Very few people really know anything | Weekly Market Update

As I type, the US S&P 500 index is up 0.2% on the week for sterling investors. Quiet week, nothing to report. For the last 6 months headline equity indices have been pretty stable, but there have been a whole lot of AI-driven ups and downs going on under the hood (which I wrote about here for example). The last seven days have seen a similar story, but it is the contrast of the headlines of war in the Middle East and equity stability (in the US at least) that is remarkable.

Before I write about why, I would repeat that very, very few people really know anything about what is going on in Iran. With its leader decapitated, it is in effect a multi-headed hydra with unknowable political objectives and uncertain military capabilities. It is easy to imagine Houthi-style drone attacks on shipping and (potentially) Dubai and neighbouring states continuing even after the US ends its military campaign. But the basic calculation the market is making is that Iran needs the Strait of Hormuz to remain open more than the rest of the world needs the oil. Up to 80% of the Iranian government’s revenues depend directly or indirectly on oil sales and, without that revenue, the current regime will ultimately collapse. This looks to be the calculation the oil market is making. Here is the Brent crude futures curve looking out to 2032:

For that reason, the most likely scenario to me is that at some point the US stops bombing and declares victory (no Ali Khamenei, Iranian military capacity vastly reduced). Of course, other scenarios are out there which is why oil futures are more expensive today than they were a month ago, even for oil 5 years from now. Any prolonged oil disruption will push up inflation and interest rates. The ghosts of the 1970s are still haunting plenty of market forecasters.

 

If the real market risk from the war is inflation, then that makes an interesting contrast with AI. I will probably write more about this next week, but one point I would make today is that what we call AI is not standing still. Models are meaningfully better today than they were only 6 months ago. This, and the development of agents (who can do things for you rather than just answer prompts), have been behind the recent fall in value of software companies, which you can see here for instance:

 

Oil shocks are inflationary. AI making it cheaper to do jobs that were traditionally done by white collar workers is deflationary. I began this note by quoting the equity return for the US S&P 500 for the week. In contrast, UK equity markets are down over -4% and Emerging Markets are down over -6% (again as I type on a Friday morning). This is, of course, a reversal of the start of the year where the UK and Emerging Markets have done quite a bit better than the US. I have in my head two dominant macro market forces going on right now:

• A global cyclical upswing after the tariff shock of 2025. This benefits Emerging Markets, Japan and the exporters of Europe. This has been the dominant theme for the last 15 months or so but is, of course, threatened by the war and higher oil prices. Note, the energy independent US is much less affected by all this than energy importers like Japan.

 

• A global supply shock caused by the (ongoing) arrival of AI and AI agents into the workplace. There is plenty of opportunity here (e.g. building out the infrastructure that will power the increased demand for AI) and there will be plenty of losers (see the chart above for where the market thinks they might be today).

 

If you think the uncertainty caused by AI is too much, you have found a safe-haven and good returns in emerging markets recently. However, this week the opposite has been true: technology has been a safe-haven from a geopolitical shock. It is always tempting as in investor to go all-in on a winning theme. This week has been a reminder that equity diversification is the only free lunch the markets offer.

 

Chris Brown, CIO

cbrown@ipscap.com

The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.