Gulf tensions re-emerged on Monday as U.S. efforts to shepherd ships through the Strait of Hormuz encountered resistance from Iran, including an attack on a United Arab Emirates oil port. The immediate market response was a sharp rise in crude prices, though those gains had moderated as trading moved into Tuesday after reports that a U.S.-flagged vehicle carrier had been escorted out of the strait by U.S. naval forces.
The combination of geopolitical risk and large upward revisions to earnings and technology spending forecasts left markets split between caution and optimism. Oil markets reacted more violently: benchmark Brent and West Texas Intermediate crude settled at levels above $114 and $106 per barrel respectively, after oil prices jumped by about 6% on the day. Major U.S. equity indexes retreated on Monday as the prospect of intensifying conflict weighed on sentiment.
By early Tuesday, global shares were trading marginally higher as investors sought to digest both the security developments in the Gulf and a stream of positive corporate and sector forecasts. Wall Street futures were in positive territory before the opening bell, while European equities started the day stronger after upbeat corporate results. In Asia, markets edged lower in what was described as holiday-thinned trading, with Japan and South Korea closed for holidays.
One of the forces counterbalancing the geopolitical shock has been a fresh wave of upgrades to earnings and technology spending expectations. Full-year S&P 500 earnings growth forecasts have been revised up to as high as 23%, from 18% only a month earlier. Analysts have pointed to markedly higher estimates for capital expenditure tied to artificial intelligence as a key driver behind those upgrades.
On that front, Morgan Stanley has raised its view of capex growth among the top five 'hyperscalers', projecting spending exceeding $800 billion this year and topping $1.1 trillion next year. Separately, Goldman Sachs has estimated cumulative hyperscaler AI-related spending through 2031 could be as much as $7.6 trillion. Those larger-than-expected technology investments are helping to underpin sentiment in parts of the market even as geopolitical risks persist.
Investors will also have a number of other items to monitor this week. In the United States, labour market data remains in focus with March JOLTS job openings slated for release, alongside the March trade balance and March new home sales. Corporate reporting continues to be an influence; companies scheduled to report later in the day included AMD, Pfizer and KKR.
Trade and political risks are also present. Markets were keeping watch on transatlantic tensions after a late-week warning from the U.S. to raise tariffs on European auto imports to 25%, a threat that knocked roughly 2% off European automakers' share prices on Monday.
Deal activity provided an unusual subplot to the market story: investors were weighing an audacious $56 billion takeover bid for online retailer eBay from GameStop, the video games retailer that rose to prominence as a 'meme stock' in 2021. Market participants were parsing the strategic and financial implications of that bid amid ongoing volatility.
Separately, central bank action continued to be meaningful for global markets. Australia's central bank implemented its third rate increase this year on Tuesday, raising borrowing costs to 4.35% and warning that inflation would remain sticky as the conflict in the Middle East put upward pressure on global oil markets. Money markets were pricing roughly a 15% chance of another move in June, while a rise in the cash rate to 4.6% by September was fully priced in - a level that would be the highest since late 2011.
The juxtaposition of an acute geopolitical event and aggressive upward revisions to technology-driven spending and corporate earnings is setting a complex scene for investors. In the near term, markets will be sensitive to any further escalation in the Gulf that could again push oil sharply higher, while at the same time monitoring whether the upgraded earnings outlook will be borne out by upcoming corporate reports.
Events to watch today:
- U.S. March JOLTS job openings (10 a.m. EDT), March trade balance (8:30 a.m. EDT), March new home sales (10 a.m. EDT)
- Speech by Federal Reserve Governor Michelle Bowman
- U.S. corporate earnings: AMD, Pfizer, KKR
Context note: For listeners preferring audio summaries, the Morning Bid daily podcast discusses the day’s leading market developments and offers analysis of how markets are responding to both geopolitical shocks and earnings-season surprises.