Moneycontrol Pro Weekender | A week of second thoughts

As oil cools and AI balances on a razor’s edge between boom and bubble, the markets are left guessing which way the chips will fall

Crude oil

Dear Reader,

The big question on investors’ minds this week was whether, now that crude oil prices have fallen back to pre-Iran-war levels, will stocks too rebound? As this FT story, free to read for Moneycontrol Pro subscribers, said: ‘Market participants seem to have decided that the US and Israel’s war with Iran is all over bar the shouting.’

Well, in the Indian markets, the Nifty is still down around 8% year to date, the INR is at 94.4 to the USD, against around 90 pre-war, and the 10-year Indian government yield is marginally higher than it was at the beginning of the year. One reason for the caution on equities is the fragile nature of the peace in the Middle East—Israel hasn’t moved out of Lebanon and Iran is firing at ships that don’t obey its orders while crossing the Strait of Hormuz. As the old saying goes, “The optimist thinks this is the best of all possible worlds. The pessimist fears it is true.”

But that’s far from being the only concern. The much scarier question that popped up in the markets this week was—is the AI bubble about to burst? The Nasdaq has been extremely choppy, while the Korean stock market index, weighted heavily in favour of AI darlings Samsung and SK Hynix, has been whipping up and down like a penny stock.

The AI trade was boosted by Micron’s results this week, which beat estimates hands down, while its guidance for the current quarter blew past the Street’s estimates, giving AI investors some real earnings to lean on. In a special question posed in the survey of global fund managers by Bank of America earlier this month, investors were asked about the current stage of AI stocks. Fifty-six percent of fund managers said AI stocks were in the “Boom” stage, 21% the “Euphoria” stage, 9% the “Profit-taking” stage and, bravely, zero percent said the “Panic” stage. The Micron results support the boom thesis, and while “The market can stay irrational longer than you can stay solvent” remains the most overused line on Wall Street, this week offered a variation: the US market can stay concentrated longer than investors can stay comfortable.

The survey also found that 28% of those surveyed said an ‘AI bubble’ was the biggest tail risk, while 34% of those polled said it was ‘second wave inflation’.

That brings us to AI-generated inflation, which was flagged by Apple increasing the prices of MacBooks and iPads due to rising prices of memory chips. The massive infrastructure buildout on account of AI has raised demand for materials such as copper and memory chips and energy. US inflation is already high, at 4.1%, more than double the Fed’s target. If AI infra spending remains robust, as the Micron results show, will it further boost inflation and therefore force up interest rates? That’s another thing for the markets to chew on, especially with the June Flash PMI for the US signalling faster growth and elevated inflation.

At the same time, there’s also this terrible fear of missing out (FOMO). As American economic historian Charles Kindleberger said, “there is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.” What if the Bank of America survey, which said this is not a ‘big top’ for risk assets but merely investors taking “summer chips” off the table, is right? What if the AI trade still has room to run? That is why the BofA survey said that investors were ‘steadfastly bullish’, albeit slightly less so than in May.

But surely the doubts about the AI trade should benefit markets like India, which do not have the AI label and are thus well-positioned for a rebound? Add to that the lower oil prices and the gains in the Rupee, and there’s a case for FIIs to return to India. Indeed, economists are busy pencilling in higher growth rates and lower inflation. Goldman Sachs, for instance, has raised its India GDP forecast by 0.3 percentage points to 6.8%, lowered its retail inflation forecast by 0.2 percentage points to 4.4% year-on-year and lowered the current account deficit prediction by 0.2 percentage points to 1.1% of GDP.

At the same time, when global investors become risk averse, they often reduce exposure across emerging markets, including India. This article asked that, with India caught in the AI crossfire, what should investors do?

AI is about far more than markets and our columnist Prosenjit Datta wrote that, after Anthropic’s decision to disable Claude Mythos 5/Fable 5 access for all non-US clients, ‘India needs a sovereign technology mission, not merely an AI mission. It needs to have home grown alternatives in every area of technology – not merely a customer settling for what other countries allow it to access.’ The Chief Economic Adviser said that in this era of AI, it’s time to shed the aura of MBAs and software jobs, and it’s time we placed greater value on trade skills such as plumbing, electrical work and carpentry–that is not going to go down well with our middle classes. As for IT services firms and consultants such as Accenture and TCS suffering from AI, this FT story says the selldown underestimates their ability to fight back.

The Indian markets also have El Nino to worry about, although, thankfully, the monsoon appears to have revived recently. We looked at the lessons from earlier droughts in 2009, 2014 and 2015 and concluded that the broader macroeconomic impact may remain manageable unless rainfall deteriorates sharply in the months ahead. Here’s our detailed analysis of which sectors and stocks could feel the monsoon shock.

The benefit from the lower oil prices should mostly have been priced into the markets by now. A Jefferies note points out that ‘MSCI India has rebounded 10% from its Mar’26 lows, following an 11% correction from the pre-Middle East conflict levels in Feb’26. However, the valuations at 20x are close to 10Y average and 72% premium to MSCI EM although EPS growth is lower than EMs. Going ahead, with the equity supply likely to rise and the chances of a potential moderation in the domestic flows and unlikeliness of FPI flows to reverse in a meaningful way near-term, pose risks to the broader market returns.’

As regards the most important question on everyone’s minds—the winner of the football World Cup—the BofA survey found that 22% of the global fund managers favoured Spain, 19% France, 8% England, 8% Brazil, 8% Argentina, 6% Portugal and 3% Germany. Most will be wrong, but will no doubt claim victory in their year-end letters.

Cheers,

Manas Chakravarty

In case you missed them, here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity, and forex markets:

Stocks

Shaily Engineering, TMPV steps on the accelerator, but JLR remains a speed bump, Cement sector, Satin Creditcare, Exide Industries, ION Exchange, Landmark Cars, Nocil, Waterways Leisure Tourism IPO, Bharat Dynamics, Voltas

Markets

MTF book hits all-time high, soars 65% in May as retail investors step up leveraged bets

Are gold, silver dead as investments?

Why SEBI’s regulatory tightening has not helped in reducing losses for traders

Financial Times

Rate cuts don’t matter if banks don’t pass them on have options, none of them good

Citadel: the hedge fund that became an energy giant

Why sinodollars outweigh the petroyuan

Companies & Sectors

Office REITs, the emerging bright spot in India’s real estate, Meta’s CRED play could shake up India’s fintech space, but can it bring in profits? From weak order flows to falling construction, road sector woes are rising, Max Healthcare, High airfare hits demand, Indian pharma’s record profit margins to lose some steam in FY27