SPX500 to new records on AI and Middle East optimism

SPX500 Analysis

Markets have been betting that the Middle East conflict and its macroeconomic fallout would not derail the AI boom, and this earnings season supports that view. The rise of Agentic AI represents a new inflection point that sustains appetite for high-end silicon, effectively broadening the demand profile beyond the initial vanguard. Key AI frontrunners have made an increasingly convincing case of monetisation while raising their spending targets to fund a massive, structural data centre buildout.

The latest confirmation of this view came from AMD's blockbuster results and guidance. Revenues jumped 38% y/y in Q1 at the fastest pace in nearly four years, while management expects growth to accelerate in the current quarter ^[1]. Alphabet underscored this momentum last week, leading the hyperscaler cohort with AI demand that turbocharged its cloud business to a record 63.4% y/y growth. This follows a strong report from Intel, while TSMC and ASML had previously set a powerful tone for the industry.

Wall Street now gets a fresh boost from rising hopes for a US-Iran deal that could lead to a normalisation of energy and trade flows, removing a key overhang from markets. President Trump touted real progress in negotiations, leading him to pause Project Freedom ^[2], while Axios reported that the two sides are closing in on a one-page memo to end the war ^[3].
A successful outcome could render the inflationary impulse from the energy price spike temporary and allow the Fed to resume its easing cycle without stifling growth.

These developments are helping SPX500 extend its record-breaking rally, setting the stage for sustained gains. However, fundamental and technical pitfalls still loom, leaving SPX500 vulnerable to corrections that could test the EMA200 and bullish momentum.

The geopolitical situation remains uncertain and there have been many false dawns in US-Iran diplomatic efforts. Failure to reach an agreement could quickly sour sentiment. Moreover, even if the Strait of Hormuz were to fully reopen, restoring flows would not happen overnight, and the oil market has already tightened in ways that could keep prices elevated for some time. Exxon Mobil CEO Woods said during the Q1 earnings call that it would take one to two months for flows to normalise after the Strait opens ^[4], while TotalEnergies CEO Patrick Pouyanné said the surplus markets were anticipating for 2026 "is now over". ^[5]

Furthermore, persistent macroeconomic uncertainty threatens to squeeze marketing budgets and consumer outlays, key revenue sources for the tech giants funding the AI boom. Beyond capital, physical disruptions to energy flows and critical material supplies pose tangible hurdles, adding significant costs to the maintenance and expansion of AI infrastructure. Most critically, the AI narrative is no longer a simple story of efficiency. A rising tide of high-profile job cuts explicitly attributed to automation can stoke fears of a hollowed-out consumer base - threatening the employment engine that ultimately keeps corporate revenues and the broader economy humming.