Shares slipped with bonds on Monday as the escalating conflict in the Gulf lifted oil prices and fanned fears of inflation, while a packed week of major tech earnings will further test investor faith in the artificial intelligence trade.
Brent crude climbed above $90 a barrel for the first time in more than a month as the U.S. military started a ninth straight day of attacks against Iran, which in turn struck targets across the region. Just a handful of ships transited the Strait of Hormuz on Sunday and Tehran claimed to have hit two.
"The longer the strait remains closed and the war escalates, the greater the risk that oil prices will have to rise to around $150/barrel to bring demand down to match the hit to supply," said Shane Oliver, head of investment strategy at fund manager AMP. "This is not our base case but it's a high risk again."
Brent added 2.4 per cent to $90.18 a barrel, while U.S. crude rose 2.1 per cent to $84.18.
The jump in fuel costs has revived worries about inflation even as U.S. consumer price data surprised on the downside last week, leading futures markets to price in 29 basis points of Federal Reserve rate hikes by year-end.
"Our forecast is for a more gradual turn toward a Fed hike in 2027, but the balance of risks is shifting in the direction of an earlier hike than expected," said Bruce Kasman, chief economist at JPMorgan, noting a recent hawkish tilt in Fed policy rhetoric.
Futures imply a 60 per cent chance of a rate rise as early as September, pushing yields on 30-year Treasuries back above the psychological 5.0 per cent barrier. This is a level that tends to attract funds away from equities and toward fixed income, while lifting the valuation bar for future corporate earnings.
The shift has come just as investors question sky-high valuations for chip and AI stocks, which have seen the Philadelphia Semiconductor Index shed 10 per cent last week to leave it 20 per cent down from June's record high.
Markets took an added blow on Friday when Chinese AI firm Moonshot said it had a new open-weight model, Kimi K3, that it says delivers performance approaching U.S. giant Anthropic's frontier Fable model.
All of which raises the stakes for this week's rush of profit results, which include Alphabet, Intel and Tesla.
BofA analyst Savita Subramanian remains upbeat on the earnings outlook, tipping a 5 per cent beat versus consensus, or 28 per cent growth. Tech is expected to drive over half of growth, with semiconductors expected to rise around 130 per cent year-on-year.