AI Rally Faces Growing Risks as Energy, Geopolitics, and Inflation Cloud Market Outlook

US stock futures are pointing to a higher open this morning.

This does come after the Dow industrials just suffered its worst day since October.

Now stocks also took another beating this week.

The latest slide resuming a brutal stretch for the sector.

The markets are facing two sided risks this week.

The US Iran ceasefire could potentially be on its last legs.

We will have to see.

And President Trump saying the US will strike around very hard.

Tonight after hitting targets near the Strait of Hormuz yesterday and this was the 2nd straight day of strikes.

Separately, the record setting AI trade has cooled and funds may be offloading some of their semi holdings to capital for the SpaceX IPO tomorrow.

Meanwhile, Marveltech down close to 15% in the last 5 days, but still up 200% here today.

Well joining me to weigh in this morning is Tom Bruce, a macro investment strategist from Tanglewood Total Wealth Management.

Tom, good morning.

Thank you so much for joining us.

Well, a lot of competing headlines this morning, but I do want to start out by looking at AI.

So the AI rally has been historic, but there are plenty of threats out there mounting from a massive capital spending as well as share deletion as well as political backlash against data centers.

So give us your take when it comes to the risks to the trade.

And thank you for having me.

So when it comes to the risks, I think more generally at two levels, there's risks to the market as a whole, right?

We're at all-time highs right now, and there's a number of, of, of risks that are just kind of staring us in the face.

We still have this conflict in Iran.

The Strait of Hormuza is still effectively closed.

We have this energy crisis that continues to progress and So far we've done OK.

We've done fine by it.

The US, I think, is better positioned than most countries, but if you look at oil reserves around the world, they're being depleted, and they're being depleted at a pretty rapid rate.

So it's not been a problem so far.

But, you know, it's only a matter of time before we hit that inflection point and it becomes a bigger problem for everyone.

And I think that's, you know, that's one of the bigger risks.

Another one just general for the whole market is Uh, a secondary effect of that energy crisis is to push higher inflation and what that means for monetary policy.

We've gone from an easing cycle to what looks like, well, we can call it neutral right now, but it looks like we may be entering a hiking cycle.

If you look at the way the Cmi futures are pricing in federal funds rates for the remainder of the year, we're looking at two rate hikes potentially.

Um, so we don't know if it's going to wind up that way or not, but going from an easing cycle to a potentially a tightening one.

Historically that's not gone well for markets.

So we have at the high level, we have a couple of major market risks.

Now when you look particularly at AI itself, there's some individual risks, right?

We have SpaceX IPOing, and we did a study recently that shows that historically when you've had these major IPOs, it may have not hurt the market as a whole too much, but it's hurt the individual sector.

There's some evidence of that.

So that's, it's not a surprise to see a little bit of weakness.

We've had questions about equities being raised, about shares being raised in, you know, Google, potentially Meta and others.

You have a share issue that's coming on that could present another headwind going forward, had, you know, Broadcom.

I don't want to say disappointing, but it didn't, their earnings report didn't cast quite a great light on, on the AI outlook going forward in terms of capital, capital spending, so.

A number of different headwinds for AI, but at the same time, earnings have been fantastic, and that's been the main driver of the market.

So we're kind of conflicted between AI has been amazing and there's a lot of risk right now too.

Yes, absolutely, Tom.

You highlighted a lot of fundamentals as well as technicals that we are paying attention to, and as you mentioned, when it comes to monetary policy, it isn't just the Federal Reserve but also central banks around the globe.

And earlier today we saw the ECB raise rates, so it does really speak to how the conflict in the Middle East is affecting.

Economies around the world.

I do want to bring our attention back to the US midterm election years have historically been challenging for the equity markets, but as you mentioned, we have rallied to new all-time highs as recently as last week.

So do you think the risk is being priced in right now when it comes to the broader markets?

I don't think that's what's in focus right now.

We have a lot of other risks.

The ones I just highlighted that are more top of mind.

But as we get closer to the midterms, and they're, they're not that far, I think investors are gonna begin, begin pricing in more of a, uh, you know, a regime shift in Washington.

And I don't think that investors are going to look favorably upon upon what that might mean for making legislative progress in DC, what it may mean for political turmoil going forward for, for the remainder of this administration.

And it just introduces a new source of volatility that's not being discussed much right now because, you know, we have a war going on, we have, you know, inflation's rising and, and that issue hasn't been addressed today, but it's something that I think is coming in the next couple of months.

Well Tom, we will have to leave it there for today as we are counting down to the opening bell here at the New York Stock Exchange.

I appreciate your time as well as all of your insights.