“Come you masters of war, You that build the big guns, You that build the death planes, You that build all the bombs, You that hide behind walls, You that hide behind desks, I just want you to know, I can see through your masks”
–Masters of War, Bob Dylan, 1963
Financial markets are transfixed by war. On Saturday, February 28, the United States and Israel launched an attack on Iran. In the eleven days and counting since, we have seen Iran knocked down but not out and counterattacks from the regime that have spread against targets across the Middle East. This has had a meaningful effect on oil markets, to which the global economy remains highly sensitive. While financial markets are likely to continue to react to this still unfolding geopolitical conflict, it is a different war that is simmering in the headlines in an entirely different way that is far more likely to drive the stock market in the months ahead.
Saturday night’s alright for fighting. Investors should beware of getting complacent heading into the weekend. The start of the Israel-Hamas conflict? Saturday, 10/7/23. The US strikes on Venezuela? Saturday, 1/3/26. The US/Israel strikes on Iran? Saturday, 2/28/26. A US-led intervention in Cuba? Perhaps some future Saturday TBD. Nonetheless, financial markets have been open for trading for seven days since this latest geopolitical episode began, and the reaction so far has been notable.
Let’s begin with the headline grabber, which has been the price of oil. With traffic through the Strait of Hormuz having effectively ground to a halt, the price of oil has predictably spiked. After bottoming just below $55 per barrel in mid-December and still hovering around $64 per barrel in late February, the spot price of West Texas Intermediate crude oil briefly surged toward $120 per barrel before settling just below $95 at the close on Monday. Brent crude oil had a similar trajectory, having risen from around $59 per barrel in mid-December and $70 per barrel in late February to over $105 per barrel before settling just below $99 yesterday. These are big spikes that could understandably spark stock investor and inflation watcher concern. But let’s put them in a broader context.
For the interest of discussion, let’s keep it simple and focus on West Texas Intermediate crude oil, as both tell effectively the same story. Yes, WTI crude oil prices briefly blipped toward $120 per barrel on Monday, but it also shed $25 bucks before the day was out. And so far on Tuesday, it’s down another $10 bucks to below $85 per barrel. In short, this spike was so fast that literally if you blinked you probably missed it. For higher oil prices to become a stress on the global economy, they need to be sustained for a prolonged period. But this spike didn’t last longer than a hot minute.
Let’s continue. Come back in time if you will and take a look at the price of oil on a nominal basis (this is an important point) over the past 20+ years since 2006. Assume for a sec that oil prices find their footing and resume their sharp rise to the upside and hold these higher prices for an extended period. It’s easy to forget that +$100 per barrel oil (on a nominal basis) was kind of a thing from 2008 to 2014, and the Fed couldn’t manufacture inflation at the time despite the fact that they wanted it really badly. Taking this one step further, it should be noted that on a real (inflation adjusted) basis, the price of oil from 2008 to 2014 was really more like in the range of $150 to $220 today, yet still no inflation to be found at the time. A ha! What about 2022 when oil prices spiked and held above $100 per barrel for a spell following the Russian invasion of the Ukraine? Indeed, but lest we forget two things. First, it was major oil producer Russia’s call to invade the Ukraine back in 2022, so we didn’t have direct control on the resolution of that ongoing conflict. Second and more importantly, the 2022 inflation spike was just as much if not more about the absurdly excessive fiscal and monetary bazooka that was unleashed on the global economy by all sides of the political aisle in response to the COVID crisis in 2020 that laid the groundwork for that inflation outbreak, and even then it was as fleeting as the Fed getting off the sidelines and FINALLY lowering interest rates off the zero bound.
So, what about the ongoing conflict in Iran and the expected impact on oil prices going forward? Expect continued volatility absolutely. But here is the reality. The conflict with Iran may continue to drag on for a few more weeks or perhaps even months. But the ability of the Iranian regime to counterattack across the region is being depleted by the day. Consider the following chart showing estimated Iranian missile attacks by day since the conflict began the Saturday before last. From around 170 on February 28 to 4 yesterday. While ten days is an insufficiently large sample size, a simple trend analysis coupled with the -97% decline in missile attacks suggests that the worst is likely by far behind us in this regard.
What about the drones? Pretty much the same story. Down an estimated -90% over the past ten days, but this is getting definitively weaker for Iran, not stronger.
