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Nvidia CEO Jensen Huang forecast the company will sell $1 trillion of its most advanced chips by the end of 2027.
Credit: David Paul Morris / Bloomberg via Getty Images

Key Takeaways

• Taiwan Semiconductor Manufacturing Co. reported record quarterly revenue on Friday, the latest sign that AI chip demand remains hot.
• Strong demand has buoyed the shares of chip manufacturing equipment suppliers this year, while AI chip designers like Nvidia and Broadcom have lagged.

AI chips are still in high demand. Earnings reports in the next few weeks will show if that's good enough for investors.

Taiwan Semiconductor Manufacturing (TSM), the world’s largest contract chipmaker, on Friday reported record quarterly revenue of approximately NT$1.13 trillion, or about $35.6 billion, a 35% increase from last year. TSMC is one of the only companies in the world capable of manufacturing the advanced semiconductors that power frontier artificial intelligence models, and its revenue has soared amid the AI data center boom. 

TSMC’s revenue report is the latest sign that, more than three years after the release of ChatGPT, demand for AI chips remains red hot. Nvidia (NVDA) CEO Jensen Huang, at a company conference last month, forecast its two most advanced offerings, Blackwell and Vera Rubin, would generate $1 trillion in sales by the end of 2027. 

Why This Matters to Investors

Spending on artificial intelligence has been vital for the economy and the stock market over the past three years. Evidence that spending remains strong should support the AI rally, but the leaders that rally could change as investor sentiment shifts and new bottlenecks emerge.

Many of Nvidia’s biggest customers are developing their own chips to keep up with demand while controlling costs and reducing their reliance on Nvidia hardware.

Custom chip designer Broadcom (AVGO) announced earlier this week it had extended its agreement to make specialized AI accelerators for Alphabet’s (GOOG) Google. Amazon (AMZN) CEO Andy Jassy on Thursday wrote that the company’s AI chip business was “on fire.” Tesla (TSLA) CEO Elon Musk last month announced plans for his companies to construct a chip manufacturing facility, saying there was no other way to get all the chips they need.

The race to develop and produce sophisticated semiconductors has been a boon to the semicap equipment industry, which develops the machines that fabricators like TSMC use to make semiconductors. Chip makers and designers including TSMC and Micron (MU) expect to spend significantly more on manufacturing capacity this year due to booming demand. Wall Street analysts expect wafer fabrication equipment sales to top $170 billion next year, more than the industry itself has forecast, according to a Deutsche Bank note Friday. 

Wall Street’s expectations have followed revenue estimates higher. Semicap shares are up about 50% since the start of the year, putting valuations about 50% above the long-term average, according to Deutsche Bank. The run-up has created “an admittedly difficult setup into earnings,” which will be reported over the course of the next month. But Deutsche Bank expects the urgency of the AI buildout to remain a strong tailwind for companies like Applied Materials (AMAT), Lam Research Corp. (LRCX), and AMSL Holdings (ASML). 

“While the bar is high, we believe fundamental momentum will remain in semicaps’ favor in the coming quarters, helping the sub-sector to continue to outperform in 2026,” the analysts wrote. 

The major AI chip designers—Nvidia, Broadcom, and Advanced Micro Devices (AMD)—have lagged the broader market so far this year, which Deutsche Bank attributes to concerns about Big Tech’s AI investments and when they will pay off. They argue that the more pressure investors put on hyperscalers like Microsoft (MSFT), Alphabet, and Meta (META) to prove their data centers are profitable, the greater the risk they rein in their spending on chips. 

That risk has lowered the bar for AI chip suppliers heading into their earnings reports over the next month, but Deutsche Bank notes the stocks may struggle to overcome those concerns. Its analysts, the bank wrote, "remain selective" with their AI recommendations, favoring “share-gaining leaders” like Broadcom.

“We believe the valuation compression across many of the AI-enabling names has become excessive, but we fail to find apparent semiconductor company-produced catalysts to reverse this trend,” they wrote, noting that strong results, splashy deals, and Nvidia’s developer conference all failed to shift investor sentiment earlier this year.

