a more subdued 24bps on two-year T-bills and 6 bps on 10-year T-bills. We believe the more modest spread widening in Canada is due to investor concerns regarding the health of the economy. This is also a reminder that “lower sensitivity” is not “lower impact risk” in Canada – household-level affordability and housing stability can deteriorate even when market moves appear modest.

PRIVATE MARKETS
Global private equity fundraising was US$162B in Q1, a 15% increase from last quarter though down 9% from the same period last year. AI remained the top sector of interest, accounting for 80% of all capital invested followed by defense & aerospace and renewable energy infrastructure. After a challenging few years, exits showed signs of stabilizing in Q1 with global funds recording 975 transactions and raising US$307B globally. Even with improved exits, longer hold periods increase the importance of private-market governance for impact, embedding KPIs into value-creation plans and maintaining mission protections when follow-on capital becomes scarcer. In Canada, geopolitical tensions particularly related to rising oil and commodity prices resulted in a resurgence of private investment interest in the country. While some of this private investment is related to the delivery of fossil fuels (for example, LNG to Germany) we note that there was increased investment in decarbonizations areas such as renewable infrastructure and energy storage. We also see increasing impact investment opportunities that intersect with Indigenous rights and local communities where impact quality will depend on meaningful partnerships, benefit sharing and long-term stewardship of land and water. Total US PE/VC deal activity hit a five-year low in terms of number of transactions but was fairly robust from a dollars-invested perspective. Several large AI-related transactions dominated Q1 investment activity including OpenAI’s US$122B funding round, Anthropic’s US$30B round and Waymo’s US$16B round. Collectively these three deals accounted for 35% of all US private equity investments in the quarter. As we’ve noted in prior quarter commentaries, larger later-stage deals continue to dominate the market which can deepen the early-stage funding gap, particularly for diverse founders and regionally rooted models. Blended structures and domestic impact capital can play a catalytic role here by absorbing early risk while preserving inclusion goals.

A notable theme that gained momentum during the quarter was the potential for AI to disrupt software-as-a-service (SaaS) companies. As investors became increasingly aware of this, valuations for software companies fell materially as noted by the 25% decline in the SEG SaaS Index (comprised of 107 public-market-equivalent B2B SaaS companies). For impact exposure to digital health and other mission-critical software, this environment favours careful segmentation. Where software supports essential outcomes, resilience may be stronger than broad tech multiples imply, provided data governance and user protections remain robust. Globally, SaaS companies account for approximately half of all venture capital investment over the past five years, reaching a peak of 60% in 2025. It is also notable that 25% of US private credit, which overwhelmingly finances leveraged buyouts, is exposed to SaaS companies. In our view, the broad-based sell-off and re-rating of SaaS companies was excessive given that certain industries, such as healthcare, have significant moats related to proprietary data and confidentiality which make displacement of critical software challenging (for example, patient treatment analytics). This is also where responsible data becomes part of impact delivery, as privacy, security and bias management are directly tied to trust and equitable access. However, we believe that more commoditized areas of the SaaS market such as B2B data warehousing may be disrupted.

Investor interest in global private credit remained strong in Q1, with total underwriting increasing 4% YoY driven by institutional demand. The riskier leveraged buyout segment of the market accounted for 60% of all new private credit issuance with the overall mid-market maintaining steady yields at ~9.1% in the US. Of concern was the increase in non-performing loans to software companies, which increased to ~4.5%, well above the 2% historical average. Of note during the quarter were several evergreen funds targeting retail investors, such as Blue Owl and Blackstone’s credit funds, that gated redemptions. While the funds were marketed as offering some degree of liquidity it appears that investor expectations regarding their ability to exit these funds was mismatched with the reality of the underling investments. Thus, as investors issued redemption requests many of the funds limited or halted redemptions to avoid punitive secondary sales of holdings in the market. This is a practical portfolio construction lesson: liquidity terms must match underlying liquidity, or forced actions can undermine both returns and outcomes at precisely the wrong time. While evergreen funds serve as an excellent vehicle and structure for creating access to a professionally managed diversified portfolio of private investments, investors should still treat these vehicles in a similar manner to traditional private investing (i.e. with a long-term holding period) rather than as highly liquid trading vehicles given the illiquid nature of the underlying assets. Appropriately structured evergreen vehicles can play an important role in broadening access, so long as expectations are set clearly and the governance supports transparent impact reporting and responsible risk management.

OUTLOOK
As we have seen in the first five months of the year, supply shocks due to the war with Iran have dominated the headlines and contributed to broad market volatility. While the US and Iran are engaged in talks to resolve the conflict, we believe the ramifications from the closure of the Strait of Hormuz will continue to be present for some time even if a deal between the countries is reached. Energy shocks tend to be regressive, feeding through to transport and food costs. For impact portfolios, this heightens the relevance of efficiency, electrification and resilience solutions that reduce household exposure to price spikes. The result is likely to be stagflation across the global economy, and in particular Europe and Asia Pacific countries that derive a significant portion of their energy from the Middle East. The path of interest rates from here remains highly uncertain, and in our view will be set region by region according to local conditions, particularly the health of labour markets and the magnitude of any financial stress Adding further uncertainty are global trade tensions and in particular the upcoming negotiations between Canada, Mexico and the US regarding free trade.

We recommend investors adopt a nimble but highly selective approach to adding new holdings or rebalancing existing positions with a disciplined eye on fundamentals and valuations while simultaneously continuing to avoid areas of the market we consider to be frothy such as AI-related chip stocks. “Selective” also means selecting for outcome durability: business models that can sustain access and affordability through volatility, with governance and reporting that makes impact performance visible and manageable. In general, we believe investor portfolios should remain well diversified with a lean towards high-cash-flow mature businesses, investment-quality public and private credits, low-correlation real assets such as farmland, and low-correlation alternatives such as impact litigation financing. Taken together, the throughline is to keep capital flowing to investments aligned to positive outcomes, while actively managing the risk of unintended harm during periods of stress.

DISCLAIMER

Rally Assets considers third-party information and data presented herein to be reliable but because it was prepared by a third-party, Rally Assets may have had to rely upon the work product of the third party to some extent, without being able to verify the accuracy of the information. Opinions expressed herein are current as of the date appearing at the top of this page and are subject to change without notice.

The information provided on this page is provided as a general source of information. While the information is considered to be true and correct at the date of publication, change in circumstances after the time of publication may impact the accuracy of the information. Rally Assets reserves the right to add, remove, vary or alter the information and materials contained in this document in its discretion.

This document may contain "forward-looking information" as defined in Canadian securities regulations. Forward-looking information involves estimates, projections and known and unknown risks. The actual performance may be materially different from those expressed or implied in the forward-looking information. Wherever possible, words such as "anticipate", "believe", "expect", "intend" and similar expressions have been used to identify these forward-looking statements. For greater certainty, information regarding a security’s or a firm’s past performance, whether that information is actual or simulated, is not a reliable indicator of future performance and should not be relied upon as a basis for an investment decision.

There are risks associated with investing in securities. The security described herein may be subject to considerable fluctuations in value and the loss of principal is possible.