Impact of Middle East Conflict on AI Stocks and Economic Stability

On February 28, 2026, military operations by the United States and Israel against Iran led to the effective closure of the Strait of Hormuz, a critical waterway for global oil transport. The Iranian Revolutionary Guard Corps declared the area unsafe for commercial navigation, resulting in a 70% drop in tanker traffic. Consequently, oil prices surged from approximately $65 to nearly $100 per barrel. This escalation prompted the Federal Reserve to maintain interest rates at 3.5%-3.75% during its recent meeting, citing the Middle East situation as a significant factor influencing its decision. Fed Chair Jerome Powell acknowledged the rising oil prices as a near-term inflation risk, which could complicate monetary policy moving forward.

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The ongoing conflict has created multiple pressures on companies within the artificial intelligence sector. Higher energy costs for data centers, increased discount rates affecting long-duration growth stocks, and broad market volatility are all contributing to a challenging environment for AI investments. As Brent Oil futures hover around $110 per barrel, investors are prompted to reconsider their portfolios, often instinctively shifting from AI stocks to oil majors. However, this approach may overlook the complexities of the situation.

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Investors are advised to focus on AI-adjacent companies that are structurally insulated from macroeconomic pressures. For instance, Modine Manufacturing, which has a five-year backlog of data center cooling contracts, demonstrates resilience due to its physical infrastructure commitments. Similarly, Clearfield, with zero debt and $157 million in cash, is well-positioned to navigate rising interest rates without financial strain. These companies are examples of how physical demand can stabilize performance amid market turbulence.

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Conversely, investors are encouraged to reassess their holdings in speculative growth stocks that lack earnings and rely heavily on anticipated interest rate cuts. The Federal Reserve's current stance indicates that such cuts are unlikely while the conflict persists. Additionally, data center real estate investment trusts (REITs) like Equinix and Digital Realty, which are capital-intensive and sensitive to rising energy costs, may face challenges in this environment.

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In light of the ongoing Middle East conflict and its economic ramifications, investors in AI stocks should adopt a more selective approach. Focusing on the physical layer of AI infrastructure—such as cooling systems, fiber optics, and contracted enterprise tools—can provide a more stable investment strategy compared to speculative software or GPU-dependent companies. The current geopolitical situation underscores the importance of understanding macroeconomic factors while navigating the long-term structural growth of AI infrastructure.

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• “The inevitable rise in inflation from a drawn-out conflict will force the Fed to raise interest rates rather than lower them to combat weakness in the jobs market.” — Jerome Powell, Chair of the Federal Reserve

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• “You do have to get more selective about which part of the AI stack you own.” — Investment Analyst

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While the Federal Reserve has indicated a wait-and-see approach regarding interest rates, some analysts speculate on the potential for rate cuts if inflation stabilizes. The exact impact of the Middle East conflict on long-term economic growth remains uncertain, with varying opinions on the resilience of different sectors within the AI market.

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