Investors have shifted away from U.S. benchmarks in early 2026, with the SPX posting a 1.8% decline through mid-March, while international indices like EEM gained 3.2% over the same period. Rising tensions between the U.S. and Iran are accelerating capital flows into global energy and defense-related assets.
- SPX declined 1.8% through March 4, 2026
- EEM gained 3.2% in the same period
- XLE rose 4.5% amid energy sector demand
- CL=F crude oil futures up 6.3% since February
- ^VIX averaged 18.7 in early 2026
- Capital flows favor international energy and defense assets
The S&P 500 (SPX) has underperformed in the first quarter of 2026, falling 1.8% as of March 4, while international equities have surged, led by the MSCI Emerging Markets Index (EEM), which rose 3.2% during the same period. This divergence reflects a growing preference among institutional and retail investors for exposure beyond domestic markets amid escalating geopolitical tensions, particularly those involving the U.S. and Iran. The shift is concentrated in energy and defense sectors, with XLE, the energy sector ETF, seeing a 4.5% increase in value, driven by supply concerns and increased defense spending forecasts in key European and Asian markets. Crude oil futures (CL=F) have climbed 6.3% since early February, reflecting both regional instability and stronger global demand outlooks. Volatility has also risen, with the CBOE Volatility Index (^VIX) averaging 18.7 through early March—up from 14.2 in January—indicating heightened risk perceptions in U.S. markets. The spike in implied volatility underscores investor unease with domestic policy uncertainty and external threats, prompting a reallocation toward diversified global portfolios. Major asset managers have begun adjusting their equity allocations, increasing exposure to emerging markets and defense contractors in Europe and Southeast Asia. This trend is expected to continue through Q2, particularly if geopolitical risks escalate further.