Higher oil, AI spending and tariffs test markets

Key takeaways

• Rising oil prices are increasing inflation risks but remain a sector-specific story
• AI leaders are facing greater scrutiny over capital spending
• Tariffs return to the spotlight, though the economic impact appears limited

Markets were relatively unchanged at the index level this week, but beneath the surface there was rotation.

The return of geopolitical tensions around the Strait of Hormuz pushed Brent crude back above $100 per barrel, while renewed Ukrainian attacks on Russian energy infrastructure added further pressure to global energy markets.

The impact has been uneven. Energy producers and refiners outperformed, while airlines, software companies and several large technology stocks came under pressure as investors assessed the impact of higher fuel costs.

So far, markets have largely treated the energy shock as sector-specific rather than systemic. The bigger question is whether persistently higher oil prices begin to affect household spending, corporate margins and inflation more broadly. The modest rise in U.S. Treasury yields this week suggests investors are beginning to price in at least some of that risk.

The first round of large-cap technology earnings also shifted investor attention from revenue growth to capital allocation.

Markets continue to recognize the long-term opportunity created by artificial intelligence, but investors are becoming more focused on the cost of building that future.

Alphabet reported revenue growth of 24%, yet shares came under pressure after higher capital spending pushed free cash flow into negative territory. Tesla told a similar story. Revenue continued to grow, but significant investment in autonomous driving, robotics and factory expansion also weighed on free cash flow.

These results suggest the market is becoming more selective. Rather than rewarding AI investment at any cost, investors are increasingly asking when higher spending will begin translating into stronger cash generation and shareholder returns.

Trade policy also returned to the headlines this week.

The White House announced a new 50% tariff on a range of Canadian imports. While the headline appears significant, the direct economic impact is likely to be more limited, with the affected products representing only a small share of total U.S. imports from Canada.

Attention has also turned to the temporary global tariff introduced earlier this year. Following its expiry, the administration has announced fresh tariffs of between 10% and 12.5% on 60 countries, including the European Union, the United Kingdom, China, India, Japan and Mexico, for allegedly failing to take sufficient measures to curb imports produced with forced labor.

Perhaps most notable is how markets have responded. Compared with earlier tariff episodes, investors appear more accustomed to policy uncertainty, resulting in a more muted market reaction.