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Posted June 2, 2026 at 10:00 am
With inflation on the upswing, U.S. Federal Reserve (Fed) Governor Lisa Cook is among those warning about the possibility of interest rate hikes.1 It’s a tricky situation for central banks. In our view, inflation has come in hotter than most observers were expecting, but not hot enough that markets should be worried about multiple rate hikes. That said, any bias toward potential rate cuts should probably come off the table at this stage. Our expectation is that the Fed will try to hold off as long as possible before raising rates, in hopes that the U.S.-Iran conflict will be resolved. If the Strait of Hormuz does re-open and oil prices come down, then the Fed has an out—they can call elevated inflation a temporary blip and potentially avoid any hikes. However, even once a resolution is reached, the problem won’t be solved overnight; oil prices will come down, but inflation has not yet been fully priced in, and knock-on effects will continue to persist for months afterwards.
Bottom line: Even after the Strait of Hormuz re-opens, inflation is likely to linger for three-to-six months, potentially pushing rate cuts into 2027.
Recently, there has been some debate over the optimal strategic allocation between software makers and AI stocks, the idea being that AI could eventually undercut software makers’ revenue base. Our evaluation is that AI will disrupt, period—and its impact will be felt not only in the software space, but throughout the economy. The question is: will this completely wipe out software companies as we know them? Probably not. Companies will try to adapt and change, and we think those with scale can probably be successful in finding new ways to generate revenue. That said, valuations will likely adjust, and that’s the aspect of the argument we agree with. We have already reduced our exposure to software in favour of memory companies, which stand to benefit more directly from AI-related capital expenditures (CapEx). But that doesn’t mean we won’t come back to software eventually—just that we’ll wait until valuations get more attractive, which is starting to happen now. This debate is also a reminder of how quicky the AI space can change. A year ago, we weren’t talking about software as collateral damage from AI. A year from now, the focus may change again, so investors need to be attentive.
Bottom line: At this stage, we would probably not be long-term buyers of software stocks. However, given the uncertain environment, we would consider them in a shorter-term tactical trade.
Last week, markets continued to receive conflicting signals on the U.S.-Iran conflict, with military action intensifying before word emerged on Thursday that the two sides could be nearing an agreement to re-open the Strait of Hormuz.2 The conflict is dragging out longer than investors anticipated, and while markets have remained resilient, we think they may be a bit in too optimistic; the last time the U.S. and Iran appeared to be close to a deal, hopes were dashed when military strikes ramped up again, and that could happen again. The longer the conflict persists, the greater an impact elevated inflation will have on companies’ input costs and consumers’ pocketbooks. In encouraging news, oil prices have retreated to under US$95 per barrel3 over the past week, and U.S. consumers are receiving further relief in the form of tax rebates. Ultimately, we still think a resolution is in the cards, especially with the U.S. midterm elections coming up in November—but having short-term hedges in place is vital. Corporate earnings still look good, so we do not want to take our foot off the gas pedal entirely. However, hedging some of our U.S. exposure to protect against short-term volatility or further military flare-ups may be the wisest course.
Bottom line: While we do expect a resolution to the conflict at some point, for now, a cautious approach is warranted.
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Originally Posted June 1, 2026 – Is AI an existential threat to software companies?
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