Q1 Stock Market: Down, but Plenty of Sectors in the Green

Key Takeaways

• The broad stock market fell in the first quarter, but the overall decline masks gains in select sectors.
• Losses were led by technology and communication services stocks, with overall indexes down, owing to their heavy weightings in the market.
• Investors rotated into stocks that had been lagging in recent years, notably value stocks, small-caps, and dividend payers.

The stock market may have started the year posting losses, but it was far from a sea of red. The reason: Investors shifted into previously unloved corners even as they sold the former big winners. As a result, amid the uncertainty of the Iran war and concerns about artificial intelligence’s impact across a wide range of industries, stocks in the basic materials, industrials, and consumer defensive sectors finished the first quarter with gains. Most of all, energy stocks staged a huge rally on the back of the surge in oil prices.

Many of the mega-sized growth stocks that had been riding the AI boom suffered losses in the quarter. That included the biggest names in the market: Microsoft MSFT, down 23.3%, and Nvidia NVDA, down 6.5%. These tech giants, which carry heavy weights in market indexes, were key in driving the overall stock market down 4.2%, as measured by the Morningstar US Market Index.

Meanwhile, value stocks bested growth. In addition, small-company stocks fared better than those for larger companies, and dividend payers outperformed. The rotation has been driven by a combination of fundamental concerns—AI undercutting revenue and business models, the war-driven spike in oil—as well as stretched valuations on the stocks that had been leading the rally, according to Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth.

“I believe there is more room to run on the shifts we’ve seen [this year],” Pappalardo says. “Some of the valuation gaps … were quite wide. The wider the gap, the further the rotation can run." Meanwhile, “should the conflict in the Middle East persist, market dispersion will continue to increase, as sectors like energy and tech will likely move in opposite directions.”

Q1’s Big Stock Sector Rotation

Stock sector returns are among the visible signs of investors rotating out of the former market winners into stocks that had been lagging. Since the spring of 2023, the big winners in the markets have been in the technology and communication services sectors, thanks to the tailwinds of the AI boom. At the end of 2025, communication services stocks—which include Alphabet GOOG/GOOGL—were up an average of 42.4% per year, while tech stocks were up 38% per year. Meanwhile, basic materials gained 9.2% per year, while energy stocks rose 4.5% per year.

The first quarter looked dramatically different. Energy stocks led the market with a 38.1% gain on the back of the oil price leap. But beyond that move was a broader rotation into other previously lagging sectors. Basic materials ranked second, gaining 10.5%, led by a 16.7% gain on shares of industrial gas company Linde LIN and an 80.1% rally in chemical company Dow DOW. Behind them is a 7.7% return on utilities stocks, whose defensive nature helped them build on gains posted during the AI stock boom, thanks to surging power needs for data centers.

Meanwhile, technology stocks were led lower by declines at Microsoft, Nvidia, and a 6.7% drop for Apple AAPL. Communication services stocks, which lost 8.1%, had their biggest first-quarter decline since the third quarter of 2022. Meta Platforms META dropped 13.3%, for instance.

Value’s Outperformance Over Growth

For years, value stocks have been left in the dust by gains in growth stocks. The last time value bested growth for a full calendar year was during the 2022 bear market. Now, for the second consecutive quarter, value stocks have outpaced growth.

This outperformance was led by big gains in energy stocks, such as the 43.5% return on Exxon Mobil XOM and 39.6% return on Chevron CVX. “Energy and value valuations were depressed coming into 2026 relative to growth and tech after several years of relative underperformance, which has allowed the rally to move faster and run further,” explains Pappalardo.

The Q1 Large Cap Slump

Within the Morningstar Style Box, another first-quarter trend was the buoyancy of small- and mid-cap stocks compared with large-company stocks. This too reflected a change in the landscape. During the quarter, the Morningstar US Large Cap Index lost 6.1%, making for its biggest decline since the second quarter of 2022, when it lost 17.13%. Large-cap stocks are off to their worst start to any year since 2020.

“The tech names that have suffered year to date are in the large cap segment, and they are pulling that segment down relative to small caps,” Pappalardo says. At the same time, “small caps have lagged large caps in recent years, so their lower valuation had the segment poised for outperformance.”

Still, there was evidence of the continuing buildout of AI infrastructure among mid-cap stocks. The 1.2% rise in the Morningstar US Mid Cap Index was paced by a 168% surge in shares of SanDisk SNDK and a 55.6% rally in Corning GLW.

Dividend Stock Strategies Dominate

The outperformance of energy and utilities names, and value stocks in general, also meant it was a good quarter for dividend strategies relative to the overall market. It was especially strong for the Morningstar Dividend Leaders Index, which holds the 100 highest-yielding stocks from the Morningstar Dividend Composite Index. The Dividend Leaders Index gained 15.1% in the first three months of 2026, making for its best quarter since the final three months of 2022, when it rose 15.3%. Exxon and Chevron were big contributors here, as was Verizon VZ, which rallied 25.6%.