Holding onto AI tightly while staying wary of the Iranian surprise attacks! Wall Street divided as dreams of the 2000 Internet bubble era resurface.

This week, Wall Street saw extreme fragmentation in the market. New developments in the Iran situation caused short-term fluctuations in crude oil, US Treasury bond yields, and the foreign exchange market. Although overall price reactions were moderate, this event once again sparked market concerns about inflation, energy supply, and the Federal Reserve's policy path. However, within the stock market, investors' attention was constantly drawn to another issue: the upcoming earnings season, and whether it can support the substantial funds still flowing into the field of artificial intelligence (AI). This contrast was particularly evident on Friday. As the prospects of US-Iran negotiations remained unclear, oil traders continued to closely follow every signal from both sides. Meanwhile, stock investors were looking ahead to SK Hynix's debut on the US stock market, as well as the upcoming earnings releases from chip manufacturers and mega-corporations, which will serve as the next test for AI trading. The market trends this week are in line with an increasingly significant pattern in the market. Barclays PLC Sponsored ADR noted that the correlation between major asset classes is currently at around the 93rd percentile of historical levels, meaning that the linkage between oil, bonds, and currencies is higher than usual. At the same time, the correlation between stocks has dropped to the lowest level in over a decade. While individual stocks may still move in the same direction as the overall asset market, as investors focus more on distinguishing winners and losers in the AI race, differentiation among index components is increasing. Barclays believes that this is reminiscent of the dot-com bubble era - another "once in a generation" technological revolution that created a significant divide between recognized winners and losers in the market. Barclays' Head of US Equity Derivatives Research, Stefano Pascale, said, "Investors are always looking for the next beneficiary of AI trading, which is driving a lot of sector rotation." This repricing in the market is not limited to stocks. So far this year, rising real US bond yields have suppressed gold, while stocks and credit markets have remained resilient. Typically, conflicts like those involving GEO Group Inc, inflation concerns, and long-term fiscal deficits would favor gold, but this has not been the case. The reason is that rising real yields have increased the opportunity cost of holding gold - since gold itself does not generate interest income, its attractiveness has naturally decreased. This week, the S&P 500 Index rose 1.2%, the Nasdaq 100 Index climbed 1.7%, and traders are preparing for the first batch of earnings reports to be released in the coming days. Florian Ielpo, Director of Macroeconomic Research at Lombard Odier Investment Managers, believes that the current market is still pricing in "economic expansion" rather than "stagflation." AI investments are raising profit expectations while also increasing capital requirements, making the stock market more resilient to rising financing costs compared to gold. Ielpo said, "Rising real yields are not just an impact on liquidity tightening for the stock market, but also indicate positive investment and profit cycles. However, if real yields continue to rise after the expected improvement in profitability stops, risks will emerge." Deutsche Bank Aktiengesellschaft also reached a similar conclusion, but pointed out that the key premise of this balance lies in whether economic growth can sustain high profit expectations. Adam Phillips of EP Wealth Advisors said, "Continued rise in real yields may eventually pose a threat to the stock market, especially for sectors with long durations such as technology." For investors, a more pragmatic approach is to control the impact of shocks rather than allow them to dictate the entire investment portfolio. While the Iran conflict quickly stirred up oil, inflation expectations, and interest rate pricing, it did not shake the overall judgement of the market on economic growth prospects or AI profit potential. Therefore, Wall Street is more about making minor adjustments rather than major shifts. Citigroup capitalized on profit-taking in European stocks and Hungarian bond positions - both of which are vulnerable to another spike in oil prices - while still focusing on tech stock earnings reports and other catalysts in the second half of the year. HSBC HOLDINGS maintains underweight on oil, shifting allocation from emerging markets to Eurozone stocks, and warned that if there is any decline in AI spending, the semiconductor sector will be the first to be affected. BlackRock, Inc. maintains an overweight position on US stocks, focusing on companies that are likely to translate AI investments into sustainable profits. UBS Group AG sees the rise in yields as an opportunity to allocate to high-quality bonds, rather than a reason to completely reduce risk exposure. David Lebovitz, Global Market Strategist at J.P. Morgan Asset Management, said the core logic of the market remains consistent: follow the profits. "It's not about whether risk appetite is on or off, it's all about profits," he said. "In this environment, the return on investment is the investor's guiding light." This further highlights that investors are positioning themselves in the AI race across various asset classes such as stocks, high-yield bonds, private credit, while carefully selecting segments of the AI industry chain, focusing on the most profitable links. For investors, this means that while dealing with the impact of the Iran conflict, they do not have to abandon the larger investment narrative of AI. Most investors are not completely reducing their risk exposure, but making marginal adjustments while sticking to their core investment positions. Matt Rowe, Senior Portfolio Manager of Investec's Asset Management Group, said that investors manage risk through sector and factor rotation, while tactically adjusting portfolio exposure. He said, "Whether it's adding or reducing net risk exposure during market downturns, or seizing opportunities in bearish options skew, this has always been a relatively cheap risk adjustment measure, and it still is. The high degree of differentiation in the market is to a certain extent being driven by this, and is being confirmed by it."