Wall Street's Three-Act Crisis Is Just Beginning

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Kevin Warsh just told the Senate Banking Committee he wants to reshape the Federal Reserve from the ground up.

That’s not regulatory theater. That’s a declaration of war on the institution itself—and by extension, on the monetary regime that’s propped up equity valuations for the past fifteen years. The man likely to become the next Fed chair didn’t mince words during his testimony. He’s signaling foundational changes. Not tweaks. Not incremental rate adjustments. Changes.

Meanwhile, Goldman Sachs is quietly telling clients that investors are repricing U.S. equities because they’ve suddenly realized AI might actually disrupt corporate profits instead of magically multiplying them forever. Stocks are still at highs. The Nasdaq and S&P 500 are hitting records. Apple and Broadcom are in buy zones. But underneath that veneer, the consensus on what the next decade of earnings looks like is fracturing in real time.

And then there’s Trump telling Congress that hostilities with Iran “have terminated”—even as the Exxon Mobil CEO is warning that oil markets “haven’t seen the full impact” of potential escalation and oil prices are doing a manic two-step between spike and collapse.

This isn’t three separate stories. It’s one story with three acts, and we’re barely through the prologue.

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The Fed Chair Who Doesn’t Believe in the Fed Chair

Warsh’s Senate testimony marks a genuine inflection point, though you’d miss it if you were skimming between earnings reports. This guy isn’t walking in to manage the institution as it exists. He’s walking in to question whether it should exist as it currently functions.

Here’s what matters: The Fed as constructed in 1913, reformed in 1951, and turbocharged in 2008 has become a de facto equity support mechanism. Not officially. But ask yourself why Janet Yellen and Jerome Powell kept rates near zero while stocks tripled. Ask yourself why QE didn’t cause a depression but instead created a direct pipeline from central bank balance sheets to stock buyback programs.

Warsh doesn’t seem thrilled with this arrangement. Foundational changes to the central bank structure—that’s code for: we’re rethinking how deeply the Fed should be married to financial markets. Maybe that means tighter constraints on what the Fed can do. Maybe it means different leadership at the regional banks. Maybe it means the next time equities crater, the Fed can’t just print money and call it “price stability.”

The headline says “the biggest loser may be Wall Street.” No kidding. Wall Street has been living in a subsidized environment for sixteen years. If that subsidy gets restructured, equity multiples don’t stay where they are.

I’m not saying a crash is imminent. I’m saying the guardrails are being pulled back, and that’s the kind of change that takes six to eighteen months to really price in.

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The AI Reckoning Nobody’s Talking About

This is the one that genuinely troubles me.

Goldman Sachs has done the math, and the math says: a lot of current stock valuations are baked on the assumption that AI will deliver explosive profit growth from 2030 onward. That’s not crazy on its face. Productivity gains are real. But here’s the problem—and this is where Goldman’s clients are getting twitchy—what if AI disrupts industries faster than it creates profits?

Software stocks are taking the hardest look. Makes sense. If AI can automate what software companies charge $10,000-a-month-per-license for, and that automation gets commoditized, then those recurring revenue streams don’t recur at 30% growth forever. They recur at 3% growth or disappear entirely.

The shift in how investors value long-term cash flows is what Goldman’s flagging. Translation: people are starting to price in the possibility that the decade of 2030-2040 doesn’t look like 2020-2030. It looks like disruption and margin compression.

And yet—and this is crucial—the market’s still at highs. Apple and Broadcom are in buy zones. Investors are still buying dips. This is the dangerous moment. This is when the consensus is shifting but the price action hasn’t caught up yet. You get these windows where the smart money is quietly rotating while the dumb money is still piling in because “equities are hitting new highs.”

I think we’re in that window right now.

Oil, Trump, and the Geopolitical Wildcard

Here’s my genuine uncertainty: I have no idea how serious Trump is about the Iran situation, and neither does anyone else.

Trump says hostilities have “terminated.” The Exxon Mobil CEO says the market hasn’t seen the full impact yet. Oil’s been whipsawing—spiking on war fears, then collapsing on peace hopes, then repeating the cycle. Trump told Congress there’s “tremendous discord” among Iran’s leaders.

What does that mean operationally? Does it mean the conflict is actually winding down, and oil prices are coming back down? Or does it mean Trump’s leveraging internal Iranian factions and we’re one miscalculation away from a confrontation that actually does disrupt global energy?

Oil at $70 is manageable. Oil at $95 starts to matter for corporate margins and consumer spending. If Exxon’s CEO is signaling that the upside risk is real, I’d be hedging energy exposure right now rather than assuming peace is locked in.

The geopolitical tail risk here is non-trivial, and it’s getting priced like it’s trivial.

What This Means for Your Portfolio

Buffett’s playbook—invest in boring, high-quality businesses and hold forever—still works if the Fed stays loose and valuations don’t matter. That thesis gets shaky if Warsh actually restructures the Fed’s relationship to markets and if AI valuations start resetting.

Berkshire’s new CEO Greg Abel is generating cautious optimism from investors. That makes sense. The company’s fundamentally sound. But fundamental soundness matters less in a low-rate environment and more in a high-rate environment. If Warsh gets his way, that distinction matters a lot.

Spirit Airlines going under is a blip—a cautionary tale about the discount travel model being broken. But it also tells you something useful: when credit gets tight, weaker players blow up first. We’re not in a credit crisis yet, but watch for more Spirit-like collapses. They’re usually early signals that the yield environment is tightening and investors are starting to care about balance sheets again.

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What I’m Watching

Warsh’s first policy move as Fed chair (if confirmed). Watch whether his foundational changes actually translate to tighter constraints on Fed liquidity or tighter coordination with Treasury. A real restructure would show up in how the Fed handles the next dip. Does it cut rates immediately? Or does it let markets clear? That’ll tell you everything about whether Warsh means what he said in testimony.

Goldman’s client repositioning in software and AI stocks through Q1 2025. If the repricing of AI valuations is real, you’ll see persistent outflows from high-multiple software names and rotations into energy, financials, and industrials. Watch sector flows, not just headlines. Flows don’t lie.

Oil prices if Trump doesn’t actually de-escalate Iran by mid-February. Exxon’s signaling the upside. If we get past Trump’s deadline without actual conflict reduction, oil could rip higher, and that becomes a margin headwind for everything else. Watch WTI crude. Anything above $85 starts changing the macro calculus.

Buffett’s next major capital allocation move. Berkshire’s sitting on massive cash. If Abel’s cautiously optimistic but sees headwinds forming (Fed tightening, AI disruption, geopolitical chaos), the next move might be buying more Treasury bonds or deploying cash defensively rather than aggressively. That’d be a real tell that even the smartest money in the room thinks valuations are getting tricky.

The market’s at highs, but the foundations are creaking. Don’t mistake a lack of noise for a lack of pressure.