Does this mean the Strait of Hormuz is reopening right away and oil prices are heading back below $70 per barrel tomorrow? Probably not. The threat of missile and drone attacks will linger for at least a week or two, and we also can’t rule out the threat posed by anti-ship cruise missiles, naval mines, coastal artillery, and/or proxy militia launches from places like Yemen and Iraq. Moreover, we must remember that shipping product through the Persian Gulf is a business, and insurance companies may have a say on whether these vessels can set sail right away or not. As a result, it may take a week or two at least before shipping activity starts to get back to normal through the region. With that being said, it is important to also note that financial markets are a forward-looking mechanism, so even if markets anticipate things are going to get back to normal in the foreseeable future, that may be enough to bring oil prices back down. Indeed, it may help explain while we are more than $35 per barrel lower on the price of oil today versus just 24 hours ago.
We’ll finish this part of the discussion with one final important point that we can file under “price is truth”. Even if I was not convinced that the Iran conflict won’t eventually cause a major inflation outbreak, the market decisively disagrees. In the day before the attack on Iran was launched, the average expected inflation rate over the next five years was a subdued 2.40%. As of yesterday on day ten of the conflict, the average expected inflation rate over the next five years has “spiked” by a whopping 16 basis points to a still subdued 2.56%. Put simply, the financial market itself that simply does not care about anybody’s feelings whether right or wrong gave a collective yawn about whether the Iran situation is going to cause any meaningful and sustained inflation going forward. In a word according to the 5-year breakeven inflation rate, the answer is “no”.
Could this inflation outlook change? Absolutely – continue to watch the 5-year breakeven inflation rate that is available for free from the Federal Reserve Bank of St. Louis. But at least to this point, the outlook is reassuring.
AI Wars. So where is the real war that is likely to have a more substantive and sustained impact on financial markets taking place? Across the information technology landscape including Magnificent Seven guest stars from communications services (Alphabet and Meta) and Consumer Discretionary (Amazon and Tesla). And the battleground upon which the war is being waged? Artificial intelligence.
First, let’s draw back the lens and look at the broader, market cap weighted S&P 500 Index (which is made up of 33% information technology, 11% communications services, and 10% consumer discretionary (33+11+10 = 54, yikes)). First, it is actually notable how well the US stock market has held up amid all of the uncertainty caused by the Iran conflict. Overall, the S&P 500 is effectively flat since the market close on the Friday before the attacks on Iran began, having fallen by roughly -0.5%. What is more notable is the fact that the S&P 500 today is trading below its highs from late October 2025 more than four months ago. This suggests that stocks continue to work their way through what can best be described as uncertainty since late last year.
What resides at the heart of this uncertainty? The free cash flow management, capital expenditure, and debt raising decision making from many of the AI masters of war – Amazon, Alphabet, Meta, Microsoft, and Oracle. Together, these Mag 7 titans and friends make up more than 17% of the market cap of the entire U.S. stock market (we should note what titans are not included on this list for different and varying reasons – NVIDIA, Apple, Broadcom, Tesla – this is an important distinction for future discussion).
Let’s get quickly to the bottom line. Together, these five companies spent more than $400 billion in 2025 on AI related capital expenditures. And in 2026, they are projected to spend as much as another $700 billion on further AI related capital expenditures. This spending is the equivalent of a top ten market cap company in the S&P 500 Index. It’s a lot.
While these companies have been copious free cash flow generators in recent years, they only create so much. So while free cash flow growth is projected to take a hard turn to the negative for these five companies, at the same time they are tapping the debt markets like drunken sailors. They’ve already raised more than $120 billion in 2025 (after raising a mere $28 billion per year on average over the previous five years), and they are projected to tap the debt markets for more than $400 billion over the next three years to finance continued spending. For companies whose stock prices went soaring over the past decade behind the narrative of low debt and strong free cash flow growth, these AI wars drive a meaningful spike through the heart of this investment thesis. Such is likely why the markets continue to struggle to adjust to this new AI narrative, as winners and losers will be crowned before it’s all said and done.
Bottom line. Financial news has been understandably focused on the spillover effects on markets from the Iran conflict. But upon closer inspection, we see that markets are actually holding up well amid the uncertainty. Instead, the war unfolding within the investment space that is having a more notable and lasting impact on asset prices is the battle that continues to unfold across the AI landscape. And this is a source of uncertainty and increased volatility that is likely to persist for the foreseeable future.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Please consult a tax or legal professional for specific information and advice.
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