Investors had hoped April’s historically strong seasonality could bring a rebound for stocks after a rough first quarter. But several forces may stand in the way.

The S&P 500 fell 4.6% in the first quarter — its worst first quarter since 2022 — as U.S. stocks were dragged down by concerns about AI disruption and the intense uncertainty surrounding the Iran conflict.

Still, investors entered April with some optimism. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite tallied their biggest weekly gains of the year on Thursday, starting April off in a stronger position. Also, April has historically brought the second-best monthly performance for the S&P 500, based on data going back to 1928, according to Dow Jones Market Data.

The Iran conflict may continue to weigh on the stock market because investors still do not know how long it will last, nor how deeply it will affect oil prices and the global economy, said Marta Norton, chief investment strategist at Empower. When asked to name the market’s biggest concerns right now, she said: “Iran, Iran, Iran.”

Most importantly, the conflict may threaten the three things a sustained rally needs most: softer inflation, prospects for Federal Reserve monetary easing, and confidence that corporate earnings can hold up, according to Norton and other analysts.

Heating inflation

Of the three, inflation may be the most immediate concern.

Few economic reports so far have captured the Iran conflict’s impact on the broader economy beyond rising gas and fuel prices. But the March consumer-price index, due out on Friday, is likely to be the “first real slap in the face” since U.S. and Israeli forces struck Iran on Feb. 28, Russell Price, chief economist at Ameriprise, said in a call.

There are already signs of building price pressures. The ISM prices-paid component for March, a gauge of input costs, rose to its highest level since mid-2022 when it was released last week.

Ameriprise’s Price said he expects the CPI to rise 0.9% month over month in March and 3.3% year over year, while expecting the core CPI reading to rise 0.3% month over month and 2.7% year over year.

Separately, analysts at BofA Global Research said they expect the personal-consumption expenditures index — the Federal Reserve’s preferred inflation gauge — to peak at around 4% in the second quarter before falling next year. February’s PCE data is due out on Thursday.

Higher inflation, in turn, would complicate the picture for the Fed’s interest-rate path.

Rob Haworth, senior investment-strategy director at U.S. Bank, said in an interview that his biggest concern is whether energy-driven inflation will bleed into higher core readings. “If core inflation is sticky, that could point to more worries for the economy. It might mean the Fed would hold [rates] for longer,” he said.

Fed’s rate path

Fed Chair Jerome Powell said last week that interest rates could go in either direction, depending on the risks to the economy.

“There’s still a very high bar for the Fed to even open the conversation to hike rates, and there’s also a high bar to cut rates,” Haworth said. But if the economic activity starts to deteriorate, the Fed will tilt toward holding rates steady for longer, he added.

The U.S. economy added 178,000 jobs in March, topping forecasts, while the unemployment rate dipped to 4.3%, according to data released last Friday.

Fed-funds futures traders are pricing in a 72.7% likelihood that the Fed will keep rates steady at its December meeting, according to the CME FedWatch Tool — a sharp shift from late last year, when markets were pricing in up to four rate cuts by the end of 2026.

Earnings uncertainty

Then there’s the question of whether corporate profits can hold up under the pressure. Earnings are more critical than ever to the stock market’s performance as investors scramble for clues on how the Iran conflict may be impacting the economy, said Empower’s Norton.

For now, the outlook is still mostly bright: 2026 earnings-per-share estimates for the S&P 500 stood at around $320 on March 31, up 4.1% over a year ago, according to John Butters, senior earnings analyst at FactSet.

The chart below shows how the earnings estimate for the S&P 500 has changed over the past year.

Photo: FactSet

Meanwhile, as the start of earnings season nears, analysts appear to be “more optimistic than normal” in their forecasts for the first quarter, Butters said. Analysts have, in aggregate, raised first-quarter 2026 earnings estimates for S&P 500 companies. Also, more companies in the index have issued positive EPS guidance for the quarter than negative guidance, he noted.

However, much of that optimism around first-quarter earnings expectations is concentrated in the information-technology sector, Butters said. That could leave the broader earnings picture more vulnerable if the strength in tech begins to falter.

It will also be difficult for companies reporting earnings to describe their experience based on just one month of disruption since the Iran conflict began, said U.S. Bank’s Haworth.

Haworth said he would be watching for the kind of commentary companies gave during last year’s third-quarter earnings season, to see whether management teams use a similar playbook in talking about tariffs and the latest geopolitical uncertainty.