Iran War Hits Spirit, Pentagon Doubles Down On AI, And The Fed Is Now Talking Hikes

Markets closed Friday, May 1. DJIA 49,499.27, up 0.31%. S&P 500 7,234.15, up 0.35% (week: +0.9%). Nasdaq 25,114.44, up 0.9%. Russell 2000 2,856.22, up 2.01%. WTI at $101.94, off $3.13 on supply-shock commentary. Gold $4,629.90, down $15.20. 10-year 4.377%, 2-year 3.859%. Euro $1.1723, yen 157.07. The four stories that matter this morning.

Spirit fell. Fuel did it.

A1, top left. Spirit Airlines ceased operations Saturday morning after a $500 million federal bailout fell apart. Bondholders balked; Trump officials objected to deal terms. The real reason: fuel costs broke the discount-airline economic model.

American Airlines alone estimates $4 billion in additional fuel costs for 2026. United, Delta, and JetBlue are raising fares and cutting unprofitable routes. Gas hit $4.39 a gallon Friday—an unprecedented $1.41 surge in nine weeks, the steepest climb since the early 1990s. The Strait of Hormuz is closed. Refineries are strained. Summer driving season is coming.

What I'm doing: not yet adding airlines as a basket, but Southwest (LUV) is the last big domestic low-cost survivor and bears watching. When industry capacity contracts this sharply, the best-positioned survivor tends to win pricing power. The fuel headwind is real; I'm watching UAL and DAL for value only if Iran moves toward ceasefire.

Pentagon signed eight AI vendors. Anthropic isn't on the list.

A4, Pentagon news. The Defense Department closed contracts with OpenAI, Alphabet/Google (GOOGL), SpaceX/xAI, Microsoft (MSFT), Amazon (AMZN), Oracle (ORCL), Nvidia (NVDA), and Reflection AI for classified AI work. Defense Secretary Pete Hegseth called Anthropic CEO Dario Amodei an "ideological lunatic" after Anthropic refused Pentagon contracts on grounds that guardrails against domestic mass surveillance and autonomous weapons come first.

Reflection AI and Nvidia named explicitly because their open-source models are preferred for national security applications. The Pentagon views vendor lock-in as a China-risk factor.

What this means for the book: the AI builder sleeve gets reinforced again. GOOGL, MSFT, AMZN, ORCL all added/reinforced. NVDA stays reinforced—Defense prefers open-source hardware, not walled-garden silicon. And the derivative play: data-center power. Vertiv (VRT), Eaton (ETN), Cummins (CMI)—eight vendors building AI infrastructure means eight parallel power-demand expansions. Adding VRT at 2%; reinforcing ETN, CMI, Vistra (VST).

Trump just took EU autos from 15% to 25%.

A2, Truth Social announcement Friday afternoon. The EU never codified last year's trade agreement into law, so Trump invoked the escalation clause. EU auto exports to the U.S. were already down 21% in 2025 from existing tariffs; 25% likely takes another big chunk out.

German automakers (Volkswagen, BMW), Italian luxury (Porsche, Ferrari)—all lose 25% price flexibility in the U.S. market. The U.S. domestic beneficiaries aren't suddenly more profitable. Rather, their European competitors just had their margin sanded away. Ford (F) and General Motors (GM) are moderate share-gainer plays. I'm reinforcing both at 2% each.

The Fed just stopped talking about cuts.

B10, Nick Timiraos column. Three Federal Reserve bank presidents released statements explaining their objections to rate-cut bias. The internal debate has shifted from "when do we resume cuts" to "conditions that would warrant rate increases." Powell leaves May 15; Kevin Warsh confirmation hearing week of May 11.

Implications for the book: short-end yields drift up, JPM/WFC net-interest-margin expansion thesis re-engages. Gold (GLD) gets the inflation-plus-monetary-pivot bid (gold down $15 today but the long-term thesis holds). The energy sector (XLE, COP, XOM) benefits from inflation staying elevated. I'm reinforcing JPM at 5%, WFC at 3%, GLD at 10%, Energy (XLE) at 8%.

YouTube owns the K-12 classroom now.

B1, Business & Finance lead by Omar Abdel-Baqui. Teachers integrate Google's video platform extensively in lessons. Google's quiet takeover of the curriculum layer has happened without much resistance. Adds another moat to GOOGL beyond search and cloud capex. A regulatory albatross down the line, but a revenue moat today. Held in AI/Cyber/Data sleeve.

What I think happens next

AI capex buildout extends through Q3. Pentagon procurement is now adding to private capex, not competing with it. Eight vendors building classified systems means demand front-loading. GOOGL, MSFT, AMZN, ORCL all get held or added on weakness.

Energy holds $90+ even with ceasefire talk. Strait is the swing factor. If it reopens, crude reverses. If it stays closed (likely through Q3), WTI floor stays at $90. Reinforcing XOM, COP, CVX. Energy sector (XLE) at 8% holds.

Small-cap rotation pauses on Fed hawkishness. Russell 2000 wins on rate cuts. The shift to "when do we raise" puts a cap on small-cap leadership. Watching IWM but not adding. Prefer individual domestic-revenue industrials (VRT, ETN) and financials (JPM, WFC) with hike upside.

What I think happens next

Defense spending boom continues. Pentagon AI procurement, Iran war, AUKUS shipbuilding pipeline, China threat escalation—all bipartisan. Five-to-ten-year tail wind.

Energy crisis persists into Q3. Strait closure, summer driving, refinery constraints. WTI floor holds; upside capped only if geopolitical breakthrough occurs.

Consumer trade-down accelerates on tariffs. PCE inflation, fuel shock, EU auto tariffs passing through. Defensive sector (WMT, COST, DG) benefits. Discretionary (retail ex-auto) compresses.