Our market continues to dance to the tune of the US President. Whatever ‘off ramp’ is conjured in the mind of Donald Trump to end the war and Hormuz pinch, his words of appeasement that never quite stack up, once again prompt the idea within our fraternity that maybe this is the time. Yesterday, it was all about the conflict approaching its “final stages” and oil prices had little choice in obliging with a reaction to the downside. However, this morning’s early postings from media outline something not quite so pending. Iran's foreign ministry spokesperson, Esmaeil Baghaei, told news agency ‘Nour News’, "we have received US views and are reviewing them". The news channel ‘Al Hadath’ reported Pakistan’s army chief may visit Iran today where a final agreement might be announced but with the next round of negotiations not taking place in Islamabad until after Hajj, which ends on the 30th of May. Adding insult to verbal injury, Trump has now said he was "in no hurry" to make a deal to end the war, but Washington could wait a few days to "get the right answers." As worthy as it may be to consider the state of oil inventories and dwell on how US oil stocks once again show strong draws, nothing can move the spotlight away from the US President when he takes to a podium. Donald Trump may have lost the initiative in this current war, but he certainly has not lost the ability to control the narrative.

Stock markets to the rescue

“Never in the course of stock market health has so much been owed by so many to so few”. With all apologies to Winston Churchill. However, this manipulation of the greatest 20th century statesman’s immortal words is true. Yes, the broader base of share prices in the US and globally have all fared very well, thank you very much, but the inspiration and source of what seems unimpeachably bullish sentiment comes from the purveyors of technology be it in hard or software. 

Alphabet, Amazon, Apple, Tesla, Meta Platforms, Microsoft, and NVIDIA, namely the ‘Magnificent Seven’, make up approximately 18 to 20 percent of the total global stock market value. Representing over $23 trillion in market capitalization, using data from ‘Schroder’ and ‘Investopedia’, this small group of US mega-caps alone accounts for more value than the combined stock markets of countries such as Japan, the UK, Canada, France, China, and Switzerland. Their enormity carries incredible, and some might say disproportionate, influence in the likes of global funds and various portfolios. This is even more heightened on home soil, for the group of technological monoliths now make up close to 35 percent of the value of the S&P 500. Tracking back ten years to 2016, their contribution at the time was 12.5 percent, therefore it is not surprising that such growth in participation would show how the Mag 7 in a decade, as seen on ‘Motley Fool’, have grown by 875 percent against the wider S&P growth of 235 percent.

Today’s results in the biggest of them all, Nvidia is a transitory quarterly influence, it will not change the state of the tech darling’s meteoric rise. Overnight results reveal another blockbuster period of trading, reporting record first-quarter revenue of $81.6 billion, up 85 percent year-on-year as the demand for its A.I. chips run unabated from global data centre spending. The share price, as has become habit, falls away but this is because Nvidia shareholders are not happy with perfection, they want more. However, its importance in performance is a balm for market sensitivity due to the handwringing surrounding bonds and yields bought about by inflation and the prospect of it accelerating because of the economic ravages meted out on global economies by the Iranian war. Despite the current inverse relationship of bourses to oil benchmarks, it is to the wider influence on energy markets that interests our fraternity. 

Oil companies now make up such a paltry membership in the S&P, accounting for between only 3.5 and 4 percent of weighting and while the oil barons have a say in demand because of refining and their corporate size, it registers as a diminishing influence at the consumer level as it services demand, arguably not create it. The Mag 7 encourage economic growth, with factories producing more goods and businesses through services and operations expand consumption in all manner of fuels from liquids to gases. Their success drives higher consumer activity as wealth creation allows for higher spending, greater social mobility and at the corporate level, again, travel with additional infrastructure and buildings expansion that must be fuelled by oil products. These considerations do not even take into account the massive use of power seen from data centres around the world and while all modern technology companies will be quick to assure that their aim is to harvest electricity from renewable sources, how will they generate when the wind does not blow, or the rivers are too low and the sun does not shine?

Our fraternity is rightly besotted by the comings and goings, or now standstill, surrounding the Strait of Hormuz. The continued pinch in supply of energy molecules will drive prices ever higher and by doing so there might very well be demand destruction. Yet, oil markets and those of equities are heavily dependent on each other. High-flying stock markets and their proxy for economic growth will more often than not encourage length into oil futures which along with inflation hedges will give something of looping feedback of demand elevation and higher equity prices. If we are to assume that the success of stock markets, driven by the Mag 7 is to continue, and that it represents much of the source of fossil fuel demand, wherever oil prices fall to after the final resolution to the Iranian war, there will be a stock market bid to greet them.

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