Risk-on rally fades as oil volatility and Iran tensions threaten market gains driven by lower yields and inflation expectations.
Sectors & Industries
June 1, 2026
Table of Contents
For decades, the post World War United States built a military optimized to defeat other national militaries through overwhelming size and superiority. The result was a force centered on aircraft carriers costing $13 billion, destroyers costing $2 billion, fighter jets costing $80–100 million, and interceptor missiles costing millions of dollars per shot. The Iran conflict demonstrated that future warfare will be governed by economics more than raw military power.
Iran and its proxies repeatedly employed inexpensive drones, missiles, fast attack craft, cyber capabilities, and decentralized networks to challenge systems that were hundreds or thousands of times more expensive. A drone costing $30,000 can force the launch of an interceptor costing millions. A swarm of $5,000 drones can threaten naval assets worth billions. The question is no longer whether a weapon works, but whether it can be deployed at scale and at a sustainable cost.
This realization is reshaping U.S. military doctrine. The Trump administration's "Drone Dominance" initiative aims to field more than 300,000 low-cost attack drones by 2027, while simultaneously expanding domestic drone manufacturing capacity and reducing unit costs of missiles via contracts with Anduril. The programs reflects a recognition that the United States cannot afford to fight future wars by repeatedly using million-dollar missiles to destroy inexpensive autonomous systems. Instead, the objective is to create a force structure built around mass-produced, disposable, AI-enabled platforms measured in the hundreds of thousands rather than the hundreds.
The conflict also exposed the vulnerability of centralized infrastructure. Power plants, communications networks, logistics hubs, ports, and data centers are now military targets. Future resilience will require decentralized power generation, microgrids, distributed communications, hardened networks, and redundant systems capable of operating even after significant disruption. National security and infrastructure policy are becoming increasingly intertwined. Civilian infrastructure that supports military operations, e.g. data centers, power, water, are now military targets requiring protection.
Artificial intelligence emerged as the force multiplier that makes this new model possible. AI enables autonomous reconnaissance, precision targeting, drone swarm coordination, missile defense, logistics optimization, and battlefield decision-making at machine speed. Systems such as autonomous drone swarms, AI-assisted targeting, laser weapons, and next-generation missile defenses represent the beginning of a transition from platform-centric warfare to network-centric warfare. And the first humanoid robot for combat operations i.e. a Terminator, was recently revealed.
The war also highlighted the growing importance of cheap countermeasures. As traditional stockpiles began getting low, The U.S. and Israel both deployed laser weapons for the first time for destroying drones at a cost of about $5 per shot. Quick to see and adapt to the limitations of these weapons in being unable to fire through smoke, fog, clouds, and air particles, the Israelis are modifying the Lockheed Martin F-35 fighter jets with laser weapons automated with AI targeting systems. By flying over the fog, cloud, and smoke, where the air is thinner, the lasers can destroy missiles and drones from up to 6 miles away at the speed of light for almost zero cost per shot.
As a major partner and military vendor for Israel, the U.S. will undoubtedly have this capability in hand as well soon. Such battlefield improvisations and evolutions are happening in real-time, supported by an administration known for moving exceptionally fast to solve problems - a philosophy referred to as "Trump time" in Washington.
Viewed through this lens, the Iran conflict may have provided the United States with a critical warning and training before a potential confrontation with a peer competitor such as China. It revealed that future wars, like WWII, will primarily be determine by manufacturing capacity and speed, not by size. The side that can produce the most drones, robots, and projectiles will likely win. And today, it's not the U.S.
The most widely cited U.S. Navy intelligence estimate is that China possesses roughly 200–230 times America's shipbuilding capacity and 5 times the drone making capacity.
In that sense, the Iran conflict may ultimately be remembered as the moment the United States recognized that the future of military power lies not in building a few extraordinary machines, but in fielding vast networks of intelligent ones and countermeasures for them. With a $trillion dollar budget, the war in Iran is adding another $trillion in capital expenses to the $trillion being spent by major companies to build better AI - doubling down on the investment.
Each month, we break down the emerging short and long-term software and hardware beneficiaries of all of this capital in our Level 2 trades. It's a lot to unpack, but we are in the early innings of the next industrial revolution.
For decades, investors primarily focused on economic growth, interest rates, and corporate earnings. Increasingly, however, some of the biggest market-moving developments are coming directly from Washington.
