The Market's Schizophrenia Problem: AI Boom Meets Iran Brink

The S&P 500 finished 2025 up 17.9%. That’s the headline everyone’s reading over their New Year champagne. But here’s what’s genuinely wild: we got there while simultaneously staring down a potential war with Iran and watching used car prices spike to their highest levels since summer 2023. This isn’t a market operating smoothly. This is a market operating on fumes and hype, with one hand cranking up AI valuations while the other nervously checks the news feed for mushroom clouds.

Let me be clear about what happened in the fourth quarter. The S&P 500 Total Return (USD) gained 2.65% in just those three months, which sounds modest until you remember we were already up double digits for the year. The real story was the AI sector’s continued dominance. Big Tech didn’t just win—it obliterated everything else.

Businesswoman analyzing financial chart with loss noted, expressing stress. Photo by Nataliya Vaitkevich / Pexels

When Fund Managers Start Playing Musical Chairs

TCW’s Relative Value Large Cap Fund made two moves in Q4 that tell you everything about where sophisticated money is right now. They bought the dip on Meta Platforms, citing “substantial growth potential.” Meanwhile, they sold Alphabet at valuations that finally made sense to them. Translation: they think Meta’s cheaper, Alphabet’s not—even though both companies are printing money from AI services.

This matters because it’s not a vote of no confidence in tech. It’s a reallocation within the AI throne room. When a disciplined value-focused fund like TCW is still finding reasons to own Big Tech stocks, you know the AI narrative hasn’t collapsed. It’s just gotten more selective.

Intel’s partnership with NVIDIA sparked a surge in Intel’s stock. That tells you something too: the market will bid up anything adjacent to the AI infrastructure trade. Intel’s been a zombie for years. One whisper of partnership with the most important chip company on Earth, and suddenly it’s got a pulse. This is what happens when one sector owns all the oxygen in the room.

Detailed close-up of a newspaper displaying global financial market statistics and country flags. Photo by Markus Spiske / Pexels

The Iran Problem Isn’t a Stock Problem Yet

Here’s where I need to be honest: I can’t predict what Trump does next. Nobody can. But the market’s reaction to the Iran situation tells me traders think it’s manageable risk, not existential risk.

Markets are facing volatility as the Trump deadline to launch strikes on Iran approaches. The Strait of Hormuz—through which roughly a third of global seaborne oil traffic moves—has been partially closed since the war began, creating a historic oil supply shock that sent energy prices soaring. This should be apocalyptic for markets. Yet equities are up, tech is flying, and nobody’s really freaking out.

Why? Either the market believes the administration will blink, or it believes any conflict will be surgical and brief. Or—and this is what I actually think—traders have decided the odds are low enough that they’re not repricing risk. That’s either the most rational assessment or the most dangerous complacency I’ve seen in a decade.

Used car prices rising to their highest point since summer 2023 is the real tell. That’s an inflation signal. That’s consumers with money in their pockets. If we were genuinely terrified of geopolitical blowup, you’d see demand destruction in the used car market. Instead, you’re seeing strength. Either that means the Iran situation is being properly discounted as low-probability, or it means the market’s in complete denial.

I’m genuinely uncertain which one it is. That’s not hand-wringing—that’s honest. But if I had to bet, I’d say traders are underpricing tail risk. The market loves to do that until it doesn’t.

The Prediction Market Wild Card

Here’s something nobody’s talking about enough: prediction markets like Kalshi and Polymarket have exploded in popularity, and now House Democrats are calling on federal regulators to crack down on offshore war bets. This is the first sign that the political establishment finds prediction markets threatening enough to regulate.

Why? Because prediction markets are actually revealing something the traditional news cycle obscures: probabilities. If money is flowing into Iran conflict bets, it doesn’t mean war’s coming. It means smart money thinks there’s a material chance. The fact that Democrats are already circling the regulatory wagons tells me they’re worried about either (a) what prediction markets are actually pricing, or (b) the influence prediction markets will have on political decision-making.

Either way, this is the thin edge of a wedge. Regulation of prediction markets will come. And when it does, you lose one of the few market mechanisms that’s actually good at assessing tail risk.

The Conspiracy of Cheap Money

Bill Ackman’s $64 billion bid for Universal Music stock surged after the takeover proposal. Universal Music’s stock has “languished” due to various issues that Ackman thinks he can fix. That’s a private equity signal. That’s cheap capital hunting for undervalued assets in a world where Big Tech has soaked up all the “growth” premium.

Novo Nordisk’s oral Wegovy launch is pulling new patients into GLP-1 weight loss treatment. The pill works. Patients are trying it. This is going to reshape healthcare spending and pharma valuations for the next decade. But it’s also going to reshape food companies, gym chains, and consumer discretionary stocks. That’s a longer-term trade than most traders are thinking about right now.

My Read on What This Means

The market is running on AI momentum and central bank money still sloshing around. The valuation story for tech is real—these companies do have pricing power in an AI-driven world. But we’re pricing in perfection. We’re assuming no Iran escalation. We’re assuming no demand destruction from geopolitical shocks. We’re assuming Nvidia’s margins stay fat. We’re assuming the regulatory knives stay in the drawer.

One of those assumptions breaks, and the repricing gets nasty fast.

I think the Q1 2026 performance is going to tell us whether the market actually believes in the AI thesis or whether it’s just been riding momentum into year-end. If we get earnings reports that show AI capex hasn’t translated into actual profit growth by March, you’ll see rotation out of mega-cap tech fast. Not collapse. Just rotation.

The Iran situation will resolve one way or another by March. Either we’ll know there’s no war, or we’ll be in a short, contained conflict. The uncertainty itself is the worst outcome for markets. Once uncertainty resolves, traders can reprice accordingly.