AI, Iran, and the Perpetual Now

How markets learned to start worrying and hate the bomb.

There are several interpretations for current market conditions that have been put forward by the commentariat. One of the most interesting is that the current weakening of the S&P 500 relative to the rest of the market is a confirmation that tech hasn’t been overvalued - rather, the fact that investors are currently shying away from the Magnificent Seven would be an indication that the lessening of tech froth could point both to sector health and to potential undervaluation.

The idea that tech equity is undervalued and that investor action over the course of the past five years can be treated as a benchmark of rational behavior - and thus that the “AI bubble” narrative might be more difficult to defend is… a touch misleading.

What we are actually seeing is a flight away from a highly overvalued sector at a moment of near-unprecedented historical uncertainty. In short, investors are terrified - and with good reason. Let me unpack.

There are three concurrent phenomena that are of interest to unpacking the current cycle. The first is the growing consensus of an overvaluation in AI. The second is rising geopolitical risk related to (specifically, but not exclusively) the ongoing Iran war and the energy crisis brewing due to disruptions in the Strait of Hormuz. The third is the narrative ecosystem that denies the former and ignores the latter.

I - History

In early 2023, I released this video on Capital Matters, highlighting the froth in the tech sector. This was immediately following a protracted wave of quantitative easing due to covid as well as retail investor enthusiasm and tech sector optimism built not just on enormous amounts of liquidity, but also on an economy that was lopsidedly focused on WFH and streaming.

In retrospect, my hopes were overly optimistic: OpenAI’s release of GPT-4 radically extended the tech rally well beyond what I thought possible, not least because they were promising to birth a digital God (they’ve since - quietly, reluctantly, and with no shortage of unspoken consternation - pared back their expectations while simultaneously attempting to maintain as much investor enthusiasm as possible via a steady stream of new announcements and releases in anticipation of their IPO in 2026-27). Indeed, the froth we saw in 2021-22 was positively sane when compared to the all-encompassing financial significance of AI to markets at the height of 2024-25.

So to say that tech being 10% down relative to that period doesn’t so much showcase investor sanity as it does indicate that we are finally beginning to see reality creep in to puncture one of the most lopsided stock runs in history.

II - Blood And Oil

And why have investors finally found the tech market to be less than palatable? Two reasons: one mathematical, one geopolitical.

Point One: the math on the wall. Investors cycle their liquidity in and out of sectors with regularity based on considerations such as relative saturation and appreciable returns. Actions must be met with equal and opposite reactions: if a sector doesn’t yield appreciable returns over a protracted period, people will eventually notice, and begin to diversify. This is the one we’ve been hearing about for years - it’s the “bubble narrative”, and relates to the circular dealmaking within AI spaces that haven’t been met by appreciable returns. There is an asterisk here: manufacturing in anticipation of increased AI usage has seen enormous returns, something that has indicated - perhaps, once again, misleadingly - before; this is not the same as returns from AI-first companies aimed at either businesses or consumers, both of which have been weighed down by narratives of limited productivity gains and consumer loathing of AI products.

None of this is news: we’ve been awash in the counternarrative for literally years now. The calming of investor enthusiasm - and even then, only a relative cooling failing further evidence - is a welcome, anticipated shift away from the wide-eyed insanity of the past five years. This is also not historically odd. The S&P 500 is tech-heavy. Tech traditionally does well in periods of high stability and high liquidity, when markets have more appetite for risk. This is not that, which brings us to…

Point Two: the geopolitics. It is impossible to argue that the current environment is low on risk. With oil at peak volatility, rising and falling on disruptions to supply, regional war, and assertive tweets that completely contradict reality, investors are facing a historically noisy environment fraught with the kind of systemic disruptions we have only periodically seen since 1945, and are now seeing with increasing frequency.

There are both long- and short-term adaptations to these disruptions (the gold and silver rally and trend towards a falling dollar are the former), but in this acute phase, we are seeing a reliable set of behaviors that have served markets well during troubled times in the unipolar moment: flight to safe assets such as US Treasuries and the dollar, and cycling out of high-risk sectors such as tech.

Moreover, given that Mister Market is under significant geopolitical and macroeconomic strain, why wouldn’t investors seek shelter from tech? One of the core parts of the AI narrative has been its enormous appetite for energy. It’s very hard to imagine a case in which structural disruptions to energy supply wouldn’t impact the medium-term trajectory of the AI sector - and that’s without taking into account the exploding data centers.

III - Perpetual TACO Tuesday

So the narrative that tech might be undervalued is wrong on two counts: it both misreads the current moment within its historical context, and underestimates the acute geopolitical disruptions to financial markets. But how is it that such an argument can be made by ostensibly respectable market-watchers?

The answer is the culture of the perpetual now.

One of the most cynical adaptations to the events of the past year has been the so-called “TACO” trade, the idea that geopolitical disruption can be intelligently traded by assuming that President Trump will always reverse course to avoid political backlash to his more geopolitically fraught actions, and thus restore market status quo: hence, “Trump always chickens out”.

This is not just false - Maduro would like a word - it also pretends that Trump’s repeated brinksmanship will have no ill effects on the broader macro environment, a sort of naive Americentric perspective that assumes that reality will always revert to the 90s. As many have noted, the game has changed: US unreliability is having a real, sustained, measurable impact on financial markets, one which is legible in, for instance, surging EU defense stocks and an increasing focus on developing markets.

Far be it from me to provide investment advice - I’m not a financial journalist, so it’s not my place to point out when reckless analysis might goad the hapless into catching a falling knife. What I am, however, is a geopolitical analyst and historian. So I will use this particular narrative nonsense as a perfect showcase of a brand of hubristic, historical insanity.

But that 10% tremor in tech is a sign that market actors are beginning to feel the weight of history.

Shane McLorrain