Indications that the US and Iran are nearing an end to the latest Middle Eastern conflict have prompted equity traders to offload hedges and shift uniformly to a bullish stance this week. This move comes just before new Federal Reserve Chair Wash is set to reveal aspects of his monetary policy stance on Wednesday, US Eastern Time. According to institutional data on options markets, the cost of insuring against a 10% drop in the S&P 500 over the next month fell sharply on Monday to its lowest level in over a year, relative to contracts profiting from a similar magnitude of gains.
Concurrently, recent research from Wall Street giants including Goldman Sachs, Morgan Stanley, and JPMorgan Chase indicates that the global stock market bull run, led by the AI computing power supply chain, is far from over. In essence, as the risk premium from the Iran conflict fades, traders are once again flocking to the pre-war themes that were extremely popular: short-term US Treasuries, Asian currencies, and the AI computing power chain.
NVIDIA, AMD, ARM, SK Hynix, and Micron form the core of this AI computing power investment thesis. Within equity markets, stocks directly tied to AI computing infrastructure—the "AI computing power super group" led by NVIDIA, SK Hynix, and AMD—are typically the most sensitive, quickest to move, and see the largest gains during market and tech sector rebounds. The core logic behind their leading role is exceptionally solid: they are directly tied to the record-breaking trillion-dollar AI capital expenditures from tech giants, not mere narrative-driven speculation.
Key Strategy from Major Institutions
A strategy team led by David Kelly, Chief Global Strategist at JPMorgan Chase's asset management division, is urging investors to continue holding stocks and other relatively high-risk assets into the second half of 2026. They argue that an unprecedented AI investment boom and resilient consumer spending should sustain economic and market expansion, even amid persistent inflation and a Fed in a holding pattern on monetary policy.
Goldman Sachs believes the global bull market centered on the AI computing chain is far from finished. The market's main theme has evolved from the long-standing post-2008 era of "programming/code-driven software and light-asset valuation expansion" to a "re-pricing around a series of physical assets for AI computing infrastructure." This shift implies that the next wave of excess alpha returns will not be confined to the top players in AI GPU/ASIC fields but will systematically spread across the full stack of AI computing infrastructure. This includes data center high-performance CPUs, DRAM/NAND/HBM memory, AI PCBs, liquid cooling systems, data center optical interconnects, ABF substrates/glass substrates, MLCCs, electronic fabrics, and broad foundry services—essentially the entire "AI factory."
NVIDIA CEO Jensen Huang added on Wednesday that AI infrastructure could revitalize US factories, suggesting AI has the potential to usher in a new era of manufacturing and industrial growth in America.
Underlying Market Anxieties
However, some traders remain anxious ahead of Wash's first FOMC meeting as Fed Chair, noting that cautious investors may not be fully reflecting their concerns in options positions. This rare complacency could leave the market vulnerable to a short-term downturn. These cautious traders argue that the uniform shift to a bullish stance actually leaves equities in a fragile position, susceptible to any negative surprise, as investors bet on a calm market while awaiting Wash's first post-decision press conference, scheduled for 2:30 PM Washington time. If this bullish bet proves wrong, a resurgence in the VIX volatility index could end the current fervent optimism, fueled in part by the US-Iran ceasefire.
A Delicate Moment as Hedges Fade
"Fear has been taken out of the market," said John Salama, a proprietary equity derivatives trader at Maverick Trading. "This could signal significant complacency, exposing traders to major downside risk, or it could be the start of a low-volatility market for the coming weeks."
Investors and Wall Street strategists widely expect the Fed to hold rates steady when its two-day meeting concludes Wednesday. The anticipated formal signing of a US-Iran peace framework in Switzerland has eased concerns over high oil prices and their inflationary impact, helping the S&P 500 recover to within 1.3% of its record high. Yet, this setup is not without risk for strategists, as Wash faces the delicate task of balancing calls from former President Donald Trump for rate cuts to spur growth against data showing inflation accelerated in May to its fastest pace in three years.
Traders are pricing in some degree of risk. Data compiled by Piper Sandler shows the options market implies the S&P 500 could move 0.9% to 1.2% in either direction on Wednesday, significantly above the average 0.6% move on Fed decision days over the past year. However, few seem worried enough to hedge for downside. With the US tech earnings season a month away and geopolitical risks easing, investors see few catalysts to move markets strongly in either direction. In options markets, receding anxiety has pushed a gauge of one-week implied price volatility below expected volatility one month out.
"Investors believe the pressure on Wash to hike has eased now that a US-Iran peace deal is expected to lower oil prices and inflation pressure," said Max Wasserman, founder and senior portfolio manager at Miramar Capital. "But we still haven't resolved everything, and we don't know every detail of the agreement."
Fed officials have indicated that robust job growth and war-related price pressures left policymakers little room to cut rates. Traders still speculate the Fed's next move could be a hike, not a cut. This puts the Fed's new economic projections and any changes to the quarterly "dot plot" in focus. Investors are speculating whether a Wash-led Fed might streamline its quarterly Summary of Economic Projections, with potential risks to market transparency and valuations. Any expression of concern from Wash about persistent inflation or the fight against it could trigger a correction in the AI-led bull market or broader global equity volatility post-meeting.
After months of calm, price swings around economic data releases have increased again. Data compiled by Rocky Fishman of Asym Research shows the S&P 500's average realized volatility on days of CPI reports, monthly jobs data, and Fed decisions was 19 over the past three months, higher than the 15 reading on other days. This could be a dangerous setup for an index that has added over $10 trillion in market cap since late March. "If Wash says anything surprising about China-US trade, tariffs, or inflation, that would spook the market," Salama said.
