Important points
- Historically, geopolitical price shocks are short-lived.
- Big tech hyperscalers are entering an unprecedented spending cycle.
- Historical data shows that market tops rarely appear in May or June.
Price volatility vs. geopolitical instability
For weeks, Wall Street was obsessed with all the headlines about the Middle East conflict between the United States and Iran. All it took was one negative headline or escalation for the Nasdaq to fall more than 1% and oil prices to jump more than 5%.
Currently, the strategically important Strait of Hormuz (a strait crucial for energy trade) remains at a standstill due to the US naval blockade, and oil prices are certain to remain elevated (oil is currently trading above $100). Until April, U.S. stocks fell whenever oil prices rose. But important changes have taken place in recent weeks. U.S. stocks are becoming decoupled from the rise in oil prices and are no longer as reactive. For astute market watchers, this shift is significant and suggests that investors are once again focusing on economic fundamentals (more on this later) rather than geopolitics. Current price trends reflect historical geopolitical events. Data shows that geopolitical shocks tend to have short-term effects on stock markets.
Image source: Charles Schwab
AI capital investment snowballs
Last week was the busiest week of earnings season and included reports from the “Mag 7” tech giants, including: meta platform ((meta – free report) ), Amazon ((AMZN – free report) ), and alphabet ((google – free report) ). Initial reaction to the Mag 7 stocks’ earnings was mixed, but the tech giant’s hyperscalers’ capital expenditure (CAPEX) spending plans have far from slowed. In fact, capital spending is expected to skyrocket from less than $500 billion in 2025 to $646 billion in 2026 and more than $1 trillion in 2027.
Image source: Apollo
Hyperscalar capex in 2026 will be a staggering 2% of GDP in 2026, roughly the same size as the market capitalization of the Belgian, Danish, and Indonesian stock markets. In the first quarter, AI already accounted for 75% of GDP growth. This trend is likely to continue. Meanwhile, hyperscaler spending is driving immense demand for AI infrastructure. for example, microsoft ((MSFT – free report) ) Recently paid “neocloud” provider nevius group ((NBIS – free report) ) Pay 40% upfront for multi-year contracts.
Don’t “sell and withdraw in May”
The old Wall Street adage warning investors to “sell in May and walk away” is catchy, but historical data disproves it. According to Bluekurtic Market Insights (@Bluekurtic): “Since 1950, the S&P 500 has hit an annual high in May less than 3% of the time. In the past 76 years, the SPX has hit an annual high in May only twice, in 1969 and 2015. Even better, the index has never hit an annual high in June. Never.”
Image source: Bluekurtic Market Insights
conclusion
While headlines may still focus on naval blockades and energy costs, underlying market fundamentals and price trends tell a much more optimistic story. The enormity of the demand for AI infrastructure, highlighted by large upfront contracts and historic CAPEX plans, provides a fundamental foundation that geopolitics cannot break through.
