AI Rally Has 'Room To Go' Says Ozan Tarman

AI-related equities posted fresh gains on Monday, helping global stocks absorb a rebound in oil prices despite continued US-Iran deadlock over a peace deal. The discussion also highlighted moves in stocks and where bond yields may head next, pointing to ongoing cross-asset volatility rather than a single event-driven shock.

Analysis

The near-term leadership is less about AI fundamentals than about factor durability: mega-cap duration equities are still behaving like a substitute for long bonds, so any slide in real yields can extend the AI tape even if growth data are mixed. That makes the biggest beneficiaries not just semis and hyperscalers, but also the infrastructure layer with the cleanest capex visibility and pricing power; the second-order loser is anything levered to a reflation scare, because higher oil is not yet enough to rotate capital out of the low-volatility AI complex.

The geopolitical premium in energy looks tactical unless it starts to contaminate inflation expectations. For now, oil can rebound without breaking risk appetite, but the transmission to equities changes quickly if the move lifts breakevens and term yields at the same time. That would pressure long-duration tech multiples first, then spill into credit via wider spread volatility, especially in lower-quality issuers whose financing assumptions rely on a benign rates backdrop.

Consensus seems to be treating this as a clean ‘AI up / oil up / stocks up’ regime, but that’s likely too neat. The more interesting risk is that the market is underpricing a violent factor reversal if bond yields reprice higher over the next 1-4 weeks; AI winners with crowded ownership can de-rate faster than their earnings would justify. In contrast, if yields drift lower despite firmer oil, that’s a signal the market is prioritizing growth-scarcity and would favor a continuation trade rather than a broad cyclical rotation.

Key Decisions for Investors

• Stay long the AI factor, but express it defensively: buy 4-8 week call spreads on QQQ or SMH rather than outright stock exposure, so you participate if yields soften while limiting damage if oil pushes rates higher.
• Fade the reflation impulse tactically: short XLE vs long QQQ for 2-4 weeks if real yields remain capped; this pair wins if the market keeps treating oil as a geopolitical premium rather than a new inflation regime.
• Add a hedge against a yield shock: buy 1-2 month puts on high-multiple semis or unprofitable software names that are most sensitive to a 20-30 bp move up in the 10-year real rate.
• For credit exposure, reduce beta in lower-rated HY tech/consumer names over the next 1-2 weeks; use CDS or index hedges if oil strength starts to flow into breakevens and refinancing spreads.
• If bond yields fail to rise on higher oil, add to long-duration growth on pullbacks; that setup implies positioning is still underexposed to the AI leader trade and could extend for another 1-3 months.