While commodities prices are stabilizing, consumers may not see relief at the pump as quickly.
Credit: Zhang Fengguo / Xinhua via Getty Images

Key Takeaways

• The record-breaking increases in gasoline prices during the Iran war will be slow to unwind, if at all, even if everything goes perfectly.
• Fuel prices follow oil prices, which could retreat in the coming months if and when ships resume carrying oil out of the Persian Gulf.
• Motorists can expect prices to fall by a few cents per day if this week's ceasefire holds.

If you've had to tighten your budget to pay for $4-a-gallon gas, don't expect to relax any time soon, despite this week's ceasefire in the Iran war.

Friday's Consumer Price Index data showed exactly how much surging gasoline prices pushed up the cost of living for U.S. households in March. The price of motor fuel rose 21.4% in a single month, a record-high increase in data going back to 1967.

The squeeze could linger for months. As the old saying goes, gasoline prices have a habit of rising like a rocket and falling like a feather. Economists and other experts say oil prices will be slow to drop after their initial retreat following the ceasefire news. Fuel prices are likely to retreat even more slowly, assuming tensions ease in the Middle East and ships resume sailing through the Strait of Hormuz.

"Even if a long-lasting deal to end the war is reached and the Strait of Hormuz is fully reopened, it would take months for oil, gasoline, diesel and other commodity supplies to snap back to pre-war levels and thus for prices to settle back to pre-conflict levels," Kathy Bostjancic, chief economist at Nationwide, wrote in a commentary.

What This Means For The Economy

The economy must deal with the fallout from the oil shock for a long time to come. It could have ripple effects on inflation, consumer spending, and other major barometers of the health of the economy.

Nationwide, the average price of a gallon of regular gas fell two cents to $4.15 a gallon Friday, remaining well above the Feb. 28 price of $2.98, according to AAA. If tensions continue to ease in Iran, relief for drivers will come in similar drips and drabs, according to Patrick DeHaan, head of petroleum analysis at GasBuddy.

"Wholesale prices are volatile, but retail prices are averaged," he wrote on the X social media platform this week. "Stations raise prices quickly when costs jump to avoid losses, but when costs fall, they lower prices gradually as they sell through higher-priced inventory. So instead of prices bouncing wildly, what drivers see is actually a slower climb—and an even slower descent."

Falling fuel prices are far from guaranteed. Gas prices follow the cost of the oil from which it's refined, and the supply of that oil has been seriously restricted since the war began. The key to the disruption is the Strait of Hormuz, the crucial waterway that normally carries about 20% of the world's oil supply.

Ship traffic slowed to a trickle when the war broke out and still hadn't fully resumed as of Friday, according to news reports. That means higher oil and gas prices for the duration, however long that is. And once ships get moving again, it could take months for supply chains to recover.

"The duration of this shock remains uncertain, but even if the conflict were to end tomorrow—which is unlikely—it would take weeks or months for oil flows to normalize and much longer for the natural gas market to return to equilibrium,' Benjamin Tal, an economist at CIBC, wrote in a commentary. "By all accounts, we are in the midst of a significant oil shock."

So What's Next For Oil Prices?

Forecasters at Goldman Sachs laid out three scenarios for oil prices in the coming months.

In the best case, the war ends, traffic recovers, and crude oil prices fall, averaging $80 a barrel in the fourth quarter of the year, down from the current level of $96 as of Friday afternoon, according to the Brent international benchmark.

Should reopening the strait take another month, oil would average $100 a barrel. If things go even worse than that, oil could shoot back up to $115 a barrel average in the fourth quarter, the same as it was at the height of the crisis, according to an analysis by Daan Struyven, co-head of global commodities research at the investment bank.

Investors' take on markets on the moment suggests bullishness and optimism.
Credit: Spencer Platt / Getty Images

Key Takeaways

• Investors are celebrating early even as an end to the war in Iran remains uncertain.
• Stocks are up for the week, the VIX is down, and prediction markets bettors put money on a return to normal by the end of June.

