Global Stocks Rally as AI Optimism Returns and Middle East Oil Supply Risks Ease

Global stocks extended their rally on Tuesday as renewed enthusiasm for artificial intelligence combined with signs of improving oil supply from the Middle East to ease some of the pressure that has weighed on markets in recent weeks.

The MSCI global equity benchmark gained as investors responded to a sharp rebound in technology shares and indications that disruptions to energy flows could begin to ease. Oil prices fell as much as 3% to a two-week low before recovering modestly to around $97.60 a barrel.

The decline in crude prices followed two developments that raised hopes of improved supply. A senior Iranian official told Reuters that Tehran could reopen the Strait of Hormuz within seven days if the United States eased military pressure and lifted its blockade on Iranian ports.

Separately, three sources briefed on the matter said Saudi Arabia had restarted operations at its East-West Pipeline and could resume exports from the Red Sea port of Yanbu later Tuesday.

The developments matter because the Strait of Hormuz is a critical energy chokepoint. Any credible reduction in the risk of prolonged disruption can quickly change the market's assessment of oil supply, inflation and interest rates.

The improvement in oil markets provided support for bonds as well. The benchmark U.S. 10-year Treasury yield fell three basis points to 4.93%, moving further below the 5% level that has become an important focus for investors.

Technology stocks provided the other major source of support for global equities.

The recent surge in enthusiasm around AI was reinforced by the strong market response to Meta Platforms' Muse AI assistant, which was launched two weeks ago. Meta shares jumped more than 11% on Monday, their biggest one-day gain since April 2024, helping revive demand for companies exposed to the AI investment cycle.

AMD reached a $1 trillion market value, while Intel and Arm Holdings gained 12.2% and 17%, respectively.

European semiconductor stocks continued to benefit from the renewed optimism. The STOXX 600 rose 0.5% on Tuesday after gaining 1% in the previous session.

"This suggests that demand for costly AI tools is robust and worth the hundreds of billions of capex spent by the hyperscalers," said Kathleen Brooks, research director at XTB.

"If there is widespread adoption of Muse, it could add to demand for other AI tools, which could lift the AI sector, after a rough few months."

The rally comes after a period in which investors had begun questioning whether the enormous capital expenditure by major technology companies would generate sufficient returns. Warnings from leading AI executives about the risks associated with powerful models had also added to uncertainty around the sector.

The market response to Muse has shifted some attention back toward the commercial side of AI. The key question for investors is whether new AI products can generate enough adoption and revenue to justify the hundreds of billions of dollars being committed to data centers, chips and computing infrastructure.

That makes the performance of consumer-facing AI products important for the broader technology trade. Strong adoption could support demand throughout the infrastructure chain, while weak monetization would leave companies facing the challenge of maintaining enormous capital spending without comparable revenue growth.

Investors are also looking ahead to a meeting between U.S. President Donald Trump and Chinese President Xi Jinping later this week. Xi is due to arrive in Washington on Wednesday, his first visit to the U.S. capital in more than a decade.

Markets are watching whether the two leaders can extend their existing trade truce and establish a more stable framework for relations between the world's two largest economies. Any discussion of cooperation on artificial intelligence could also be significant for technology investors, although the outcome remains uncertain.

"For markets, the big question is what's going to happen when the current one-year trade truce expires in November, and whilst the general tone remains positive, there still isn't an agreement yet," Deutsche Bank strategist Jim Reid said.

The outlook for monetary policy remains a constraint on the rally.

Although falling oil prices reduced some immediate inflation pressure, investors continue to price in further interest-rate increases from major central banks. That limits how far bond yields can fall and keeps borrowing costs elevated for companies and households.

The Federal Reserve raised interest rates last week and signaled that its campaign against inflation was not finished, leaving open the possibility of further tightening. The Bank of Japan also raised rates last week to a 31-year high, although two dissenting votes and the absence of stronger forward guidance disappointed investors looking for a more aggressive tightening path.

The yen remained vulnerable as a result, with the dollar down 0.15% against the Japanese currency at 157.14 after earlier reaching a three-week high. Japan's authorities remain under pressure to contain the yen's decline, with markets watching for signs of intervention.

"FX intervention remains a blunt tool to prop up currencies, and without a forceful monetary policy response it will be difficult for Japanese authorities to rein in the selloff in the yen," said Matthew Ryan, head of market strategy at Ebury.

The market's reaction on Tuesday therefore rests on two separate but connected developments. Lower oil prices reduce the immediate threat of another inflation shock, while renewed enthusiasm for AI is restoring demand for technology stocks.

Analysts believe the chance of that combination supporting a sustained global rally will depend on developments in energy supply, the path of interest rates, and whether the latest wave of AI spending produces evidence of strong commercial adoption.