Asian Markets Post Gains Despite Lingering Concerns Over Iran Conflict

Asia's Artificial Intelligence-Fueled Rally Masks Strains in Broader Market

Asia's stock market has seen a significant rally in recent weeks, with the region's tech gauge rising by nearly 10% since the US-Iran war began. However, this gain is largely driven by the artificial intelligence (AI) sector, which has propelled the region's tech gauge to an all-time high this week. In contrast, most other sectors remain under pressure, with consumer discretionary down nearly 10%.

The divergence underscores persistent concerns over higher energy costs for Asia's oil-importing economies and their impact on household spending and corporate profits. Strategists say the gap is likely to widen amid uncertainty over the Strait of Hormuz reopening, even as Asia's stock benchmark rebounds toward record highs.

Profit Expectations Diverge

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The divide is also evident in profit expectations. Earnings-per-share forecast for MSCI Inc.'s info tech sector has risen nearly 60% over the past three months, while estimates for the consumer discretionary sector have fallen by about 7%. This suggests that the AI sector is driving the market rally, while other sectors are struggling to cope with the impact of the war.

Robust chip demand lifted sales for chipmakers such as SK Hynix Inc. and Taiwan Semiconductor Manufacturing Co. in the first quarter. Regional tech hardware makers may see continued gains as major customers announce AI spending plans - Alphabet Inc. and Meta Platforms Inc. raised their outlooks for capital expenditures in reports before markets opened in Asia on Thursday.

However, other companies have begun warning of profit pressure from rising costs and supply-chain disruptions. Shares of Toyota Motor Corp. and Japan Petroleum Exploration Co. have fallen around 19% and 4%, respectively, since the war broke out amid such concerns.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

Uncertainty and Economic Damage

Outside of AI, there is a genuine absence of catalysts, and many companies' spending plans and margin outlooks remain on hold until there is greater clarity on the conflict. Authorities in Japan and Thailand have slashed growth estimates as elevated oil prices cloud outlooks. The high degree of fund flow concentration in AI is unlikely to be sustainable over the long term, according to Masanari Takada, a quantitative and derivatives strategist at JPMorgan Securities Japan.

A credible signal on easing tensions between the US and Iran may lift lagging sectors such as consumer, real estate and materials. However, economic damage due to the war fallout will not unwind quickly. Any slowdown in capital spending by global hyperscalers could derail tech-driven gains, while doubts over the payoff from heavy AI investment have resurfaced after reports that OpenAI fell short of its targets for user growth and revenue.