Executive Summary
As we look ahead to the second quarter of 2026, markets are no longer centered on a soft landing debate alone. Q2 begins under a new regime: an energy shock tied to the U.S.- Israeli war with Iran, renewed inflation pressure, and a much narrower path for central bank easing. What was a “transition” story in Q1 is becoming a “shock-absorption” story in Q2. The macro backdrop has changed materially. The OECD’s March interim update now projects global growth at 2.9% in 2026 and 3.0% in 2027, with G20 headline inflation rising to 4.0% in 2026. In the same update, U.S. 2026 growth is projected at 2.0% while U.S. headline inflation is projected at 4.2%, reflecting the pass-through from higher energy prices and still-lagged tariff effects. At the same time, the Federal Reserve held the policy rate at 3.50%–3.75% in March and explicitly said uncertainty remains elevated, with Middle East developments posing risks to both sides of its mandate. More recently, Fed officials have warned that the balance of risks has shifted toward inflation as oil surged and the Strait of Hormuz disruption intensified. In this context, Q2 2026 will likely be shaped by three forces: the durability of the energy shock, the speed of inflation pass-through into consumer and producer prices, and the extent to which slowing activity starts to resemble stagflation rather than a clean slowdown. This quarter is less about chasing easing and more about managing downside macro asymmetry.
Global Snapshot
• Global growth is now expected to remain positive but softer than previously assumed. The OECD projects 2026 global GDP growth at 2.9%, down from earlier expectations, and explicitly links the downgrade to the evolving Middle East conflict and energy-market disruption.
• Inflation is no longer simply “cooling gradually.” In the OECD’s March baseline, G20 headline inflation is projected at 4.0% in 2026, while advanced G20 inflation is projected at 3.5%, largely because oil and gas assumptions have moved sharply higher.
• The energy shock is central. OECD assumptions now embed Brent and European gas prices around 40% and 60% higher, respectively, than in the December 2025 baseline.
• The IEA estimates global oil supply will plunge by 8mm b/d in March, that export flows through Hormuz are near a standstill, and that 2026 oil-demand growth has been cut by 210k b/d to 640k b/d.
Summary: The global economy is not in a base-case recession, but Q2 opens with a classic stagflation setup: weaker growth, higher energy prices, and rising inflation sensitivity.
Regional Focus
United States - Resilient Baseline, Rising Stagflation Risk
• The Fed’s March projections still show a median 2026 outlook of 2.4% real GDP growth, 4.4% unemployment, and 2.7% PCE inflation. That is the official policy baseline.
• The war-shock macro scenario is less comfortable. The OECD now sees U.S. growth at 2.0% in 2026 and 1.7% in 2027, while projecting 2026 U.S. headline inflation at 4.2%.
• Labor is still holding, but it is not strong enough to fully absorb a prolonged oil shock. February payrolls fell by 92,000 and unemployment was 4.4%, while weekly jobless claims most recently remained low at 210,000, suggesting a “low-hire, lowfire” labor market rather than outright breakdown.
• The inflation base before the war was relatively contained: headline CPI was 2.4% year-on-year in February and core CPI 2.5%. That makes Q2 especially important, because the next move in inflation is more likely to come from energy transmission than from a broad reacceleration already visible in pre-war data.
Outlook: The U.S. still enters Q2 with positive momentum, but the margin for policy easing has narrowed sharply. If oil stays elevated, the market’s old rate-cut narrative becomes much harder to justify.
Eurozone - More Exposed to the Energy Shock
• The OECD projects euro area growth at 0.8% in 2026, with higher energy prices weighing directly on activity. Euro area inflation is projected at 2.6% in 2026.
• Flash March PMIs showed the euro area composite index falling to 50.5 from 51.9, with Reuters describing the data as “ringing stagflation alarm bells.”
• OECD also expects a modest increase in euro area policy rates in Q2 2026 to help keep inflation expectations anchored, which underlines how different this quarter looks versus the Q1 easing narrative.
Key theme: Europe faces the most obvious growth-energy tradeoff in Q2: weaker activity, tighter margins, and less room for easy policy optimism.
Asia & Emerging Markets - Growth Engine, But Energy Importers are Vulnerable
• China’s growth is projected to ease from 5.0% in 2025 to 4.4% in 2026, with higher energy-import costs, property-sector adjustment, and softer domestic dynamics partly offset by infrastructure support and lower effective U.S. tariffs.
• India remains one of the fastest-growing major economies, but OECD expects growth to slow from 7.6% in FY 2025-26 to 6.1% in FY 2026-27, and it explicitly notes that gas rationing and higher energy costs could disrupt activity.
• Reuters’ March PMI roundup showed India’s private-sector growth falling to a threeyear low, with input costs rising at the fastest pace since June 2022.
Summary: EMs still offer relative growth, but Q2 favors energy exporters over energy importers, and countries most reliant on imported fuel are more vulnerable to margin compression and policy tightening.
Key Macro Themes & Risks for Q2 2026
Theme / Risk | Implication |
|---|---|
Energy Shock Persistence | If Hormuz disruptions last longer than expected, higher oil and gas prices may feed directly into transport, food, chemicals, and consumer inflation. |
Stagflation Risk | Business surveys across the U.S., euro area, UK, andJapan already show weaker activity and higher inflation expectations. |
Policy Divergence | The Fed is on hold, the OECD sees euro area rates rising modestly in Q2, India may tighten temporarily, and China remains accommodative. |
Demand Destruction | The IEA has already cut March-April oil-demand growth by more than 1mm b/d on average. |
Recession vs. Slowdown Debate | Reuters notes recession is not yet the consensus, but downside risks are significant and highly dependent on conflict duration and energy prices. |
Drivers to Watch
• War and Energy Transmission: Since the conflict began on February 28, oil has moved from around $65 to above $100 at points, while the IEA said Brent briefly traded within a whisker of $120 before easing. That is the single most important macro transmission channel for Q2.