Sustained Bullishness on AI Investment
JPMorgan Chase's global asset management arm is urging investors to hold stocks into late 2026, arguing that the AI investment boom and resilient consumers should sustain the economic and equity market expansion. This view counters growing concerns that this year's strong rally has left stocks vulnerable to a pullback. Instead, the Wall Street giant, managing $4.3 trillion, states economic momentum is strengthening as companies ramp up AI infrastructure spending, while high-income consumers continue spending, aided by wealth effects from rising stock and home prices.
In its updated mid-2026 outlook, JPMorgan Asset Management also noted bonds are attractive again due to high yields, and emerging markets warrant an overweight as they become more linked to the Asian chip supply chain. For diversification, the firm suggests adding defensive alternative assets like real estate, infrastructure, and transportation alongside AI supply chain leaders, and also highlights Europe and Japan.
"The good news for our base case is we think the economy will strengthen into mid-year," said David Kelly, Chief Global Strategist at JPMorgan Asset Management, adding this strength is partly aided by tax refunds and AI spending. He said whether growth continues into Q4 depends on additional fiscal stimulus from Washington, though their base case assumes Democrats retake the House, limiting 2027 stimulus prospects. "It's a very resilient economic growth story for Americans; it's a great story for global stocks," he said. "All that really matters for stocks are profits and interest rates. And profit growth has been outstanding."
Despite high inflation, the economic backdrop is stronger. Kelly expects inflation pressures to gradually ease through the rest of 2026 and into next year, assuming a lasting resolution to Strait of Hormuz tensions, helped by falling energy costs, slowing housing inflation, and controlled wage growth. "We're not forecasting a recession," he said. "The wealth effect and the AI boom keep us going." On rates, the JPMorgan team sees no Fed hikes at any point in the next two years, with Kelly suggesting the possibility of rate cuts next year.
Kelly described the 2026 investment environment as defined by tension between rising political and economic risks and the sustained support from the AI-driven infrastructure spending frenzy. "That really sums up the economic and financial market state we're in at mid-2026," Kelly said, citing crosscurrents like lofty P/E valuations, economic nationalism, political polarization, Middle East conflicts, immigration, and tariff risks. "Yet, amidst all of that, we have this huge, unprecedented AI infrastructure dividend, both from the potential of the technology and, more specifically, from the massive capex underway by hyperscale cloud providers."
He noted that earnings growth in international markets is also driven more by long-term trends around AI infrastructure and applications than the business cycle, while warning against over-leveraged exposure to Asian tech stocks. He said markets like South Korea and Taiwan have nearly double the exposure to "hard tech around chips" compared to the US and expects both to be among the top performers. "We're in the fourth year of a very strong equity bull market in terms of the gains we've seen. And there's increasing concentration risk," he said.
The Scale of the AI Infrastructure Cycle
A recent Goldman Sachs report shows AI capital expenditure is no longer concentrated just on massive purchases of NVIDIA's Blackwell/Rubin GPU clusters but encompasses systemic spending across the entire AI factory chain. This includes data center power equipment, liquid cooling, data center CPUs, DRAM/NAND/HBM memory, optical communication/interconnects, high-performance Ethernet networking/data center interconnect (DCI), transformers, and gas turbines.
Goldman Sachs' base framework estimates hyperscale cloud providers' 2026 investment will reach $770 billion, nearing their total operating cash flow. It forecasts cumulative AI infrastructure capex of about $7.6 trillion from 2026 to 2031, with annual AI capex of at least $765 billion in 2026, rising to about $1.6 trillion by 2031. In their view, the market's pricing logic for the AI wave is shifting from "who develops the strongest AI model/application" to "who can rapidly build AI compute clusters, achieve large-scale power supply and cooling, accelerate intra- and inter-data center optical interconnects, and continuously iterate the next-generation AI factory."
Goldman Sachs Global Investment Research notes that AI computing infrastructure companies with substantial physical assets are beginning to outperform lighter-asset tech firms. The reason is a fundamental shift: AI advancement now requires robust infrastructure—data centers, power grids, cooling systems, raw materials, and heavy machinery—just as much as clever code. This contrasts sharply with the post-2008 financial crisis landscape, where capital-light software firms commanded premium valuations amid low rates and sluggish growth, while traditional industrial sectors struggled.
The current economic climate has altered this dynamic. Strong nominal output growth, persistent price pressures, and massive ongoing AI project capex are bringing new revenue streams to long-neglected industries. Goldman Sachs data shows a notable reversal, with asset-intensive stocks beginning to outperform asset-light peers after years of lagging.
Analysts at Bank of America see AI computing infrastructure entering a more durable and broader capital expenditure cycle. Around the same time, Morgan Stanley research indicated the AI computing arms race is entering a systemic expansion phase, with AI infrastructure demand showing a rare "inelastic" trend—tech giants continue building data centers regardless of cost curves. This inelastic demand is expected to reinforce US economic resilience and S&P 500 earnings growth, with nearly $3 trillion in AI-related infrastructure investment forecast to flow through the global economy by 2028, with over 80% of spending still ahead.
TSMC CEO C.C. Wei recently stated at the annual shareholder meeting that demand will outstrip supply for many years, and even with new US capacity coming online, TSMC will struggle to fully meet AI-driven demand for several years. Regarding the AI capex outlook, Wei's comments that "I don't know where the peak is" and "we don't see any indicators of demand stopping" were seen as highly bullish signals from a key player in the AI computing supply chain.
Comments