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AI BUILDOUT IS DRIVING THE GLOBAL ECONOMY
The Iran War is projected to slow the growth of the global economy, mostly due to higher energy prices. We believe this will have a relatively brief impact, as both sides likely want a quick resolution.
Longer-term, we see the further development of AI as the bigger economic story.
Robust AI-related spending has continued to start the year. The forecast is that more than 600 billion dollars will be spent on the AI buildout in 2026.
Much of that spending will be by tech giants for data centers and other infrastructure, but smaller companies are also expected to spend tens of billions of dollars this year for AI-related capabilities.
STOCKS POWER AHEAD ON EARNINGS GROWTH OUTLOOK
We’re not alone in thinking that the Iran War will have a limited impact on the global economy. The stock market also shares that view.
Both U.S. and international stocks fell sharply after the war started at the end of February, but both have bounced back. U.S. stocks have set new all-time highs.
The key reason for our optimism in the stock market is that corporate revenue and earnings are both expected to grow briskly in 2026.
International stocks also stand to benefit if the U.S. dollar continues to weaken. After rising in March because of the war, the dollar declined by about 2 percent in the first half of April.
ENERGY-RELATED INFLATION WILL TAKE TIME TO RECEDE
Inflation in the U.S. jumped by almost a full percentage point in March to 3.3 percent. That increase was almost entirely due to higher energy prices – not counting energy, the inflation reading was much more muted.
If history is any guide, it will take several months at least for prices to come back down to pre-war levels. Part of that move has already happened – oil prices are more than 25 percent below their peak in March.
The Federal Reserve is concerned about the job market, but with inflation high, it will likely hold off on interest-rate cuts for a while. We think the Fed may have room to still make a rate cut late in the year.
OUR OUTLOOK
We don’t think the Iran War will be prolonged or that it will have a lasting impact on the global economy or asset markets. We believe the AI growth story will be a stronger contributor to economic expansion in the U.S. and globally. Inflation will likely be elevated for a while due to energy costs, but we still envision an interest-rate cut late in 2026.
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