The first quarter of 2026 was unsettling for many investors. Global headlines were dominated by geopolitical tensions, trade policy changes, and sharp moves in share markets. A glance at the numbers suggested the US share market had fallen around 4.3 per cent for the quarter, and many investors were understandably anxious.
But that headline figure tells only part of the story.
In Episode 73 of The Purposeful Investor Podcast, David Andrew was joined by Apollo Lupescu from Dimensional Fund Advisors to examine what actually happened beneath the surface of Q1 2026. What we found is that for investors with a properly structured, diversified portfolio, the quarter looked very different from what the headlines suggested.
Small cap stocks, value shares, and other parts of the market that rarely make front-page news delivered positive returns. Meanwhile, the seven technology giants that had dominated market commentary for years dragged the broader index down considerably.
Here is what happened, and what it means for long-term investors.
Key takeaways
- The US market fell 4.3 per cent in Q1 2026, but the fall was driven almost entirely by seven large technology stocks. The rest of the index was essentially flat.
- Small cap value shares in the US were up approximately 5 per cent over the same period.
- The Australian market delivered approximately 11.59 per cent for the full year to March 2026.
- Diversified portfolios that include value and small cap stocks experienced the quarter very differently from those concentrated in large technology.
- A single negative quarter is not a reliable signal for long-term investors to change strategy.
What Actually Happened in Q1 2026?
The US S&P 500 finished the first quarter of 2026 down approximately 4.3 per cent. That sounds significant, but a closer look changes the picture entirely.
The S&P 500 is a market-cap-weighted index, meaning larger companies carry more influence over the overall result. Remove the seven largest technology stocks, commonly known as the Magnificent Seven, and the remaining 493 companies in the index were essentially flat for the quarter. The broader US share market did not have a bad quarter. One concentrated corner of it did.
To put this in context: the US market also fell 4.3 per cent in Q1 2025. The following three quarters were all positive, and the S&P 500 ended that year strongly. A single negative quarter, on its own, tells you very little about what comes next.
It is also worth remembering that individual companies performed very differently within the quarter. The overall index result masked a wide range of outcomes:
- SanDisk (memory cards): up more than 150 per cent in US dollars
- Dow Chemical: up approximately 80 per cent
- Moderna: up approximately 70 per cent
- Energy companies (select): up more than 30 per cent
- Estee Lauder, Paramount, DoorDash: down significantly
The quarter was not clean or simple. Some companies made money, many others did not.
Why the Magnificent Seven Dragged the Market Down
The Magnificent Seven refers to seven large US technology companies: Nvidia, Microsoft, Meta, Amazon, Google, Tesla, and Apple. These are not simply large companies. They are some of the largest companies in the world by market value, and they carry enormous weight inside major indices.
The table below shows how dominant these seven companies are depending on which index or portfolio type you hold:
| Index or portfolio | Magnificent Seven weighting |
| Nasdaq | ~51% |
| S&P 500 | ~32% |
| Global diversified portfolio | ~18% |
The difference matters. A global portfolio that includes Australian, US, Japanese, and other markets reduces this concentration to around 18 per cent, which meaningfully lowers the risk that any single group of stocks can derail your results.
In Q1 2026, the Magnificent Seven fell approximately 11.3 per cent as a group. That single decline accounted for roughly $2.4 trillion in market value lost over the quarter. Because these companies dominate the index weighting, their poor performance pulled down the headline result for the entire S&P 500.
Investors who had recently moved more of their portfolio into these seven companies, hoping for reliable returns, felt this most acutely. This is what happens when too much of a portfolio sits in one group of stocks, and a clear case for the kind of broad diversification that evidence-based investment management builds on.
What Are Small Cap Stocks and Why Did They Outperform?
Small cap stocks are shares in publicly listed companies that are smaller in market size than the established large companies that typically dominate financial news. In Australia and globally, smaller companies generally have more room to grow and higher long-term return potential, though with greater short-term variability.
Academic research going back to the 1970s and 1980s identified three factors that have driven long-term returns above the broad market:
- Size: Smaller companies have tended to outperform larger, more mature ones over time.
- Value: Lower-priced stocks, measured against earnings or assets, have tended to outperform more expensive growth stocks.
- Profitability: Companies with stronger earnings have tended to outperform unprofitable ones.
This approach to building portfolios is often described as evidence-based investing because it is grounded in decades of academic research, not speculation or short-term market timing.
