Wall Street Bulls Are Staring Down $100 Oil, Tariffs, AI Angst

e[54nrqtjysbkem9lx59lb0m_media_dl_1.png Bloomberg

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(Bloomberg) — Every bull market has a recurring cast of villains. Oil shocks. Inflation. Rising bond yields. Trade wars. This week, investors had to contend with all of them at once.

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Brent crude broke above $100 a barrel on Thursday for the first time in two months as the Middle East conflict spread from the Strait of Hormuz to the Red Sea. President Donald Trump rebuilt part of his tariff wall, imposing duties of 10% to 12.5% on imports from about 60 economies. Long-dated Treasury yields climbed. Big Tech stocks tumbled after Alphabet Inc. raised its artificial-intelligence spending plans, reviving questions about whether the industry’s enormous capital outlays will ultimately pay off. 

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The S&P 500 notched a second straight weekly decline after its biggest one-day drop this month. The Magnificent Seven tech stocks shed nearly 6%. The 30-year Treasury yield traded just below its highest level since 2007. Credit spreads remained near their tightest levels in years.

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Wall Street’s advice: get tactical. Barclays Plc this week turned neutral on risk assets, citing renewed US-Iran hostilities alongside concern about AI capital spending, while remaining underweight duration. Goldman Sachs Group Inc. stayed neutral across asset classes over the next three months while remaining modestly constructive over twelve. HSBC Holdings Plc rotated away from semiconductors toward European banks and the equal-weighted S&P 500.

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Taken together, this week’s shocks challenge an investment case built on resilient earnings, contained inflation and confidence that the AI-spending boom can continue. Whether they prove durable enough to change all that remains an open question.

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Higher oil has to feed inflation. Inflation has to alter expectations for interest rates. Higher rates have to tighten financing conditions for companies already in the middle of one of the largest capital-investment cycles in technology history. Each link in that chain takes time, and any of them can break.

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“The bottom line is that you need to diversify your diversifiers,” said David Lebovitz, a global strategist for multi-asset solutions at JPMorgan Asset Management. “When it comes to hedging, we like certain hedge fund strategies as a way of mitigating market volatility and real assets as a way to deal with higher inflation and interest-rate volatility.”

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To Lebovitz, the level of oil matters less than its staying power. If crude remains around current prices through the end of the summer, he said, the firm would begin reassessing its positioning because a higher risk premium would then be warranted. For now, he’s watching earnings revisions as a negative turn would likely widen credit spreads and fan volatility beyond technology. 

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Charlie McElligott, a cross-asset strategist at Nomura, sees crude as the most likely trigger. Higher oil reprices the inflation tail — the probability of a more persistent inflation outcome rather than the central forecast — unsettling rates markets before spilling into other assets. Markets can begin repricing that risk well before it shows up in earnings.