Iran, AI, and the Fed: What's Really Driving Markets Now

At the start of the year, there were four dominant themes driving markets, which we summarized under the ITAP acronym: Iran, Tariffs, Artificial Intelligence, and Private Credit. As the year has progressed, Iran and AI remain front and center, heavily influencing markets, while tariffs and private credit no longer seem to be front-page considerations. This summer, markets began to react more regularly to an additional factor: the Federal Reserve (or Fed). Under new leadership, with Kevin Warsh as Chairman, the transparent approach championed by the last three Fed Chairs has intentionally become more opaque. This has added to interest rate volatility and become an additional element of investor uncertainty. 

As episodes of market volatility have increased, we focus our discussion on how markets are reacting to the now dominant market themes of Iran, AI, and the Fed (IAF). We also expand with our perspective of how we view these themes at present, along with the considerations we put into building portfolios in what has already been an eventful 2026. 

Iran

The conflict in Iran has gone from what was initially expected to a short-term conflict to one that continues to linger with no definitive resolution. Global oil supply chains have weathered the conflict better than we and most expected, given reduced demand in parts of Asia and additional supply from the release of strategic petroleum reserves by numerous countries. Oil prices have remained highly volatile, with West Texas Intermediate (WTI) crude peaking at $113 per barrel in April and then falling rapidly to $69 per barrel in early July[i]. Prices have continued to ebb and flow depending on the tone of progress in peace negotiations. We expect the volatility to remain until a permanent peace deal is reached. 

What is often overlooked is the impact the war with Iran will have on crude oil markets in the years to come. First, while it's plausible that some demand destruction for oil may prove permanent, we expect the need to restock strategic petroleum reserves to drive additional demand for some time. This is likely to support higher oil prices for at least another couple of years, and we think oil prices persisting above $70 a barrel is probable. Second, we have seen only a gradual increase in new supply, with, for example, the U.S. rig count growing from roughly 550 to 590 since the war began. This compares with over 750 rigs in the U.S. three years ago[ii]. Collectively, this dynamic supports a more attractive environment for energy companies, with added volume from more wells and higher per-barrel prices. 

Artificial Intelligence

The evolution of AI continues at a hyperbolic pace. Spending on AI infrastructure continues to expand, with an increasing share of dollars going toward compute capacity. This spring, it was semiconductor companies, and memory chips in particular, that indicated insatiable demand, with projections suggesting the current memory cycle will extend at least into 2029. Semiconductors have been a notoriously cyclical sector, with episodes of demand outpacing supply followed by a swift shift in which supply exceeds demand. This time around, the magnitude and expected durability of the current semiconductor cycle have piqued investor interest to the point where, by the end of the second quarter, the Philadelphia Semiconductor Index’s year-to-date return was roughly 100%. In July, some of the bloom fell off the rose as investors began to question whether all AI hyperscalers could justify and sustain heightened spending. 

The thematic trend around AI is exciting given the possibility the technology possess and the magnitude of its impact. We have seen this lead to pockets of euphoria in investor behavior, followed by moments of recoil as uncertainty around competitive dynamics and economic returns arise.

We view AI as an investable long-term thematic trend. However, we have our own questions about who the most significant beneficiaries will ultimately be. Will it be the model providers whose capabilities are the front-line tools for users? Alternatively, these model providers (i.e. Anthropic, OpenAI) are becoming increasingly reliant on the compute capacity provided by hyperscalers such as Amazon, Google, Microsoft, Meta and Oracle. Will the hyperscalers ultimately have the greatest pricing power in an environment where compute capacity is in short supply? Lastly, hyperscalers remain reliant on the right infrastructure and chipsets to offer compute capacity. Will the hardware and semiconductor companies whose products are in short supply and will inevitably need to go through a replacement cycle be in the most dominant position? These are the questions we debate as we work to understand the economic ecosystem and identify the levels of return on investment that can be generated from a technology that requires such a substantial investment in infrastructure.

Federal Reserve

Incoming Fed Chairman Kevin Warsh is unabashedly looking to shake things up at the Fed. One change Chair Warsh has initiated off the bat is a less prescriptive communication around the Fed’s forward-looking expectations for the path in monetary policy. Warsh’s approach harkens back to the era of former Fed Chair Alan Greenspan, who shied away from showing his hand and often offered more cryptic messages of the Fed’s intentions to markets. Greenspan’s approach was altered when Ben Bernanke took the helm. Bernanke, a former academic and student of the Great Depression, believed better communication about forward guidance would have helped ease some of the strain of the Great Depression. Following Chairman Bernanke’s term, his successors, Janet Yellen and Jerome Powell, further increased transparency. 

The markets must now revert to a Federal Reserve that is less communicative. We don’t necessarily see this as a bad thing. What we have seen over the years is that volatility in interest rates has been confined to the days following Federal Reserve meetings or key economic announcements (e.g., the monthly employment report or the consumer price index reading). Going forward, we may see interest rate movements become less tied to these events and exhibit greater variability overall. Ultimately, rates will move toward long-term equilibrium, and a less communicative Fed won’t result in interest rates that are higher or lower than they would otherwise be. However, the path could be a bit more winding. 

Conclusion

The IAF themes have created episodes of added volatility as the emotions of investors adapt to the evolving news and information flow around Iran, AI and the Fed. Each of these have elements of ambiguity and uncertainty. 

Such an environment brings to life the concept of Mr. Market, a fictitious individual coined by legendary investor Benjamin Graham. Graham described the concept of Mr. Market as having a volatile personality that would swing from moments of euphoria to depression. Graham used this example to illustrate how investor expectations often shift from high to low, driving erratic moves in stock values.  

This analogy effectively describes how markets have reacted during 2026. During the second quarter, markets cheered semiconductor stocks, lifting the value of the Philadelphia Semiconductor index by nearly 90% over the three-month period. The mood abruptly changed during July, when semiconductors fell as much as 27% (intra-month) before ending down 20% by month’s end.[iii]

As Mr. Market’s moods swing, it's best to focus on the long-term perspective, despite near-term volatility.  For example, while AI spending is exceptionally strong now, we know that AI-related investment spending will eventually moderate. This is typical of an economic cycle. As we look ahead with a longer-term perspective, we continuously evaluate how to position portfolios not just for the current environment but also to be prepared for how conditions may evolve over the next several years. For example, investors began August by rotating out of energy stocks and back into technology. We see long-term opportunity in energy and are also proactively looking at market segments that have been unduly penalized by greater interest rate volatility.  

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Sources:

[i] Source: Bloomberg. As of August 6, 2026. 
[ii] Souce: Bloomberg. Based on Baker Hughes United State Oil and Gas Rotary Rig Count Data. As of Aug 6, 2026
[iii] Source: Bloomberg. Semiconductor returns based on the Philadelphia Stock Exchange Semiconductor Index. As of July 31, 2026

 

Disclosures:

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