Citadel Securities says inflation, not growth, has moved to the top of investor concerns as a surge in capital expenditures driven by artificial intelligence activity reshapes market risks.
In a client note, Nohshad Shah, head of EMEA fixed-income sales at Citadel Securities, argued that a blend of more accommodative financial conditions, AI-related investment and a stronger labor market raises the possibility that the recent oil price shock could spill over into wider inflationary pressures.
Shah emphasized that market participants are underestimating the risk of inflation. He pointed out that financial conditions have in fact become more accommodative than they were prior to the outbreak of the Middle East conflict, and that short-term inflation expectations have risen.
The note also describes a notable shift in how investors view AI. Where the technology was once largely seen as a disruptive force that might displace parts of the economy, Shah wrote that AI is increasingly regarded as a lever for economic expansion. Supporting that view, he highlighted that the one-month correlation between semiconductor and software stocks has turned positive - a market signal that investors are now treating AI as a growth catalyst rather than a displacement risk.
On geopolitics and energy supply, Shah said the reopening of the Strait of Hormuz appears likely despite recent tensions involving Iran. He noted that President Donald Trump wants to resolve the conflict, and that the president's visit to China this week could help speed a resolution.
Shah also warned that the longer-term consequences of the recent turmoil could be material. He listed possible outcomes including higher energy costs, changes in alliances and greater pressure on energy-importing and lower-income economies.
Sector implications
- Energy - higher oil prices and sustained energy costs could weigh on importers.
- Technology - semiconductors and software stocks may reflect AI-driven growth expectations.
- Fixed income and broader markets - looser financial conditions combined with rising inflation expectations alter risk assessments.
Bottom line - Citadel Securities cautions that inflation risk has moved ahead of growth as the primary market threat, driven by AI-led capex, easier financial conditions and labor-market strength. The firm highlights both near-term and longer-term channels through which elevated energy prices and geopolitical developments could translate into broader price pressures.