Oil prices push up inflation as chip company valuations soar

May gave investors a lot to think about: a potential agreement between the US and Iran, shifting central bank expectations, and continued strength in equity markets – particularly within technology. 

Early in the month, markets reacted strongly to reports of  a plan to de-escalate tensions between the US and Iran, which included discussions around the reopening of the Strait of Hormuz. This raised hopes that the key global energy checkpoint will resume operations, triggering a sharp fall in oil prices and a meaningful decline in bond yields. While negotiations are ongoing, progress has been uneven and, at times contradictory.

Iran conflict = inflation pressures 

Developments around the Strait of Hormuz remain central to the global outlook. Although there have been suggestions of a framework for restoring shipping flows, these have been met with mixed responses, highlighting the fragile nature of negotiations.

Even if a deal is reached, rebuilding inventories from current levels will likely keep oil prices elevated. This dynamic is already feeding into inflation. Global headline inflation rose in April, pushing annual inflation to 3.4%, while the 3-month annualised rate accelerated to 6% – the strongest reading since 2022. This reflects the lagged impact of higher energy prices as well as persistent services inflation in several regions.

No rate cuts on the horizon 

With inflation shocks dominating, the world’s major central banks have been forced to change their tone. At the start of the year, many investors expected a series of interest rate cuts as inflation pressures eased. However, those expectations have largely been pushed back. Instead, central banks are adopting a more cautious and data-dependent approach. While the sharp tightening cycle seen in 2022 is unlikely to be repeated – given rates are already at relatively restrictive levels – central banks are also reluctant to ease policy prematurely while inflation risks remain elevated.

In markets, expectations for further rate increases have moderated, particularly in the UK. But the overall message from policymakers remains clear: interest rates are likely to stay higher for longer than previously anticipated.

A landmark moment for chip firms

Away from the war, the technology sector delivered an attention-grabbing headline. Two companies that make the memory chips powering artificial intelligence (AI), SK Hynix and Micron, both crossed $1 trillion stock market valuations for the first time. SK Hynix shares more than doubled this year, while Micron reached the $1 trillion mark just 48 days after hitting $500 billion – faster than Amazon, Meta, and Tesla managed the same milestone.

Demand for their specialist chips from AI companies has been relentless, and neither business has been able to make them fast enough – giving both the ability to charge higher prices and grow profits quickly. 

Opportunities amid uncertainty 

Developments around the Strait of Hormuz will continue to play a key role in shaping the direction of energy prices and inflation, and therefore central bank decisions.

Against this backdrop, the resilience of economic data and continued strength in corporate earnings provide an important buffer for equity markets. Structural growth themes, particularly AI, are also likely to remain a key source of support.

For investors, the outlook reinforces the importance of maintaining a long-term perspective. While short-term uncertainty, particularly from geopolitics, is unlikely to disappear, the combination of steady growth and strong earnings supported by AI investment is creating opportunities.