Investors are buying the de-escalation story.

The S&P 500 rose for seven straight days, only Friday snapping a winning streak U.S. stocks hadn't otherwise seen all year. Geopolitical tensions have eased, with the U.S. and Iran agreeing to a tentative ceasefire and headed into weekend negotiations, and investors are apparently betting on a return to normal soon—and celebrating early.

The Cboe VIX, also known as Wall Street's fear index, closed below 20, signaling stability. The U.S. dollar, a haven asset, fell, and risk assets, including bitcoin, are up. Prediction-market bettors see the end of June as the likeliest timeline for lower crude oil prices and the U.S. ending military operation in Iran—just over two months away.

WHY THIS MATTERS TO YOU

Investors appear to be taking the investing maxim "buy the rumor, sell the news" to heart amid a tentative ceasefire between the U.S. and Iran. Market experts also appear to be positive, but one major hurdle before the "all clear" would be what the Federal Reserve does in the coming months.

Risks, of course, remain—among them whether the Strait of Hormuz actually reopens, and how the Federal Reserve, expected to transition to a new chair, will handle stubbornly high inflation. But for now, it seems, many investors are comfortable with them.

"The markets trade in the future," Mike Wilson, Morgan Stanley chief investment officer and head of U.S. equity strategy, said in a Thursday interview with CNBC. "Maybe we might go lower here or there, but you know, the idea of putting the capital to work is not to call the exact day but call it when there's good risk/reward."

Prediction market bettors appear to be calling it. They place the highest odds, at 80%, that President Donald Trump announces an end to military operations against Iran by June 30. And they set a nearly 75% probability that crude oil prices will sink to $85—a level last seen in mid-March—or lower by the end of June.

Where crude prices go "will depend on the extend and speed of any recovery in traffic" at the Strait of Hormuz, according to Goldman Sachs. The firm's commodities strategists have not changed their medium-term forecasts for Brent, the global oil benchmark, to average $80 per barrel in the fourth quarter. That assumes traffic flow through the strait starts to rise over the weekend and for oil exports to return to pre-war levels over the next month, according to Daan Struyven, Goldman's head of global commodities research.

But that could change with events. "If the ceasefire doesn’t hold and the reopening of the Strait of Hormuz is postponed for a month, Brent could still average $100 per barrel in the fourth quarter of 2026 provided oil production in the Persian Gulf fully recovers," he said. If things are worse than that, and there's a delay in the reopening, Brent prices could sit at $115 in the fourth quarter.

The "final hurdle" for investors to get past is the transition at the Federal Reserve, Morgan Stanley's Wilson said. Once the markets know who the new Fed Chair will be, investors will be able to look forward to the second half when the central bank will likely be more willing to cut rates as indicated by Trump nominee Kevin Warsh.

Traders aren't betting on rate cuts as decisively as they are on oil. Estimated probabilities of the Federal Reserve lowering benchmark rates by a quarter of a percentage point in September, are currently around 7%.

Another thing to keep in mind: While Macro Risk Advisors' John Kolovos on Thursday told CNBC there are "high odds the market low is in," stock corrections that happen in mid-term election years tend to occur in the back half, closer to September and October.

This article has been updated since it was first published to reflect the close of trading Friday.

Lumentum shares have more than doubled in value since the year began
Credit: Cheng Xin / Getty Images

Key Takeaways

• Nvidia-backed photonics and laser maker Lumentum said it's seeing booming demand from AI hyperscalers.
• CEO Michael Hurlston said the company could soon sell out of its production capacity through 2028.

Photonics and laser maker Lumentum's CEO said it's seen such strong AI-driven demand that it could sell out.

CEO Michael Hurlston told Bloomberg that the company, which counts AI chip leader Nvidia (NVDA) among its backers, could soon sell out of its production capacity through 2028, as Big Tech companies allocate "enormous" amounts of cash to the hardware needed for data centers. "There seems to be no end in sight," he said.

