Chips and oil

Chips with everything

We are almost a third of the way through 2026 and, despite the Middle East conflict, the technology theme has continued to dominate stock market returns – note the stellar performance of technology-dominated markets like Korea, Taiwan, Japan and Israel. The Nasdaq 100 index has lagged the Asian markets, as has the broader S&P 500 but both have still delivered strong returns. 

The subtle difference between good and stellar is that the Korean and Taiwanese markets are dominated by semiconductor manufacturing and support, while US markets have a much larger share of software companies that might potentially be disrupted over the medium term by artificial intelligence being able to undercut the ‘software as a service’ business model. 

The picks and shovels trade is still working better. This week, semiconductor manufacturer TSMC raised its revenue forecast. Meanwhile, the limited number of S&P 500-listed technology companies that have reported first quarter earnings so far have massively exceeded expectations, particularly in the semiconductor sub-sector. 

Technology remains a key driver of equity returns globally and, this year, it has been best played through chips and Asia. 

Technology companies’ order books are full. The build-out of data centres and computer capacity shows little sign of slowing. However, running the servers and meeting the computing demands of ever-growing AI use means massive demand for energy, water and critical metals. New investment opportunities are emerging in technologies that address these potential bottlenecks, including more efficient cooling technologies that place less demand on scarce water resources.

Energy is a potential challenge for the technology industry, especially given the situation in the Middle East. Both the crude oil and liquified natural gas markets are experiencing significant supply disruptions. Data centre costs will increase, despite technology companies investing in their own energy generating assets.

The market is electric

The energy crisis is unlikely to derail the AI trade. It is a challenge but eventually supply could be restored, and enhanced, by the addition of capacity in renewable, nuclear, hydro and biomass power generation.

The interrelated themes of building computing capacity, communication networks, power generation and electricity transmission will remain central to investment strategies for some time. 

The top five performing stocks in the S&P 500 industrials index so far this year are involved in providing electricity services and equipment. 

It’s going on longer

Headlines continue to generate volatility in markets. As discussed here in recent weeks, markets trade on the belief that a peaceful settlement will be reached which will allow energy markets to slowly normalise, and thus minimise the disruption to longer-term prices and to economic activities that rely on oil and gas products. Hence the recent rally.

However, investors need to be prepared for potentially less benign outcomes. The political outcome and situation in the region over the coming months and years is unknown. The potential exists for recurring disruptions to the oil trade and for a persistent political risk premium (which will underpin, for example, higher shipping insurance costs). 

The transition from oil and gas to other forms of energy becomes even more important if the Middle East scenario remains volatile, especially for Asian economies that are feeling the pinch from the energy crisis.

There are concerns that demand will suffer should the flow of oil through the Strait of Hormuz remain restricted. Asian countries have already taken steps to reduce energy demand. 

There are warnings of jet fuel shortages in Europe. Industrial processes that use derivatives of fossil fuels sourced in the Gulf might need to be wound down in some economies. Farmers are very worried there will not be enough fertiliser for the spring planting season.

What if March’s market fall was just a first reaction to the war’s initial impact and there is more unwelcome news to come? The recovery was based on the view that there would be limited macroeconomic impact once the US, Israel and Iran embarked on a road towards a settlement. 

There is a risk that energy trade disruption implications are already starting to manifest. This could include higher costs to businesses, stocks being run down, shortages of inputs, popular unrest over the increased cost of fuel (such as the recent demonstrations in the Republic of Ireland), declines in consumer confidence, and restrictions on energy consumption. 

There are boundaries to what kinds of scenarios are feasible, but possible outcomes must include a potential global recession.

Official data from several advanced economies covering March shows the initial impact of higher gasoline costs and other direct primary energy products on consumer prices. Market pricing, in terms of inflation expectations, continues to suggest a modest near-term bump with inflation rates eventually reflecting the diminishing change in energy prices. 

Yet it is not clear markets have factored in the potential hit to activity, the supply disruptions and pressure on margins. The technology bull market is masking these concerns for equity investors for now. 

Stock decline

The last oil to leave the Gulf by tanker to Western destinations has already arrived, and from now on stocks start to become depleted. One comment I read this week posited that “there is no available oil left at sea”. 

The Port of Rotterdam is the leading conduit for crude oil trade in Europe. Typically, every year about 100 million tonnes of crude oil pass through, destined for refineries in the Netherlands, Belgium and Germany. 

Its Q1 report suggested only minimal impact on overall cargo volumes, including crude oil and LNG. However, it stated that it expects the effects on energy trade to be more pronounced in Q2.

The Strait needs to open soon before this becomes a big piece of grit in the workings of the world economy. 

Markets will rally again if the US and Iran do hold talks and an agreement to open the Strait is reached. Even then, the damage already done might start to be more evident in corporate activity and messaging, and in official macroeconomic data in the months ahead. We are still in a bull market - but expect bumps.

Performance data/data sources: LSEG Workspace DataStream, ICE Data Services, Bloomberg, BNP Paribas AM, as of 23 April 2026, unless otherwise stated). Past performance should not be seen as a guide to future returns.