Caught Between War and the AI Boom

The U.S. economy is caught in a crosscurrent. The conflict with Iran has created a classic oil shock, while booming AI investment is supporting growth and lifting asset prices.

The war has damaged energy infrastructure in the Persian Gulf region and shut down the Strait of Hormuz, which before the fighting carried about 20% of the world’s oil supply and a similar share of global liquefied natural gas exports. Since the war began, oil has jumped from roughly $70 a barrel to more than $100 at times. In the United States, gas prices are up about 50%, helping push inflation from 2.4% year over year in February to 4.2% in May. That squeeze is hitting households and has effectively ended hopes for near-term Federal Reserve rate cuts.

At the same time, the economy is benefiting from one of the strongest capital-spending waves in years. Real private domestic investment in information-processing equipment and software has risen more than 18% over the past year and reached 4.9% of GDP in the first quarter of 2026. Much of that spending is tied to AI infrastructure. Its near-term effect on GDP is muted because much of the equipment is imported, but the longer-run impact could be positive if it expands the nation’s productive capacity. Meanwhile, soaring technology valuations have lifted equity markets, with the S&P 500’s total capitalization rising by more than $5 trillion this year. That wealth effect is helping support consumption even as real income growth remains subdued.

So where does that leave the outlook? Balanced on two unstable pillars. The economy could still slip into recession if the current truce fails to hold and the strait remains closed long enough to trigger a deeper global shock. The second risk is that the AI boom disappoints—if massive capital spending fails to generate returns quickly enough, investors could reprice AI-related stocks, weakening both investment and wealth-driven spending.

If neither of those outcomes materializes, the more likely path is slower growth, not collapse. GDP growth may settle into a 2% to 2.5% range in the second half of 2026 and beyond. If the Strait of Hormuz does reopen, energy prices could stabilize, allowing inflation to cool and supporting the case that this is a temporary oil shock rather than a lasting inflation regime. If labor markets remain steady and real income growth improves, household demand could regain some footing. And if AI spending broadens beyond semiconductors and data centers into productivity-enhancing applications across the economy, the current investment boom may begin to generate more durable gains.