Shares of Lumentum (LITE) surged in early trading Friday following the comments, before pulling back in recent trading.

Why This Matters to Investors

The CEO's latest comments add to strong signals for Lumentum's outlook, and could point to more gains ahead for its stock.

Lumentum and many of its peers have seen their stocks surge in recent months as demand for their networking products has soared to connect equipment in AI data centers. Hurlston told Bloomberg there looks to be "a decent amount of sustainability in the cycle for at least five years."

Lumentum and Coherent (COHR) shares also got a boost last month after Nvidia announced investments in the companies and their stocks were added to the S&P 500.

With its recent gains, Lumentum shares up more than 140% this year, and 1,600% in the last 12 months.

Shares of Organon got a lift early Friday from a report of a possible takeover.
Credit: Sheldon Cooper / SOPA Images / LightRocket / Getty Images

Key Takeaways

• Organon shares surged Friday following reports India’s Sun Pharmaceutical made a bid for the women's healthcare company.
• Shares of Organon were down roughly 40% over the past year heading into Friday's session.

Organon shares are popping Friday on signs of a takeover deal.

Shares of the women's healthcare were recently 15% higher premarket following a report that India's Sun Pharmaceutical Industries submitted a binding offer to take over the Jersey City, N.J.-based firm. Shares of Organon entered the day down roughly 3.5% this year and were off some 40% over the past 12 months.

Organon (OGN) rose after Indian publication The Economic Times, citing "people in the know," said that Sun "has decided to proceed with a binding offer of $12 billion" for Organon. Organon has a market value near $2 billion, according to Visible Alpha, and an enterprise value above $9 billion.

Organon did not respond to Investopedia's request for comment in time for publication.

The Times said the offer brings Sun Pharmaceutical "to the final stages of its most ambitious overseas acquisition bid as it looks to become a branded and innovative drug-making powerhouse."

Organon in February reported 2025 revenue of over 6% billion, down 3% year-over-year, and projected similar sales this year.

Gas prices threaten to push up prices on all kinds of products as companies pass on higher transport costs.
Credit: Mario Tama / Getty Images

Key Takeaways

• Consumer prices rose 0.9% in a single month in March as the Iran war drove up gas prices.
• Energy commodities increased the most in one month since at least 1957 when the government began keeping track.
• Gas prices could ease in coming months if the Strait of Hormuz reopens.

Consumer prices rose at their fastest pace in years in March as the Iran war pushed up energy costs the most in any single month in history.

Consumer prices rose 0.9% in March from February, largely due to the spike in gas prices caused by the Iran war, the Bureau of Labor Statistics said Friday. It was the largest one-month increase since the post-pandemic burst of inflation in 2022.

That brought the Consumer Price Index to a 3.3% increase over 12 months, up sharply from a 2.4% annual increase in February and the most since 2024. The increase was in line with forecasters' expectations, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal.

The magnitude of the gas price hikes was unprecedented, even compared to previous energy crises. The price of energy commodities rose 21.3% in March, the largest one-month increase since at least 1957.

The CPI report highlighted the swift and significant impact of the war on household budgets. The closure of the Strait of Hormuz between Iran and Oman has restricted the flow of oil from Persian Gulf nations, leading to a surge in crude oil prices that has pulled gas and diesel prices along with them.

What This Means For The Economy

Whether the surge in gas prices is a temporary blip or leads to broader inflation and a serious drag on the economy depends on how long the Strait of Hormuz remains closed: the resumption of normal tanker traffic would push down oil prices and, by extension, fuel costs.

Average prices for gasoline and diesel have risen more than $1 since the war began, although the ongoing ceasefire has raised hopes that the strait could reopen and prices could ease in the coming days.

Core inflation, which excludes volatile food and energy prices, rose a more subdued 2.6% over the year, up from 2.5% in March and below expectations of a 2.7% increase.

Economists view core prices as a better predictor of the overall inflation trajectory, since food and gas prices can rise and fall dramatically for reasons unrelated to longer-term trends. So far, the high gas prices haven't led to a surge in core prices, although that could change as higher transportation costs are passed along through the supply chain.

