by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with what Oracle’s earnings signal about the AI investment cycle, then examines how the US’s difficulty in securing passage through the Strait of Hormuz illustrates the challenges of confronting smaller asymmetric adversaries. We next highlight key market developments: the IEA’s reserve release, Google’s provision of AI technology to the Pentagon, and Israel’s expanded Red Sea presence. As usual, the report includes a summary of recent US and international economic data.

AI Maturing: Oracle surprised investors with a stronger‑than‑expected earnings report, though its financial statements also revealed a developing concern. On Tuesday, the company said revenue from its cloud infrastructure business surged 84% to $4.9 billion in the quarter ended February 28, outpacing prior growth of 68% and topping analyst estimates. While these results were warmly received, the release was not without controversy as Oracle’s aggressive AI‑related capital spending has pushed its free cash flow into negative territory for the first time in decades.

• The revenue beat reassured investors that Oracle is starting to turn its substantial AI-related bookings into actual sales. While the company now counts more than 700 AI and cloud infrastructure customers, a significant portion of its remaining performance obligations remains tied to a single partner. OpenAI’s roughly $300 billion cloud infrastructure deal represents a substantial share of Oracle’s reported $553 billion AI-driven backlog.
• Oracle has effectively emerged as a proxy for the broader AI infrastructure trade that rose to prominence last year, driven by investor focus on surging demand for cloud computing and storage capacity. This theme has been cemented by generous data-center tax incentives and supportive federal and state policies, which continue to encourage heavy capital investment while keeping the near-term tax burden low.
• Much of the market’s attention has centered on tech companies’ readiness to build out infrastructure and their tendency to keep raising the bar. Just this quarter alone, Meta, Alphabet, Microsoft, and Amazon signaled as much as $700 billion in combined capital expenditures for 2026 as they race to keep pace with demand. Nvidia, meanwhile, estimates that trillions of dollars’ worth of infrastructure still needs to be built.
• While the AI build-out has delivered strong returns, it has also fueled growing concerns that an industry once considered capital-light is becoming capital-heavy. This shift has drawn scrutiny, as much of the spending has come at the expense of free cash flow and is increasingly being financed by debt. Although deploying cash in this way is often viewed as a sign of confidence in future investment opportunities, it also raises questions about a company’s ability to return capital to shareholders down the line.
• Although we remain confident that tech momentum still has room to run, we suspect that the heavy spending on infrastructure could lead investors to place a higher premium on profitability and strong cash flow. As a result, we could see sharper pullbacks if companies disappoint and a more muted upside if they beat expectations. We continue to believe that diversifying beyond tech could be beneficial for wealth preservation.

Mixed Message: Oil prices remain volatile as the White House continues to send mixed signals about the war’s progress. On Tuesday, President Trump encouraged oil tankers to take the risk of passing through the Strait of Hormuz, a move later reinforced by a US general who said the military was considering ways to escort the vessels. However, market sentiment quickly shifted after reports surfaced that Iran had deployed mines in the strait, prompting the White House to announce that it was not ready to provide naval escorts at this time.

• The controversy over transit within the strait underscores that the US’s continued demonstration of military dominance may no longer be enough to ensure safe passage. Over the last four years, modern weaponry has evolved in ways that enable smaller nations to sustain prolonged engagements. Iran, for instance, has increasingly relied on inexpensive weapons such as drones to strike targets across the region. Ukraine has used similar tactics in its fight against Russia.
• This shift toward low-cost, high-impact warfare has made modern conflicts far less predictable. The resilience of smaller adversaries has made it far more difficult to compel outright, unconditional surrender in modern wars. Rather than seeking to defeat a stronger rival outright, these states can rely on cheap, easily produced weapons to prolong the fighting and steadily raise the political and financial cost of maintaining dominance over a region.
• Iran’s ability to inflict outsized damage relative to its economic and military weight has become a major source of market uncertainty. This is reflected in recent oil price swings, which underscore investor unease as Iran disrupts traffic through the Strait of Hormuz — even after much of its conventional military capacity has been degraded. The underlying concern is that the conflict could broaden to include more countries.
• While we remain cautiously optimistic that the conflict will conclude within the president’s stated four-to-five-week window, we recognize that the probability of a more protracted campaign is rising. This lingering uncertainty is likely to weigh further on market sentiment in the near term, particularly for risk assets. In our view, investors should focus on broad portfolio diversification, which can include exposure to precious metals and value-oriented sectors.

Strategic Reserve: Japan has announced it will be the first country to draw on its strategic reserves in an effort to cool energy prices. This follows a coordinated move by IEA members to undertake the largest collective release of strategic stocks in history to offset supply lost from the blockade of the Strait of Hormuz. While this action is likely to put near-term downward pressure on oil prices, it could also create significant future demand once markets stabilize and reserves need to be rebuilt.

Google Defense Contract: Tech companies are deepening their ties with the Pentagon. Alphabet will provide AI agents to handle unclassified, routine tasks, highlighting Washington’s growing use of AI to boost efficiency and manage staffing. This could leave the Defense Department more dependent on private tech firms for daily operations, while making those firms more reliant on government contracts. We see this as another step in the blurring of the line between the public and private sectors.

Israel’s New Base: Israel is moving to establish a foothold on the Red Sea as it prepares to confront key Houthi strongholds and safeguard maritime trade routes. The planned security presence builds on Jerusalem’s recent decision to recognize Somaliland, a breakaway region of Somalia, as an independent state. A base on Somaliland’s coast would enhance Israel’s ability to counter Iranian-backed proxies in Yemen. The expanding presence underscores how Israel is positioning itself as an increasingly important power in the Middle East and Red Sea basin.

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