In Q1 2026, here is what happened in the parts of the market that evidence-based investing emphasises:
- Large value shares in the US were up approximately 2 to 4 per cent for the quarter.
- Small cap value shares in the US were up approximately 5 per cent.
While media coverage focused on a negative quarter, investors with diversified portfolios tilted toward small cap and value stocks experienced a notably different outcome.
The Long-Term Case for Small Cap and Value Investing
The short-term results are interesting. The long-term data is compelling.
Apollo Lupescu shared an illustration from Dimensional’s Matrix Book. Consider $1 invested across three different strategies, starting from the 1920s:
| Strategy | Value of $1 by end of 2024 |
| S&P 500 (broad market) | ~$14,000 |
| Small cap index | ~$54,000 |
| Small cap value index | ~$166,000 |
These figures reflect the return premium that researchers have observed when portfolios deliberately emphasise smaller companies and lower-priced value shares alongside a focus on profitability. The numbers are not a guarantee. They reflect what the research shows over very long time horizons.
The trade-off is patience. The value premium does not show up every year. The longer your investment horizon, the greater the probability it works in your favour:
| Investment period | Probability value beats growth |
| 1 year | ~59% |
| 5 years | ~70% |
| 10 years | ~77% |
| 15 years | ~86% |
The strategy requires time to work. Having a clear philosophy before markets move is what matters. The discipline to hold it when conditions are uncomfortable is what turns long-term premiums into real outcomes.
Our investment philosophy page explains in more detail how we apply this thinking to the portfolios we build for clients in Perth and across Western Australia.
Australian Market Returns: A Better Picture Than Headlines Suggest
It is easy, when reading financial news, to focus exclusively on the US. But Australian investors hold Australian assets, and the Australian market told a noticeably better story in Q1 2026.
For the full 12 months to the end of March 2026, despite the negative quarter, the Australian market delivered a strong annual return:
| Segment | Full year return to March 2026 |
| Australian market (broad) | ~11.59% |
| Value stocks | ~27% |
| Small companies (vs index) | ~13% above index |
Australian companies such as Woodside Energy and Santos, which are value stocks and profitable businesses, performed strongly in 2026 despite global uncertainty. Their underlying business fundamentals drove returns, independently of what was happening with US technology stocks.
A well-diversified portfolio, one that holds Australian, global, small cap, and value positions, does not behave like any single market index. Your outcome depends on what you actually own, not on what the headlines are reporting.
Why Media Coverage Makes This Harder Than It Needs to Be
One of the most consistent challenges for long-term investors is separating financial news from financial advice. They are not the same thing.
Financial media is built on two powerful human emotions: fear and greed. Fear, in particular, helped humans survive for thousands of years. When something feels dangerous, the instinct is to run. That instinct served our ancestors well on a savannah. It can be costly for investors.
Media outlets understand this. Their business is to keep you engaged, and anxiety is more engaging than reassurance. The result is coverage that emphasises risk and downside, and that frames short-term market movements as evidence of long-term disaster.
An investor who acted on media signals during Q1 2026 would have missed the positive returns already sitting inside their portfolio in the small cap and value segments. They would have reacted to a headline number that did not reflect their actual holdings.
Apollo Lupescu reflected on a family he had met during the quarter, who were anxious not only about markets but about a family member deployed overseas. Those emotions were real and legitimate. But the discipline to separate emotional responses from investment decisions is what protects returns over time.
As he noted: history shows that when challenges hit markets, human creativity and resilience tend to emerge. The oil crisis of the 1970s ultimately led to US energy independence. The pandemic accelerated innovation across industries. Disruption, over time, tends to generate new sources of value.
That does not make volatility comfortable. It does mean that long-term investors have good reason to stay the course. We covered this theme in our earlier piece on navigating volatility amid geopolitical tension, which remains relevant context for Q1 2026.
If you have been experiencing the kind of anxiety many Perth investors are feeling right now, you are not alone. Our article on the confidence gap affecting West Australians speaks directly to this dynamic.
Should You Invest in IPOs Like SpaceX, Anthropic, or OpenAI?
One of the most widely discussed investment topics of 2026 has been the expected public listings of major private technology companies, including SpaceX, Anthropic, and OpenAI. The excitement is understandable. These are genuinely significant companies. But investors considering jumping in based on the names alone would benefit from understanding how IPOs actually work.