• Central-Bank Repricing: Fed officials now speak more openly about inflation risk than near-term easing, and markets have sharply dialed back 2026 rate-cut expectations.
• Supply-Chain and Input-Cost Shock: The war is not just about crude. Reuters reports that petrochemical flows through Hormuz have been badly disrupted, pushing plastic prices higher and raising manufacturing costs, especially in Europe and Asia.
• Business Survey Deterioration: March PMIs show that higher energy prices are already weighing on activity and pushing up inflation expectations across major economies.
• Emergency Supply Response: IEA members agreed on 11 March to release 400 million barrels from emergency reserves, the largest coordinated release in IEA history, but the agency also stressed this is a stopgap if shipping disruptions persist.
Upcoming Catalysts
• April U.S. Employment Situation (March 2026): First full jobs read for Q2 positioning.
• April U.S. CPI (March 2026): Key test of whether the energy shock is starting to pass through into headline inflation.
• April FOMC Meeting: Important because the Fed will have more post-war inflation and labor data by then.
• May U.S. Employment Situation (April 2026) and May U.S. CPI (April 2026): These releases will matter more than usual because they will capture deeper Q2 energy pass-through.
• June U.S. Employment Situation (May 2026) and June FOMC Meeting with projections: This is likely the quarter’s most important policy checkpoint.
• Ongoing Conflict Developments: Any change in Strait of Hormuz access, tanker security, or damage to Gulf infrastructure can still overwhelm scheduled macro events.
Gold (XAU/USD)
Confirmed technical medium-term correction to the downside.
Long-term uptrend remains intact and still targeting $6,000/Oz in 2026.
Major support around the $4,100 level (200-Day MA)
Outlook: Gold started correcting after a huge run in 2025 (more than 70%) and is expected to continue dropping in the short-term before finding support and recovering losses from March 2026, then eventually head toward a new all-timehigh of $6,000/Oz Support levels are as follows: $4,100, $4,000, $3,820, $3,600, and $3,450.
S&P 500 (US500)
• Thinning volumes observed previously (Q1 report) were a proper signal of a corrective move in the making
• The S&P 500 has been facing negative pressure from the macro environment, in addition to the rotation to less risky assets.
Outlook: A sustained break below support zones could lead to deeper corrections, especially if macro headwinds intensify. The S&P500 broke key support levels recently, triggering a possible “price-bleed” after closing for 5 consecutive weeks below most of the major Moving Averages. Support levels are as follows: 6475.00, 5825.00, 5500.00, 5210.00
EURUSD
• EUR/USD remains under pressure and continues to trade within a clear descending channel, reflecting sustained short- to medium-term bearish momentum.
• The pair failed to hold above the 1.1650 key area, which now appears to be acting as a key resistance zone.
• Price is also trading below the main moving averages on the chart, reinforcing the bearish structure.
• The red horizontal levels at 1.1385 and 1.1070 stand out as the key downside support zones if the current channel continues to guide price lower.
• Unless EUR/USD reclaims the upper part of the channel and breaks back above the nearby resistance cluster, rebounds may continue to be viewed as corrective rather than trend-changing.
Outlook: As of now, EUR/USD remains technically bearish, especially after getting rejected from the very important 1.2100 area, which would have invalidated the 18-year-old downtrend. The pair is respecting the descending channel well, and the rejection from the upper boundary suggests sellers are still in control. As long as price remains below the 1.1700– 1.1650 resistance area, the path of least resistance remains to the downside. In that scenario, we would expect the market to gradually move toward 1.1385 first, followed by 1.1070 if downside momentum accelerates. Only a decisive breakout above the channel would weaken this bearish view. Support levels are as follows: 1.1385, 1.1070, 1.0750, 1.0400
• Risk-Off with Selective Quality: Q2 favors liquidity, balance-sheet strength, and pricing power over broad beta exposure. Energy shock environments typically reward selectivity more than aggressive index chasing.
• Inflation Hedges over Pure Duration: If the main risk is stagflation rather than an outright collapse in demand, inflation hedges, energy exposure, and selective commodity-linked trades may hold up better than long-duration rate-cut positions.
• FX and Macro Hedging: USD defensiveness and cross-asset hedges remain relevant as long as energy pricing and shipping risks dominate the macro tape.
“Don’t Confuse Panic with Trend.”
Q2 begins with exactly the kind of backdrop that can trigger emotional overreactions: war headlines, inflation shocks, and policy repricing all happening at the same time. The right response is not paralysis, but process. In stagflationary environments, capital preservation, patience, and disciplined sizing matter more than narrative conviction.
Q2 2026 will be defined by how markets absorb an energy shock before they fully digest it. Growth is still positive in baseline forecasts, but the distribution of outcomes has worsened materially. Inflation is no longer merely “sticky”; it is at risk of being reaccelerated by oil, gas, and supply-chain disruption just as growth momentum becomes more fragile
Strategic priorities:
• Stay cash liquid to capture once-in-a-decade opportunities.
• Treat war-driven inflation as a macro variable, not just a commodity story.
• Hedge both inflation risk and growth disappointment.
Final Word: “Think into the Future.” Q1 was about transition. Q2 looks more like stress-testing. The next quarter will likely reward investors who can separate temporary price shocks from durable regime change, while staying adaptive enough to respond if the energy shock proves longer-lasting than the market hopes.