The newsflow remains focused on the Middle East, and the Strait of Hormuz, with the continuing lack of a more dramatic market sell-off explained by the fact that investors have learned in recent years to treat such events as buying opportunities.
There has also been a continuing assumption that the conflict will not last long (first days, then weeks and now months).
This dangerously underestimates the resolve of an Iranian regime which faces an existential crisis. Meanwhile, Tehran has done what it said it would do if attacked, namely attack US missile bases in the region regardless of the surrounding collateral damage.
And the damage to these bases has much been greater than first admitted to, as has started to be reported in the Western media (see, for example, Washington Post article: “Iran has hit far more US military assets than reported, satellite images show”, 8 May 2026).
The US-Israel attack on Iran was always highly risky for the American president politically unless there was some pre-agreed deal in place with an anti-regime element in Iran’s security forces.
For now there is no sign of this, though a New York Times article last week revealed there may have been such a plan which backfired (see New York Times article: “Early War Goal Was to Install Hard-Line Former President as Iran’s Leader”, 19 May 2026).
This article gives some insight as to why the Israelis, and the Trump administration, were so confident that they could secure regime change.
This is because they reportedly thought they had secured an “asset” close to the regime similar to the Venezuela precedent. Such hopes have now been dashed.
The surge in energy prices, triggered by the seeming closure of the Strait of Hormuz, will not have been to the liking of the 47th US president.
The Brent crude oil price and European natural gas prices have risen by 36% and 45% respectively since the onset of the Iran war at the end of February even after recent declines on renewed deal hopes.
This creates the continuing potential for another Trump U-turn, where the 47th president opts to exit from the conflict on the argument that he has already decapitated the regime.
This, however, will not be to Israel’s liking.
Meanwhile, Trump’s initial claim that the American navy will be able to secure safe passage though the 21 miles narrow Strait has not been credible as reflected in soaring shipping insurance rates.
US Outperforming the World in Q1 and Valuations Remain Reasonable
Moving on from Iran, the renewed momentum in the AI trade since the start of this quarter, combined with the reality that America is much less dependent on imported energy, has led to renewed US outperformance of late.
The MSCI USA has outperformed the MSCI AC World ex-US Index by 7.5% since the end of February.
It has also led to renewed concentration in the US stock market in terms of the dominance of Big Tech as defined as Nvidia and the four major hyperscalers.
Still if they are back near the peak percentage of S&P500 market capitalisation, valuations are below recent peaks.
Nvidia and four major hyperscalers’ share of S&P500 market capitalisation rose from 23.8% in late March to 27% in mid-May and is now 26.1%, compared with the peak share of 27.4% at the start of November 2025.
But they are now trading at 22.9x 12-month forward earnings, compared with a recent high of 29.2x in late October 2025 and 33.1x in July 2024.
This de-rating reflects growing concerns that hyperscalers’ projected capex this year, at US$680bn, accounts for a projected 92% of their operating cashflow, as recently discussed here (see Why The AI Picks-and-Shovels Boom May Be Peaking, 13 May 2026).
Without the Mag-7, US Stock Markets Would have Looked More like Europe’s.
Meanwhile it is worth highlighting from a more historical perspective the extent to which US outperformance between 2020 and 2025 was driven by the Magnificent-7 by showing the chart below.
This highlights that, if the Magnificent-7 are excluded, the American stock market has had essentially almost the same performance as the European stock market in the period between the pandemic low in March 2020 and the end of 2025.
Thus, the S&P500 rose by 234% between 23 March 2020 and 31 December 2025 on a total-return basis, while the US 500 excluding the Magnificent-7 Index and the Stoxx Europe 600 Index were up 181% and 175% respectively in US dollar terms over the same period.
If the US stock market has done well of late, the really dramatic equity rally globally has not been in the hyperscalers but in the continuing AI picks and shovels trade.
This is the tech hardware companies whose profits are directly linked to the hyperscalers’ massive spending.
For example, about one third of the capex is estimated this year to be spent on memory.
The other important point is that the semiconductor companies, like Hynix and Samsung Electronics in Korea, book their profits up front, with Hynix enjoying a record profit margin of 72% last quarter, whereas the hyperscalers are in no hurry to account for capex as reflected in extended depreciation schedules.
Still their depreciation bill is rising.
The four major hyperscalers collectively spent US$130bn on capex in 1Q26. But their depreciation expenses were “only” US$41.6bn, though up 33% YoY.
Hyperscaler Spending is Driving Emerging Market Outperformance
The surge in hardware stocks is why emerging markets continue to outperform with the neutral weightings at Korea and Taiwan in the MSCI Emerging Markets benchmark soaring from 9.0% to 21.3% and 19.7% to 26.3% respectively since the start of last year.
Even more dramatically, three stocks, TSMC, Samsung Electronics and Hynix now account for 28.2% of the emerging market benchmark, an unprecedented level of concentration in this asset class.
The biggest loser from this in an emerging market context has been India which has been the main funding source for flows into Taiwan and Korea.
India’s neutral weighting in MSCI Emerging Markets has declined from 19.4% to 11.3% since the start of 2025.
Foreigners sold a record net US$18.8bn worth of Indian stocks last year and a net US$23.9bn year to date.
EM Flows are Leaving India to Chase South Korea’s Semiconductor Miracle
So, if timing the top tick in semiconductor stocks is perhaps the most critical market timing issue for global emerging market fund managers this year, it is also clearly critical for an Indian stock market hoping for renewed foreign inflows in a country which as a major energy importer is also highly vulnerable to rising fossil fuel prices.
The only other way foreign investors are likely to return to India in size is a sharp correction triggered by a sudden cessation in domestic mutual fund inflows in the country.
If this is certainly possible in theory, since mutual fund returns have been lacklustre since the start of last year, there remains a continuing lack of evidence of any sudden sharp decline in flows into India’s Systematic Investment Plan (SIP) schemes.
Indeed flows have remained, for now at least, surprisingly healthy.
Monthly SIP contributions rose to a record Rs321bn (US$3.5bn) in March and were still Rs311bn (US$3.3bn) in April.
Meanwhile, the 4QCY25 saw both top line and bottom line acceleration in India in terms of earnings.
Still this should be put in perspective.
The projected profits of Samsung and Hynix this year are around three times the aggregate profits of India’s benchmark Nifty 50 Index. Thus, Samsung and Hynix are forecast to earn profits totalling US$307bn this year, three times the total forecast profits of US$102bn for India’s Nifty 50 universe.
Back in 2023, the first year of the AI capex arms race, the profit of Samsung and Hynix was only 5% of the Nifty 50!
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