"This won’t make consumers happy (as obviously they are buying groceries and filling up the tanks of their cars), but should give the economy some room to absorb the higher energy price shock," Chris Zaccarelli, chief investment officer at Northlight Asset Management, wrote in a commentary.

Indeed, household budgets are being squeezed by the gas price hike, especially for those on lower incomes, who must devote a larger share of their money to fuel. Many people will likely cut back on spending in other areas to afford gas, economists said. The lower demand could subdue inflation for some non-gasoline products in the coming months, Bernard Yaros, lead U.S. economist at Oxford Economics, wrote in a commentary.

The hot inflation report has implications for borrowing costs on all kinds of consumer loans. The Federal Reserve, anticipating an uptick in gas prices from the Iran war, has scaled back expectations that it will cut its key interest rate and lower borrowing costs later in the year.

The Fed has kept the fed funds rate at a higher-than-usual level to discourage spending and stifle inflation. That could change if the Iran ceasefire becomes a lasting peace and commerce returns to normal.

"A key wildcard in the outlook for both inflation and monetary policy is the duration and intensity of the Iran war, which still hasn't been resolved by the tenuous ceasefire," Yaros wrote.

Update, April 10, 2026—This article has been updated after publication with additional data and commentary from experts. It was first published April 10, 2026.

News of the day for April 10, 2026

Stocks ended Thursday higher after spending much of the morning in the red.
Credit: Charly Triballeau / AFP / Getty Images

Stock futures are little changed this morning after a volatile week.

Oil prices are stable as investors look ahead to weekend peace talks between the U.S. and Iran in Pakistan; March inflation data, due out today, is expected to show that soaring gas prices caused by the Iran war drove up costs across the economy; Taiwan Semiconductor Manufacturing Co. topped first-quarter sales estimates as the chipmaker continues to benefit from AI demand; and shares of Lumentum and fellow makers of optical networking hardware are rising after its CEO said it could soon be sold out of its entire production capacity through 2028.

Here's what you need to know today.

Futures Quiet Ahead of CPI Data, Iran Peace Talks

Stock futures are hovering around flat this morning as investors await news from Iran and the latest inflation data. Futures tied to the Dow Jones Industrial Average, S&P 500 and Nasdaq 100 were all moving modestly this morning, with the Nasdaq's rise of about 0.1% the most notable move. The three indexes posted another day of gains Thursday after spending the morning in the red because of concerns about the stability of the ceasefire in Iran. Gold futures are down 1% to roughly $4,770 an ounce, while the 10-year Treasury yield is up to 4.3% from 4.28% late yesterday. Bitcoin is hovering just below $72,000, where it has spent much of this week, briefly surpassing the $73,000 mark on Thursday.

Oil Holding Steady Under $100/Barrel as Investors Await This Weekend's Peace Talks

Crude oil futures are having a calm morning, recently little changed around $98 per barrel. Traders have been watching developments in Iran, including the still-low numbers of ships passing through the Strait of Hormuz and any indications about whether the current ceasefire will hold or fall apart before a long-term deal can be reached. Concerns about the ceasefire have included whether the strait would be fully reopened and ships allowed to pass safely through, and whether the deal would include a pause to Israel's attacks on the Hezbollah militia in Lebanon. Talks are scheduled to take place between Iranian and U.S. officials, including Vice President J.D. Vance, over the weekend in the Pakistani capital of Islamabad.

March CPI Data to Give Investors Look At How Iran War Impacted Inflation

Investors will get a look at the Iran war's impact on the U.S. economy this morning, with the Consumer Price Index for March scheduled to be released at 8:30 a.m. ET. The metric is expected to show that prices rose 0.9% in March, a number that has only been reached or surpassed in a single month 16 times since 1981. Prices are likely to have risen 3.3% year-over-year, putting inflation well above the Federal Reserve's 2% target thanks to the war driving gas prices higher. Yesterday, the Personal Consumption Expenditures index revealed that inflation remained stubbornly high before the war started in February. The inflation data will help inform the Fed's interest rate decisions as the central bank looks to balance bringing down inflation and supporting the job market.

