A resilient US stock market is betting that a powerful, technology-driven earnings cycle will override geopolitical shocks, even as the chasm between equity prices and economic reality grows wider.
The S&P 500 has posted four straight weeks of gains to hit record highs, a stark contrast to a backdrop of war in the Middle East, Brent crude prices above $106 a barrel, and increasingly dire warnings from central bankers. The rally has been driven less by a belief in imminent peace and more by a structural shift in the market’s focus, where artificial intelligence and corporate profits now form the core of global risk appetite.
“The equity rally is being driven less by geopolitics and more by positioning, with AI and semiconductors acting as the core engine,” Stephen Innes, a market analyst, said in a recent note. This sentiment is reflected in cross-asset signals, with the S&P 500 trading roughly 600 points above where conventional models anchored to oil prices and interest rates would place it, creating a significant dislocation.
While the market appears to be pricing in a contained outcome in the Iran conflict, the resilience is creating a fragile setup. The Bank of England’s Deputy Governor, Sarah Breeden, recently warned that asset prices are at “all-time highs” while ignoring a growing list of risks. “We expect there will be an adjustment at some point,” she said, highlighting a key risk for investors betting that the rally can continue indefinitely.
AI Panic, Not War, Drove March Selloff
To understand the market’s current strength, it’s crucial to re-examine the nearly 8% drop in the S&P 500 in March. While coinciding with the outbreak of war, the selloff began in late January, sparked by what traders called an “AI panic.” Investors initially dumped stocks in software, logistics, and service industries perceived as vulnerable to AI disruption. The tech-heavy Nasdaq led the decline, with just 20 AI-related stocks, including the “Magnificent Seven,” contributing to about 60% of the S&P 500’s fall.
The subsequent recovery has also been led by tech. The PHLX Semiconductor Index recently posted 18 consecutive sessions of gains, a historic melt-up fueled by strong demand signals and a narrative that has shifted from disruption fears to an arms race for AI infrastructure. Intel, for example, saw its stock surge after retail investors accumulated shares following an $8.9 billion equity stake from Washington, reinforcing the idea that the AI cycle is the primary driver of market positioning.
A Teflon Economy Built on Tech Earnings
The market’s ability to look past the conflict is supported by two fundamental factors: lower energy dependency and a robust corporate earnings cycle. The global economy’s reliance on oil has shrunk dramatically; oil now accounts for about 2% of global GDP, roughly a quarter of its share during the 1979 Iran crisis. This has kept inflation expectations in check, with the US five-year breakeven inflation rate rising only 0.2 percentage points to 2.6% since the war began.
This stability allows investors to focus on a powerful earnings story, particularly in the tech sector. Corporate profits are running at a historic 11.5% of GDP, far exceeding levels seen even during the dot-com boom. According to analyst estimates, the top technology giants are expected to contribute 70% of the S&P 500’s revenue growth over the next 12 months.
This dynamic is forcing a reallocation of capital, as seen in the recent earnings report from Annaly Capital Management (NLY). The firm beat EPS forecasts and demonstrated a pivot by deploying $510 million of newly raised capital into its residential credit and mortgage servicing rights (MSR) businesses, chasing higher returns as relative value shifts. “The ability to dynamically allocate capital toward the most attractive relative value opportunities is critical,” CEO David Finkelstein said on the company’s earnings call.
However, this divergence between soaring asset prices and underlying economic risks has central bankers on high alert. Ms. Breeden of the Bank of England pointed to the untested nature of the $2.5 trillion private credit market as a potential source of instability. “It hasn’t been tested at this scale,” she warned, expressing concern about a “private credit crunch” should multiple risks crystallize simultaneously.
For now, the market is betting that the powerful tailwind of the AI-driven profit cycle is strong enough to overcome the headwinds of geopolitical conflict and rising interest rates. The question for investors is how long that bet can hold.
This article is for informational purposes only and does not constitute investment advice.