Three structural dynamics are worth understanding before acting on IPO excitement:
- Price is already established before you can buy. By the time a company reaches a public listing, its value has been set through multiple private funding rounds over many years. Public investors may be buying at a point that already reflects a great deal of expected future growth.
- Supply is deliberately limited at launch. At an IPO, only a fraction of shares are typically available to the public. For a major listing, that might be as little as 10 per cent. Demand is high, supply is limited, and prices can inflate quickly beyond what the fundamentals support.
- Insider selling follows the lock-up period. Insiders typically cannot sell for around six months after an IPO. Once that period ends, additional supply enters the market, which can place downward pressure on the share price.
A more measured approach, consistent with evidence-based investment management in Perth and elsewhere, is to allow time for the market to absorb the supply, establish a more realistic price, and reach a stable valuation. This is not about missing out. It is about not overpaying.
The company is not going anywhere. The more important question is not whether to own a company like SpaceX, but at what price that ownership makes sense.
Frequently Asked Questions
What are small cap stocks in Australia?
Small cap stocks are shares in publicly listed companies that are smaller in total market value than large, established businesses such as the big four banks or BHP. In Australia, these typically sit outside the top 100 or top 200 companies by market size. Academic research suggests small cap stocks, particularly those with strong profitability and lower valuations (small cap value stocks), have historically delivered higher long-term returns than large cap stocks, though with greater short-term variability.
Why did the Magnificent Seven underperform in Q1 2026?
The seven largest US technology companies fell approximately 11.3 per cent as a group in Q1 2026. Because they represent roughly 32 per cent of the S&P 500’s total value, their decline pulled the overall index down to minus 4.3 per cent for the quarter. The remaining 493 companies in the index were essentially flat. The fall reflected a market reassessment of the very high valuations these companies had been carrying, rather than a broad economic collapse.
What is evidence-based investing?
Evidence-based investing is an approach that builds portfolios based on decades of peer-reviewed academic research into what drives long-term returns, rather than on forecasts, stock picking, or market timing. The research identifies three core factors: company size (smaller companies have tended to outperform larger ones over time), valuation (value stocks have tended to outperform growth stocks), and profitability (profitable companies have tended to outperform unprofitable ones). At Capital Partners, we apply these principles through our investment strategies alongside a clear investment philosophy.
Is one negative quarter a reason to change your investment strategy?
In almost all cases, no. A single negative quarter is statistically unreliable as a predictor of future performance. In Q1 2025, the US market also fell 4.3 per cent. The following three quarters were all positive, and the year ended strongly. Making structural changes to a long-term portfolio based on a single quarter’s result is a common and costly mistake.
How does diversification protect investors during volatile markets?
Diversification works because different parts of the market respond differently to the same events. In Q1 2026, while the Magnificent Seven fell around 11 per cent, small cap value shares in the US delivered positive returns. A properly diversified portfolio that holds small cap stocks, value shares, and international markets would have experienced the quarter very differently from an investor concentrated in large US technology stocks. This practical benefit is central to the approach to investment management that Capital Partners uses.
Should you invest in SpaceX or other IPOs when they list?
Not necessarily immediately. At an IPO, a limited supply of shares is available to the public while the majority remains with insiders who face a lock-up period before selling. Once that lock-up ends, additional supply can depress the price. A disciplined approach is to allow time for the market to discover a realistic price rather than buying into the initial frenzy. The company is not going anywhere, and patience often means entering at better terms.
Ready to Review Your Investment Strategy?
If Q1 2026 has left you questioning whether your portfolio is structured for the long term, or whether it is carrying more exposure to one area than you realised, we would be glad to talk through it.
We work with successful families across Perth and Western Australia who want to build true prosperity on their own terms. We are a fee-for-service, fiduciary firm, CEFEX-certified, and committed to advice that is structured around your goals rather than product commissions.
Schedule a Meeting to speak with our investment management team in Perth.
Not sure where your risk tolerance sits? Our Risk Assessment Quiz takes a few minutes and gives you a clear starting point.
You can also listen to the full conversation with Apollo Lupescu from Dimensional Fund Advisors in Episode 73 of The Purposeful Investor Podcast.
*This article contains general information only and does not constitute personal financial advice. Your circumstances are unique. Speak to a qualified adviser before making financial decisions.*
