Investors Now Face the Worst Kind of Uncertainty

The stock market was already struggling to find its footing after a difficult week marked by AI uncertainty and a hotter-than-expected PPI report. Monday morning brings something far more serious. 

U.S. and Israeli strikes on Iran have widened into a broader regional conflict. Israel is now striking Hezbollah targets in Lebanon. Iran has broadened its response to target airports and other sites in neighboring Gulf states. At least one U.S. military aircraft has been downed in Kuwait. President Trump has warned that more American deaths are possible.

This is no longer a market event disguised as a geopolitical problem. It is a genuine regional war with American forces involved and no clear timeline for resolution.

Oil Is the Immediate Issue

Brent crude futures surged as much as 13% overnight on fears of a protracted closure of the Strait of Hormuz, which is the narrow waterway through which roughly 20% of the world's oil supply passes. Gains pared back somewhat early Monday but the direction is clear. If the conflict continues to widen and the strait becomes contested, the ripple effects through the global economy will be substantial. European natural gas futures also surged.

The near-term beneficiaries of this action are obvious. Defense stocks are moving sharply higher with Lockheed Martin  (LMT)  and RTX  (RTX)  both up more than 7% ahead of the open. Oil and shipping stocks are rallying. Gold futures rose 3% to around $5,400 an ounce and are on track for a new record high. The dollar and Swiss franc are both strengthening as investors seek safety.

One signal worth watching closely is that bond prices moved lower despite the flight to safety. That is pushing the 10-year yield higher and indicates that the market is more worried about an oil-driven inflation spike than finding a safe haven in bonds. The Fed was already struggling to find reasons to cut interest rates and a sustained surge in oil prices makes it more difficult.

What This Means for the Market

Stock futures are pointing to declines of 1% or more across the board. European and Asian markets sold off overnight. Airlines are taking particularly sharp losses given their exposure to both fuel costs and route disruptions.

But the index moves are just the surface issue. The deeper problem is that a conflict of this scale impacts investor psychology and capital deployment. When there is genuine uncertainty about the scope and duration of a significant military conflict, large institutional players step to the sidelines. They do not make significant new commitments until they have some sense of how events are likely to unfold. 

When the big players pull back, liquidity thins, volatility increases, and moves in both directions become more exaggerated. Stocks that have no connection to the Middle East get caught in the crossfire simply because overall risk appetite has dropped.

Last week the market was already wrestling with a profound question about AI and which companies would emerge as winners and losers from that transition. That question has not gone away. It has simply been pushed to the background by something more immediately urgent. The AI rotation story, the Fed rate path, earnings season, all become more difficult to trade when there is uncertainty of this magnitude sitting on top of everything else.

AI Weakness Adds to the Pressure

One surprise Monday morning is the relative weakness in the AI sector. The Magnificent Seven ETF  (MAGS)  is down 1.7% versus 0.93% for the S&P 500 ETF  (SPY) , underperforming by nearly double. That is notable because MAGS has already corrected far more deeply than the broader market over the past several weeks. You might expect dip buyers to show some interest at these levels but so far there is no interest.

The AI story was already unsettled before Iran entered the picture. The questions about which companies win, which lose, and what the AI transition ultimately means for corporate earnings and valuations were nowhere near resolved. Adding major geopolitical uncertainty on top of an already uncertain investment thesis is not a combination that attracts aggressive buying. 

Dip buyers need two things: a thesis they believe in and some sense of when clarity arrives. Right now they have neither. The Iran situation puts a ceiling on any AI recovery until the geopolitical picture stabilizes, and there is no way to know when that happens.

Bad Markets Don't Scare You Out. They Wear You Out.

The good news is that volatile and unstable markets create mispricing and mispricing creates opportunity. When fear drives broad selling, investors dump entire baskets of stocks through index and sector ETFs without much regard for individual merit. Many companies that have no meaningful exposure to Iran, oil prices, or the AI transition will get sold simply because they are part of an index that is being sold. Those are the innocent victims of indiscriminate selling and they are what I will be watching.

Identifying the innocent victims is fairly easy. Timing the entry is much harder. Value buyers do not rush in during the early stages of a geopolitical shock. They wait for the dust to settle and some sense of stability to return before committing capital. There will be traders looking to play quick oversold bounces, and some of those trades will work, but for most stocks the process of finding genuine support and stabilizing takes time.

I have written many times that bad markets don't scare you out, they wear you out. What we are experiencing right now is the scare phase. The sharp sudden moves, the ugly headlines, the feeling that everything is broken at once. That is uncomfortable but it is manageable. 

What becomes truly difficult is when it persists for days or weeks and disgust and fatigue begin to build. That is when capitulation happens, when even patient investors throw in the towel not because of any single piece of news but because they simply cannot take it anymore. We are not there yet. But we need to watch for that dynamic because it is how bottoms are eventually made.

There is likely to be some short-term bounces out of the gate but don't trust them to last for long and don't be surprised if we see some lower lows.

At the time of publication, Rev Shark had no positions in any securities mentioned.