TSMC Tops First-Quarter Sales Estimates on Sustained AI Demand

Taiwan Semiconductor Manufacturing Co. (TSM) is continuing to see strong demand as companies around the world look to the chipmaking giant for the semiconductors that are used to power AI data centers. The company reported March sales this morning, meaning its first three months of sales data for the year has been released, giving investors a look at TSMC's first-quarter sales before next week's earnings report. TSMC said it generated 1.13 trillion New Taiwan Dollars ($35.69 billion) in revenue in the first quarter, up 35% year-over-year and above the analyst consensus compiled by Visible Alpha. U.S.-listed shares of the chipmaker were up 2% ahead of the opening bell.

Lumentum Surging as CEO Says Company Could Soon Be Sold Out Through 2028

Lumentum (LITE) shares are jumping, poised to open at a new record high after comments from the company's CEO about the demand the company is seeing for its optical networking products. CEO Michael Hurlston told Bloomberg that big tech companies are allocating "enormous" amounts of cash to the hardware needed for data centers, and "there seems to be no end in sight." The executive said the Nvidia (NVDA)-backed company could be sold out of its production capacity through 2028 within the next two quarters. Lumentum shares were up 5% recently, with the comments also boosting shares of rivals in the space such as Corning (GLW) and Coherent (COHR).

Nvidia's Big Tech Clients Are Taking Aim at Its Dominance

Amazon CEO Andy Jassy suggested in his annual letter to shareholders Thursday that the company's chips business could be a game changer
Credit: Michael Nagle / Bloomberg / Getty Images

Key Takeaways

• Andy Jassy said Amazon's chip business is booming, and "will be much larger than most think," in the CEO's annual shareholder letter.
• Amazon, Google, Meta, and other Big Tech firms have been ramping up their own chip design efforts to reduce their dependence on Nvidia.

Amazon's AI chip business could be a game changer, according to its CEO.

Andy Jassy said the company's chips business is "on fire," and "will be much larger than most think," in the CEO's annual shareholder letter Thursday. That could change the economics of its cloud business, Amazon Web Services, Jassy wrote.

AWS, which accounted for nearly 60% of Amazon's (AMZN) operating profit last year, still relies on chips from Nvidia (NVDA), which has seen its sales surge as Big Tech companies clamor for hardware to build out their AI data centers.

Why This Is Significant

Amazon, along with several of its Big Tech peers, has been ramping up efforts to develop its own chips lately, in order to reduce its reliance on Nvidia. Those initiatives could erode the AI chip leader's dominance.

Jassy said Amazon plans to maintain its relationship with Nvidia, anticipating that some customers will continue to prefer running their AWS workloads on Nvidia's products. However, "having our own hotly demanded AI chip opens up many possibilities," said Jassy, including helping the company lower costs for itself and customers.

Jassy said Amazon expects its Trainium line of accelerator chips to save the company "tens of billions of capex dollars per year," along with "several hundred basis points of operating margin advantage" compared to relying on other companies' chips. The company in its latest annual report said its annual revenue run rate for its chips business was above $20 billion and growing in "triple digit percentages."

Amazon isn't the only major Nvidia client doubling down on its own chips. Elon Musk laid out plans in recent weeks for Tesla (TSLA), another high-profile Nvidia client, to build a terafab to make the chips its needs, along with SpaceX, xAI, and a bit of help from Intel (INTC). Alphabet's (GOOGL) Google and Meta (META), have also invested heavily in developing custom chips in recent years with help from Broadcom (AVGO).

Shares of Amazon jumped nearly 6% to lead gains on the Dow Jones Industrial Average Thursday, amid a broader market rally. Nvidia shares added about 1%. (For more from Investopedia on today's market moves, click here.)

CORRECTION: Amazon's chips business has an annual revenue run rate above $20 billion, according to the company. An earlier version of this article mischaracterized the business as "nascent."

