The Geopolitical Turmoil was Already Priced In
Friday, the United States and Israel launched a massive coordinated air attack against Iran. After months of failed nuclear negotiations (and decades before that), President Trump decided to take action. Over the weekend, U.S. air strikes hit several major Iranian cities, ultimately ending Iranian Ayatollah Ali Khamenei’s 36-year iron rule.
Despite no progress on nuclear negotiations and proxy attacks on U.S. citizens, U.S. presidents have avoided direct military conflict with Iran for years. That ended this weekend. So why were stocks up on Monday?
1. Markets Discount the Future: Although the attack news was not confirmed until Friday, the stock market has a way of discounting the future. For instance, the United States Oil Fund ETF (USO) gained 15.9% in the past three months leading up to the attack.
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Meanwhile, defense stocks and drone makers like Red Cat Holdings (RCAT) rallied strongly as investors as investors observed the massive U.S. Middle East military build-up and predicted the attack.
2. The Military Operation Has Been Largely Successful (thus far): Prior to this weekend’s attack, a U.S. military offensive against Iran was seen as risky. However, thus far, the operation has been relatively smooth (especially when compared to expectations). The U.S. has killed much of Iran’s key leadership, U.S. forces have disabled much of the Iranian Navy, and there have been minimal U.S. casualties.
3. Geopolitical Fears Often Create Opportunity: Although geopolitical conflicts are scary for investors, they often create some of the best buying opportunities.
Image Source: Carson Investment Research
AI Infrastructure Investment Remains Robust
Artificial Intelligence is currently the hottest growth area on Wall Street. Monday, AI leader NVIDIA (NVDA) announced that it invested $2B in Lumentum (LITE) and another $2B in Coherent (COHR) under separate, multi-year, non-exclusive fiber-optics deals. Applied Optoelectronics (AAOI) also shot higher in sympathy. Optics companies are critical to the AI revolution because no matter how fast AI chips are, if the optical networks carrying the data are slow, the system gets clogged.
Beaten-Down Stocks (Software, Bitcoin) Rebound
Beaten-down industries like Bitcoin and software finally saw some relief on Monday. Earlier, I wrote “The Contrarian Case for Strategy (MSTR),” which you can read here. Meanwhile, the iShares Software ETF (IGV) is retreating to its 200-week moving average for the first time in more than two years. As Charlie Munger once said, “If all you ever did was buy high-quality stocks on the 200-week moving average, you would beat the S&P 500 by a large margin over time. The problem is, few human beings have that kind of discipline.”
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Bottom Line
While the headlines are dominated by a massive geopolitical shift in the Middle East, the market’s resilient reaction serves as a masterclass in forward-looking “discounting.” By the time the first strikes landed, savvy investors had already positioned themselves, moving capital into energy and defense months in advance. With the military operation exceeding efficiency expectations and AI infrastructure investment continuing to pour billions into the fiber-optics sector, the broader bull case remains intact.
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NVIDIA Corporation (NVDA) : Free Stock Analysis Report
Coherent Corp. (COHR) : Free Stock Analysis Report
United States Oil ETF (USO): ETF Research Reports
Strategy Inc (MSTR) : Free Stock Analysis Report
Applied Optoelectronics, Inc. (AAOI) : Free Stock Analysis Report
Lumentum Holdings Inc. (LITE) : Free Stock Analysis Report
iShares Expanded Tech-Software Sector ETF (IGV): ETF Research Reports
Red Cat Holdings, Inc. (RCAT) : Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
