The real hedge in a stock market rattled by escalating conflict in the Middle East isn't a grocery chain or a healthcare company. It's defense, and increasingly that means Big Tech.
In a week when conflict in Iran sent the U.S. equity market into a tailspin, technology stocks tied to cybersecurity and artificial intelligence have proved more resilient than sectors investors have typically treated as safe havens.
The S&P 500's information technology sector was the second-best performer on the large-cap benchmark index, behind energy. The sector slipped less than 0.4% as strength in software names such as Palantir, CrowdStrike and ServiceNow helped limit the downside.
Meanwhile, the iShares Expanded Tech-Software Sector exchange-traded fund IGV surged 7.9%, recovering most of its February losses, according to FactSet data.
"We see a lot of geopolitical conflicts around the world, and stocks like Palantir are at that cross-section of AI-driven defense stocks - they've got the extra dual hands that are there working for them," said Jeremy Schwartz, global chief investment officer at WisdomTree Investments.
Looking beyond the week-to-week noise and out to the next decade, Schwartz told MarketWatch in a phone interview on Friday, "it's a defense-tech supercycle."
Schwartz's team manages the WisdomTree Europe Defense Fund and the WisdomTree Asia Defense Fund. Both track regional companies in the military and defense industry.
The rebound in technology stocks this week reflects a recovery from their sharp selloff last month, with investors piling back into beaten-down software names on expectations that their exposure to government defense and intelligence contracts could make them a relative haven compared with traditional defensive sectors such as utilities and consumer staples.
"There's no way countries won't be more focused on getting more intelligent software going forward because of the Iran conflict - that's clearly a net positive," said David Miller, senior portfolio manager and chief investment officer at Catalyst Funds.
It's still unclear if defense and military use of data and related technologies will have a material impact on the broader software sector, aside from a handful of high-profile names. But in the short term it could certainly boost physical defense companies like Lockheed Martin and Northrop Grumman, Miller said via phone on Friday.
For now, Palantir is one of the most prominent software companies involved in U.S. defense and intelligence operations. Last year, it won a $10 billion contract with the U.S. Army, as well as a $448 million deal with the Navy.
While such opportunities remain limited, and comparable contracts with the government have yet to become available to the broader tech industry, OpenAI has struck a deal with the Defense Department to provide its own AI technology for classified networks.
Tech's rally may be a short-term reflex
In the view of Miller at Catalyst Funds, the February selloff in technology stocks was overdone, and that has contributed to their partial recovery this week.
Melissa Brown, managing director of investment-decision research at SimCorp, said the market's move back into technology names this week may just be a "short-term reflex" or a technical bounce, since there has been little new information or structural shifts to materially alter the concerns about AI-driven disruption.
Interestingly, the outperformance in technology stocks this week has left traditional defensive areas in the dust. Elevated valuations for some of those defensive sectors could be a source of concern, according to market analysts.
Traditional defensive sectors such as consumer staples, utilities and healthcare were among the worst performers in the S&P 500 index this week, tumbling 4.9%, 2.1% and 4.6%, respectively, according to FactSet data.
On the broader market, the tech-heavy Nasdaq composite fell 1.2% this week, the S&P 500 was off over 2% and the Dow Jones Industrial Average tumbled 3% in the same period, according to FactSet data.
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