Daily NVIDIA. Source: TradingView.
Right now AI and software stocks are a mixed bag. Some are still sliding, while others look like they have found a floor. I still think the long-term demand story for AI is intact. Businesses are not going to stop investing in automation and machine learning just because there is a war.
Most analysts I follow think these stocks come back once things settle down. The revenue growth is still there. But how fast they recover is really a Fed story at this point.
A Dovish Fed
If the Federal Reserve backs off and moves toward lower interest rates, growth stocks could get a significant lift. Companies like Apple, Amazon and NVIDIA tend to do well in an environment that features a dovish Fed and lower interest rates. Software firms and cloud computing companies would also benefit. A dovish Fed could support consumer spending and business investment, which helps e-commerce, online services, and digital infrastructure.
A Hawkish Fed
If the Fed keeps rates higher to fight inflation, the playbook flips. Growth stocks stay under pressure. Nobody pays high valuations when borrowing costs are elevated.
Energy holds up if oil does. Banks make more money when rates are high. Miners and commodity producers catch a bid if inflation keeps pushing raw material prices up.
If the War Ends Tomorrow
If the war between the U.S. and Iran ended tomorrow, oil prices would likely drop sharply as supply disruption fears ease. I think the U.S. stock market would soar because of lower oil prices, but energy stocks would give back some of their recent gains.
Defense stocks would also be at risk as the case for increased military spending starts to fade. At the same time, investors would likely rotate back into economic growth sectors without the geopolitical tension to deal with.
Tech stocks, especially AI and cloud computing names, could bounce back fast once the war noise fades. Airlines, travel companies, and consumer businesses would also get a lift from lower fuel costs and a market that is focused on growth again.
The Bottom Line
The way I see it, three forces are driving this market right now: the war, oil prices, and Fed policy. Energy and defense have clearly been the strongest performers since February 28. AI and software stocks took a hit, but the long-term story is still intact.
If oil stays above $100, energy leads. If the Fed moves toward cuts, tech comes back. And if the war ends sooner than expected, the market will rotate fast toward the sectors that were leading before the bombs started falling. Keep your eye on crude oil. It is the pin holding everything together right now.
Right now I am leaning toward the prolonged-war scenario, and that means energy stays in the lead longer than most people expect.