AI Echoes the Dot-Com Market Split as Iran Threat Creeps Back

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(Bloomberg) — It was a split-screen week on Wall Street.

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Fresh headlines from Iran briefly rippled through oil, Treasury yields and currency markets. The price moves proved relatively contained, but the episode revived familiar questions about inflation, energy supplies and the Federal Reserve. Inside the stock market, however, investors kept returning to a different preoccupation: whether another earnings season would justify the enormous sums still flowing into artificial intelligence.

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That contrast was evident Friday. Oil traders continued parsing every signal from Washington and Tehran as negotiations with Iran remained fragile. Equity investors, meanwhile, were already looking ahead to quarterly results, with SK Hynix Inc.’s US debut and the coming wave of reports from chipmakers and hyperscalers serving as the next test of the AI trade.

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The week’s trading fit a pattern that has become increasingly visible across markets.

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Barclays Plc says correlations across major asset classes sit in roughly the 93rd percentile of their historical range, meaning oil, bonds and currencies have tended to move together more than usual. At the same time, stock correlations have fallen to their lowest levels in more than a decade. While equities can still move with broader asset markets, the companies within the index are increasingly moving in different directions as investors distinguish between AI winners and losers.

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Barclays points to a parallel in the dot-com era — when another once-in-a-generation technology shift created unusually wide gaps between perceived winners and losers.

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“Investors are always looking to find the next beneficiaries of the AI trade and that’s creating a lot of rotation,” said Stefano Pascale, head of US equity derivatives research at Barclays. 

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The market repricing extends beyond equities.

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Higher real Treasury yields have weighed on gold this year, even as equities and credit have remained resilient. Gold would ordinarily be expected to benefit from geopolitical strain, inflation concerns and persistent fiscal deficits. Instead, the metal has struggled as higher real yields increased the opportunity cost of holding an asset that produces no income.

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This week, the S&P 500 rose 1.2%, while the Nasdaq 100 added 1.7%, as traders looked ahead to the first wave of earnings reports in the coming days. 

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Florian Ielpo, head of macro at Lombard Odier Investment Managers, argues markets are still pricing expansion rather than stagflation. AI investment is lifting expectations for earnings even as it pushes up demand for capital, allowing equities to absorb higher borrowing costs more easily than gold does.

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“Higher real yields are not yet simply a tightening shock for equities: they are also the price of a stronger investment and profit cycle,” Ielpo said. “The risk would emerge if real yields continued to rise after expected earnings stopped improving.”