Many of America's biggest software stocks plunged Thursday
Credit: CHARLY TRIBALLEAU / AFP via Getty Images

Key Takeaways

• Software stocks resumed their AI-driven slump on Thursday as investors grappled with Anthropic's announcement it had developed a frontier model so capable it's not safe to make public.
• Investors fear AI agents, which have shown they're exceptionally capable coders, could disrupt the lucrative software-as-a-service industry.

Software stocks plunged Thursday as investors grappled with the implications of increasingly capable AI models.

Shares of Palantir (PLTR), ServiceNow (NOW), and Intuit (INTU), three of America's largest software companies, dropped between 6% and 8% to rank among the S&P 500's biggest decliners, on a day when broader markets gained. Salesforce (CRM), which lost 3%, was the worst-performing stock in the Dow Jones Industrial Average.

AI startup Anthropic on Tuesday announced the development of Claude Mythos, a frontier AI model so powerful that it’s not being released to the public. The company indicated it's granted access to about 50 organizations so far, including leading cybersecurity firms, “so they can use the model to scan and secure both first-party and open-source systems.”

Why This Matters To Investors

This year's software stock rout has demonstrated how quickly investor sentiment—and potentially business models—can shift because of rapid changes in artificial intelligence capabilities.

Project Mythos, the company said, “reveals a stark fact: AI models have reached a level of coding capability where they can surpass all but the most skilled humans at finding and exploiting software vulnerabilities.” Anthropic researchers on Tuesday called the model “a step-change in [cybersecurity] vulnerability discovery and exploitation” and warned that in safety tests it demonstrated “a potentially dangerous capability for circumventing our safeguards.”

Project Mythos breathed fresh life into concerns that AI models could upend software-as-a-service, once one of the Wall Street’s favorite industries because of its high margins and reliable revenue streams. Those fears weighed on software stocks throughout the first months of the year, in what's been called the "SaaSpocalypse." Software stocks got some relief last month as investors turned their attention to the war in Iran and soaring oil prices, to which tech companies are less sensitive than others. 

Many investors will likely be looking to upcoming earnings reports and comment from tech executives to explain how incumbents are implementing AI internally and defending their businesses from AI native upstarts. Meanwhile, heavyweight AI startups Anthropic and OpenAI are widely expected to file for initial public offerings later this year or early 2027.

The iShares Expanded Tech-Software Sector ETF (IGV) on Thursday afternoon was down 4% to its lowest level since late 2023. The fund has lost nearly 28% of its value since the start of the year.

Jerome Powell, chairman of the US Federal Reserve, during a moderated conversation at Harvard University in Cambridge, Massachusetts on March 30.
Credit: Mel Musto / Bloomberg via Getty Images

Key Takeaways

• Rising inflation expectations could lead to higher prices and wage demands, creating a self-reinforcing cycle.
• The Federal Reserve is closely monitoring inflation expectations but may face challenges in returning to its 2% target.
• Markets remain calm, viewing the current price shock as temporary, but near-term inflation risks persist.

Despite a newly agreed-to ceasefire in the Iran war, the risks are rising that price-shocked consumers and businesses won't expect the inflation spike to be temporary.

Higher inflation expectations could become self-fulfilling, analysts say, as businesses pass on higher expected costs to customers and employees’ requests for raises turn into an unhealthy spiral.

The fear is a replay of the 1970s, when years of punishing inflation ended only after the Federal Reserve strangled the economy with nearly 20% interest rates.

Markets see little risk of inflation spiraling out of the Fed’s control this time and forcing drastic Fed hikes, especially after this week's ceasefire. But analysts don't expect a quick return to normal for oil prices or other commodities facing supply constraints, either.

That could force inflation expectations higher, as the public expects even more delays in a return to the Fed’s 2% inflation target. Inflation reached as high as 9% in 2022 before settling to 2.4% before the war started. 

“The longer the Fed doesn't get inflation back to target, the more likely it would seem that people start to believe they're not able or willing to do so,” said Ryan Swift, chief U.S. bond strategist at BCA Research.

