Three Crosscurrents Reshaping Markets

The Three Forces Driving Markets

Oil continues to dominate the macro narrative, but beneath the surface several other themes are gaining importance. AI financing is becoming a growing concern for credit markets, rate expectations are shifting higher, technicals across semiconductors continue to weaken, while an oversold setup and favorable seasonality suggest a short-term bounce in Nasdaq cannot be ruled out.

The surge in oil has led the RSI to hit very overbought levels. The ME situation remains very fluid, but oil is desperate for a pause, at least in the short term.

The latest escalation in the Middle East has pushed Brent nearly 40% higher in July, on track for its strongest monthly gain since March, while US gasoline prices have climbed back above $4 per gallon. Yet at around $100/bbl, Brent is only about $13 above JPMorgan's estimated fair value, suggesting the market is pricing in only a modest geopolitical risk premium. That is notable given tanker traffic through the Strait of Hormuz remains at just 50% of pre-war levels, far below JPMorgan's assumption of a recovery toward roughly 73%, with even rerouted pipeline flows facing growing disruption risks.

JPMorgan estimates Brent would average around $94 if the conflict is contained within a month. However, each additional month of disruptions adds roughly $7–8/bbl as global inventories become increasingly depleted, pushing Brent toward $114 if the conflict lasts three months. A rebound in Chinese crude imports would add further upside, with every 1 mbd increase lifting fair value by roughly $3/bbl. The same dynamic applies to gasoline. Under a prolonged disruption, US gasoline prices could rise from around $4.20 after one month to above $4.50 after two months, a level that has historically increased pressure for policymakers to pursue negotiations. More on oil here.

AI bonds deserve close attention

While hyperscalers have strong balance sheets and ample financial flexibility, the market is becoming less forgiving of ever-rising AI spending. The pressure is already visible in credit markets. Meta's $27.3 billion Hyperion financing was issued at par, traded above 109, and has since fallen to around 97. The broader concern is deteriorating free cash flow conversion as capex accelerates. Increasingly, investing in hyperscalers is a bet that AI revenues ramp before spending peaks. If not, today's capacity build could become tomorrow's compute oversupply, just as much larger depreciation charges begin flowing through income statements, writes Privorotsky. Latest note here.

Google encapsulated the market's growing concern around AI spending. Despite reporting excellent operating results, including 82% Cloud growth, Alphabet fell 6.9% after raising 2026 capex guidance to $195–205 billion and posting negative quarterly free cash flow of $5.9 billion. Investors are becoming less willing to treat AI spending as costless, particularly as questions around long-term returns remain unanswered. More importantly, higher spending by Google raises the bar for the rest of the hyperscalers, increasing pressure across the sector, writes Privorotsky. Together, these developments suggest AI is increasingly becoming a credit story rather than just an equity story. As capex accelerates and debt issuance climbs, investors are beginning to focus less on AI revenue potential and more on how the buildout is being financed.

AI is no longer just driving equity markets, it's reshaping credit. Goldman Sachs notes that investment- grade issuance is increasingly outpacing US Treasury supply, fueled by record debt issuance from AI hyperscalers. The question is no longer whether they can borrow, but whether this torrent of new bonds starts crowding out the rest of the market.