War is like boxing. A boxing match involving fighters with equal skill levels are competitive and can last long. War involving those with similar strength and resources are more uncertain and last longer. US and NATO weapon support of Ukraine military is the reason that the Russia-Ukraine war continues. Otherwise, the war would have already been over with Russia taking over Ukraine.
War between a clear favorite and a clear underdog do not last long. They end quickly as in boxing, with the favorite knocking out the underdog. That is the case with US/Israel vs Iran. The most pertinent example is the Gulf War. Anyway, even in the slight chance there was a protracted war, the market likely shrugs it off. War doesn't hurt corporate earnings. On the whole, it is a small positive due to higher military spending, which increases the earnings for defense companies.
It looks like a good time to short oil, which has been running up on these Iran strike threats, and gapping up on the news. These Iran strikes are a like horror movies with multiple parts. Part 1 was April 2024. Part 2 was June 2025. Part 3 is now. The supply-demand fundamentals are weak, as OPEC keeps pumping, without regard for price. And you have speculator positioning which has gotten much longer in Brent and WTI futures since the start of the year.
Now to more relevant news for the financial markets. AI.
The AI theme has had a few twists and turns. The market has been focused mostly on the AI winners, and not too concerned about there being losers. In middle of that honeymoon period, some haphazard conclusions from the growth of chatGPT made GOOG an AI loser, even though they were developing their own LLM models, and developed TPUs to bypass NVDA for a lot of their compute needs. Of course, later, everyone changed their mind after Gemini became more popular, and GOOG has been an outperformer ever since. Perhaps the masses are drawing the same haphazard conclusion for SaaS companies as they did for GOOG for much of 2024 and 2025. Too early to say. Stocks like CRM, WDAY, and NOW have been beaten up and valuations look reasonable now, although they don't have monopoly powers of a GOOG, so they are riskier plays.
AI was viewed as a positive for all involved from the advent of chatGPT until October 2025. Then something changed in late October 2025. As AI related positioning got saturated, the views changed along with the price action. The view on AI became more nuanced, with the market being more discriminating on what stocks to pump. The pump is continuing for semiconductors and AI energy related plays. But the dump is coming for the hyperscalers, AI data center plays, and software. The AI data centers because they had a horrible business model with low barriers to entry. The hyperscalers because they were pouring hundreds of billions into AI capex with big hopes and dreams without much tangible return. It is why META got crushed after their earnings report last October. Its why ORCL got destroyed after their earnings report last December. Its why MSFT got pummelled after their earnings report in January.
As usual, the price action dictates new explanations and rationalizations for the move. You didn't hear much about software stocks until 2026. Even when they were underperforming in 2025, it was mostly under the radar, because the SPX was going up and up, and a rising SPX covers up bad things underneath the surface. Then the AI disruption fears came like a heat seeking missle for SaaS stocks, and it seems to have peaked for software last week with the Citrini Substack article. I don't pay for Substacks, so I didn't read the article, but from all the buzz, it seems like one of his adverse scenarios in the coming AI revolution were massive white collar job cuts and software companies losing business due to Claude and other vibe coding LLM wrappers. I'm sure the article didn't go viral because it was well written or insightful. It just hit the spot for the market's zeitgeist, which was AI disrupting the SaaS business model.
We've reached peak SaaSpocalyse. The IGV to SMH ratio bottomed right after the Citrini article and has bounced back post NVDA earnings.
AI has been hyped as the future of hyper productivity, where corporations would be able to reduce labor costs and expand profit margins. It was the reason that the hyper scalers were using all their free cash flow to spend on AI infrastructure. But if these hyper scalers get punished for spending so much on AI capex, its not a big leap to predict that they will eventually cut their AI capex to save their stocks. Big cap tech receive a lot of benefits from having such high valuations. Mainly the ability to give out stock based compensation instead of cash to employees, without heavy dilution due to the high valuations. Within the next few months, I expect the next AI scare to come from reduced AI capex, which would put the target on the backs of the semiconductors and hardware space, the ones that have been mostly unscathed during this tech attack that's been happening. The XLK ETF short interest has skyrocketed this year, as fund managers are aggressively hedging with tech shorts.
The last sudden increase in XLK short interest happened during the bond market scare part 2 in the fall of 2023. It marked a bottom for the SPX.
In addition to the AI fears in software and big cap tech, you have seen financials underperform the market. The worries in the banking world now is private credit. There have been some writedowns in private credit funds, and BDCs have been getting crushed for several weeks. My default stance when it comes to news headlines is to view it as being overblown/irrelevant for the market. But I believe the smoke is real. Nothing like the GFC. But bigger than one off events like Silicon Valley Bank. Its another potential bear catalyst for the future.
Private equity/credit have gone bananas since ZIRP in 2009. Private equity has been one of the favored asset classes for IBs to sell to pensions, rich private clients, and to endowments looking for higher returns. They loved it because they thought it was some private club only they were given access to. Similar to what they thought of hedge funds in the post dotcom era. The fact that it was not marked to market made it even better, as it was viewed as being less volatile than stocks. With all the money pouring in, the private equity guys overbought and overlent. For the past few years, they've been scraping the bottom of the barrel looking for good acquisitions. There are few and far between. So they've been buying and lending to more marginal companies. Which makes their portfolios littered with more junky companies, more bad credits. And they are having a harder time re-selling their leveraged up companies, which no one wants anymore. They are getting more desperate. When you see Robin Hood launching a private equity fund, run for the hills.
Its one thing to do LBOs when you have Fed Funds at 13 bps, and a 10 year below 2%. Its a whole another thing to do LBOs with Fed Funds at 3.63%, and a 10 year above 4%. It seems obvious, but the higher the interest rate, the less likely these companies can fully repay. Higher interest rates require higher nominal growth for credit markets to remain stable.
The government is running huge budget deficits which does keep overall nominal growth higher than it would be otherwise, but its not quality growth. Its the government borrowing money to pay more to Social Security and Medicare, to pay for unfunded tax cuts and wars, to pay more interest on the national debt because they run an inflationary fiscal policy. That increases GDP, but decreases productivity. The fiscal largesse isn't spread evenly. It creates winners and losers. Those past winners who become losers will have a hard time paying back their debts in the private markets.
The COT data showed some surprising positioning changes in SPX. Asset managers continue to add to their big net long positions. As of Feb 24, asset managers are holding the largest net long position over the past 52 weeks.
Overall, the inflows keep coming for equity funds. YTD, equity inflows are running at a pace of an annualized $1.1 trillion, which would crush the high inflow numbers of 2024 and 2025, and set a new all time high, greater than the 2021 inflows. The flows have gone from US market cap weighted indices to US equal weight and international, but the overall inflows numbers are growing. That's why this market isn't dropping despite the bearish price action in big cap tech.
Bought some more longs last week, with room to add more. If we get any Iran related weakness on Monday, I will be looking to buy that dip. A CNBC guest from the CBOE was talking options positioning and she mentioned that investors were now buying fewer calls, and doing more covered call selling. Selling covered calls is taking a short term bearish position against your longs, as you are selling partial deltas, lasting about 2 to 4 weeks, against a 1 delta position. With the big increase in XLK short interest, the hedging has already happened. It feels really late in the SPX selloff, with war concerns now added on top of the AI fears. The mere return to normal levels of fear and concern could result in a face ripper.
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