Why This Matters to You

Persistent inflation expectations can keep prices rising longer, affecting borrowing costs, wages, and investment decisions. This raises the risk of prolonged economic pressure for consumers and businesses.

It’s a risk that Fed officials are monitoring, with some seeing bigger risks to inflation expectations than others. Most Fed officials, however, agree that a return to their 2% target “could be slower than previously expected,” according to minutes of their meeting in mid-March. 

The Fed “still has a lot of inflation-fighting credibility,” Swift said. That could help the Fed stick to its textbook response of looking past supply shocks, treating them as one-off episodes where inflation settles back to normal. With inflation risks contained, the Fed could focus more on keeping interest rates lower to prevent rising unemployment if growth takes a hit.

But that playbook is scrambled if inflation expectations become unmoored. 

“That’s the critical problem the Fed needs to and wants to avoid,” Swift said.

A 2% Anchor?

The Fed’s ability to look past supply shocks relies on the assumption that inflation expectations are “anchored” near the Fed’s 2% target. 

That may well hold true among professional economic forecasters, but consumers have seen a “dramatic deterioration” in their near-term inflation expectations in recent years, according to a study from Cleveland Fed economists.

In March, consumers anticipated inflation of 3.8% in the coming year, well above the 2.3% to 3% range they anticipated in the two years leading up to the pandemic, according to a long-running University of Michigan survey.

Indeed, inflation expectations from consumers and businesses have been “quite unanchored,” said Olivier Coibion, a University of Texas economist who co-wrote a new book on why those expectations matter. 

That’s one reason why the price spike after the pandemic and Russia’s invasion of Ukraine shouldn’t have been too surprising, he argued. Now, the public’s still-high inflation expectations are getting hit with another shock.

That’s a parallel to the 1970s, Coibion said, when a spike in oil prices after the OPEC oil embargo in 1973 was followed by another shock to markets from the Iranian revolution in 1979.

“The risk of inflation surging again is extremely high,” he said. “In a way, this looks so much like the 1970s.”

Watching ‘Very, Very Carefully’

The Fed is watching inflation expectations “very, very carefully,” Fed Chair Jerome Powell said last week, particularly since inflation never returned to 2%.

“It’s been a while, and we’re very mindful of that fact,” Powell said.

But he appeared relatively calm, saying inflation expectations “appear to be well anchored beyond the short term,” Powell said. The Fed can afford for now to “wait and see” the war’s impacts on the economy, he said. 

That’s helped affirm markets’ views that the Fed will stay on hold this year. Markets now see a slight chance of a rate hike, a contrast to the couple of rate cuts that traders were expecting before the war began.

The bond market doesn’t seem alarmed about inflation, either, suggesting investors view the price shock as short-lived. One market-based measure, which reflects inflation expectations for five to 10 years from now, is at 2.10% and thus close to the Fed’s 2% goal.

At least one Fed official has warned against reading too much into those measures. Kansas City Fed President Jeffrey Schmid said recently he takes “little comfort” from longer-term measures staying subdued.

Their calmness reflects “the earned credibility of the Fed and the belief that monetary policy will keep inflation in check,” he said.

“It is now our job to follow through with policy actions that validate those expectations,” he said.

Near-Term vs. Long-Term Expectations

The Fed should be wary of over-emphasizing the stability of long-term inflation expectations if near-term ones keep climbing, according to Joe Brusuelas, chief economist at the accounting firm RSM US LLP.

“We think that investors should not repeat the same mistake that was made during the pandemic, when the Fed and others discounted shorter-term inflation expectations in favor of longer-term expectations,” he wrote.

Indeed, what matters for business price setting isn’t their long-term inflation expectations but the costs they anticipate in the year ahead, Coibion argued in a paper last year.

And after the post-pandemic inflation spike, many businesses learned it’s safe to raise prices when their competitors do.

“That's going to lead them to be very willing to pass on the cost increases that they're going to experience into their prices,” Coibion said.