For decades, politicians controlling the U.S. believed China and Russia would become softer, more capitalistic societies and thus more intertwined and reliable trading partners. Over the past three decades, the United States outsourced a substantial portion of its industrial supply chain to Asia, particularly China. While America retained many high-value activities such as aerospace, defense, software, semiconductor design, and advanced manufacturing, it lost significant capacity in consumer electronics, shipbuilding, batteries, pharmaceuticals, rare-earth processing, and industrial components. The U.S. share of global manufacturing output fell from roughly 25% in 1990 to about 16% today, while China's rose from roughly 3% to more than 30%.
In many sectors, 50–90% of the production ecosystem—including suppliers, assembly, materials processing, and component manufacturing—moved overseas. The result was lower costs and higher corporate profits, but also the transfer of a large portion of America's industrial capacity and supply-chain resilience to foreign nations, creating strategic vulnerabilities that are now driving efforts to reshore manufacturing through automation, AI, robotics, and industrial policy.
COVID-19 showed the fatal flaw in this approach. When India banned exports of pharmaceutical ingredients needed to make life-saving medicines and China prevented export of N95 masks and other supplies, Trump realized the manufacturing economies had too much leverage over the U.S. Now, with feverish pace, the administration is trying to rewire the U.S. economy to eliminate dependence on foreign nations.
Over the past year, the U.S. government has steadily expanded its involvement across a growing list of strategic industries. The administration has already taken stakes or provided major support for companies tied to semiconductors, critical minerals, and domestic manufacturing, including Intel (INTC), Trilogy Metals (TMQ), Lithium Americas (LAC), and MP Materials (MP). These investments are designed not only to generate returns but also to secure supply chains that policymakers increasingly view as critical to national security and economic competitiveness.
The trend continued this month with quantum computing.
Officials announced plans to provide roughly $2 billion in funding support to quantum computing companies while taking minority equity stakes in several firms. IBM is expected to receive approximately $1 billion, while other recipients include D-Wave, Rigetti, PsiQuantum, and Infleqtion.
Markets responded quickly. IBM has climbed roughly 29% over the past month, while Infleqtion (INFQ) has surged approximately 40% as investors increasingly view government backing as a catalyst for future growth.
Taken together, these developments point toward a larger shift underway. Rather than simply regulating industries or awarding contracts, Washington is increasingly directing capital toward sectors it views as strategically important to the preservation of the country. Semiconductors, critical minerals, artificial intelligence, nuclear energy, and quantum computing have all become focal points of this effort. Likewise the use of tariffs to ensure domestic manufacturers have the financial incentives to make steel, copper, nickel, etc, falls within the Trump Doctrine.
What's interesting is that the U.S. has been here before.
The comparison between Theodore Roosevelt and Trump is less about specific policies and more about a shared doctrine: that industrial capacity is the foundation of national power. In 1901, after pushing the Spanish out of Puerto Rico, Roosevelt inherited a rapidly industrializing America and deliberately transformed that economic strength into geopolitical strength. He championed the expansion of the U.S. Navy into the world's second-largest fleet, sent the Great White Fleet around the globe to demonstrate American industrial and military might, pushed for construction of the Panama Canal to accelerate commerce and naval mobility, expanded access to strategic natural resources, and supported infrastructure that connected American industry to global markets. Roosevelt understood that battleships, railroads, ports, steel mills, coal mines, and factories were all part of the same national power equation. His famous doctrine of "speak softly and carry a big stick" depended on America's ability to build the stick.
Trump appears to be applying that same logic to the twenty-first century. His tariffs and deregulation efforts support on steel mills, coal, and battleship creation. Modernization efforts are aimed at semiconductors, batteries, critical minerals, pharmaceuticals, shipbuilding, drones, artificial intelligence, energy production, and advanced manufacturing. Through tariffs, supply-chain reshoring, industrial incentives, energy expansion, and initiatives such as building a domestic drone industrial base capable of producing hundreds of thousands of autonomous systems annually, the objective is to reduce dependence on foreign adversaries and restore America's ability to manufacture strategically important goods at scale.
Roosevelt recognized that the rise of Germany and Britain required America to become an industrial power; Trump argues that the rise of China requires America to rebuild its industrial base. In both cases, the central belief is the same: military strength, economic prosperity, and geopolitical influence are not created by financial markets alone—they are built upon a nation's capacity to produce, innovate, and mobilize resources when challenged.
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