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President Donald Trump backed off from his “unconditional surrender” brinksmanship but continues to send mixed signals about when the conflict in the Middle East between the U.S., Israel and Iran will end. Investors, traders and speculators, now accustomed to this kind of back-and-forth, bid stocks up early but sold late again during another volatile session on Tuesday.
“In somewhat of a repeat of the tariff whiplash of last April,” Louis Navellier of Navellier & Associates writes, “yesterday, Trump announced that we were close to the end of the Iran conflict, and the market reversed from losses to solid gains.”
As Navellier explains, oil fell more than 30%, from near $120 per barrel in the morning to near $80 in the evening. The front-month crude oil futures contract traded as low as $76.73 on Tuesday and closed at $84.69, down from a high of $119.48 on Monday. “Once again,” Navellier adds, “dip buyers were richly rewarded.”
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The Cboe Volatility Index (VIX) eased to 22.19 after spiking to 35.30 on Monday as oil was surging, then ticked up to 25.54 during the last hour of the trading session. A normal range for the stock market’s “fear index” is between 12 and 20. “While the trend is moving in the right direction,” Navellier says “this kind of volatility is certainly unsettling for investors.”
At the closing bell, the tech-heavy Nasdaq Composite was higher by 1.16 points, or 0.01%, at 22,697, the broad-based S&P 500 had slipped 0.2% to 6,781, and the blue-chip Dow Jones Industrial Average was down 0.07% at 47,706.
Hyperscalers boost AI hardware stocks
Applied Optoelectronics (AAOI, +8.9%) was among the market’s top-performing tech stocks on Tuesday after Needham analyst Ryan Koontz reiterated his Buy rating and raised his 12-month target price for the networking and optical equipment provider from $80 to $130.
“Hyperscale AI investment continues to drive tremendous growth in Cloud spending,” the analyst says, “and we expect capex estimates will trend upwards in 2026 as they have over the past two years.” Needham says order visibility from hyperscalers is “increasing in both scale and duration” for other networking and optical equipment providers.
Koontz cited Arista Networks (ANET, +1.8%), Ciena (CIEN, +6.0%), Coherent (COHR, +3.3%), Fabrinet (FN, +2.9%), Lumentum Holdings (LITE, +4.9%) and Viavi Solutions (VIAV, +1.6%) as other networking and optical equipment stocks with significant exposure to hyperscaler spending. Note that LITE and COHR will be added to the S&P 500 on March 23.
Investors, traders and speculators will scrutinize Oracle’s (ORCL, -1.4%) post-closing-bell turn on the earnings calendar for more data and color about the AI revolution.
How can the Fed fight stagflation?
The outcome of the next Fed meeting is almost certain. According to CME Group FedWatch, futures traders are pricing in a 97.3% probability that policymakers will keep the target for the federal funds rate in a range of 3.50% to 3.75%.
That’s despite an underwhelming February jobs report. As Deutsche Bank U.S. Economist Amy Yang writes in her most recent Fed Watcher note, voting members of the Federal Open Market Committee remain in “wait-and-see” mode. Different voting members are waiting to see different things, though, as reflected in their recent speeches.
“Regarding the economic impact of surging energy prices, both Miran and Waller did not anticipate sustained inflation from the Middle East conflict,” Yang notes. Fed Governor Stephen Miran sees potential for “demand drag” and a reason for “more dovish policy,” while Christopher Waller “cautioned about potential spillovers from energy prices into other categories.”
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Minneapolis Fed President Neel Kashkari said war in the Middle East “could complicate his outlook and may necessitate an extended pause.” Meanwhile, Chicago Fed President Austan Goolsbee highlighted the risk of stagflation.
“Indeed, oil prices surpassing $100, the highest since 2022 presents increased risks for both higher inflation as well as downside risks to growth,” Yang observes. “These opposing effects have contrasting implications for monetary policy.”
The Fed’s past performance is no indication of what it will do in the future: “Indeed, looking at the Fed’s prior responses to energy shocks does not yield a regular pattern,” according to Yang. Sometimes “price stability” was the Fed’s primary concern, sometimes it emphasized the “full employment” part of its dual mandate.
Yang concludes that it’s “likely too soon to determine which force will dominate, supporting a continued wait-and-see approach in the near term.” In the meantime, the Bureau of Labor Statistics (BLS) will release the February Consumer Price Index (CPI) report before the opening bell on Wednesday.