All is Fair in Love and War: Insights and Implications of the Third Gulf War, AI Eating the World and Private Credit Becoming a Public Spectacle

The title of this piece, a well-worn quote, is attributed to John Lyly, the famed English playwright. A contemporary and influencer of William Shakespeare, a brilliant scribe by all accounts, his work entertained the upper crust of British society and the Queen of England herself. Despite churning out brilliant works and serving in Parliament, he sadly died poor at the young age of 52.   The father of at least 9 children, with no shortage of grit, Lyly seemed to be constantly scraping by, unable to ever catch the big break that would bring him the wealth and comfort later in life that he so desired.  We promise this is not a piece about Victorian history, but it’s worth crediting the source of a timeless quip and his personal plight.  His experience seems to capture the zeitgeist of the current moment, where many Millennials and the Gen Z crowd are finding it difficult to tread water, let alone get ahead.   As for the war itself, the very idea that there are norms and customs on the battlefield has always been a gray area.  As Iran fights for its survival, nothing is off limits, confounding advisers and the administration alike.

Market Resilience Meets Unprecedented Uncertainty

As we are now in the back half of the decade, it’s worth reflecting on where we have been these last 5-6 years as we try to figure out where we are headed. To say it’s been a period of unprecedented events and historic change does not do it justice. It will be interesting to see what the history books say in another 50 or 100 years. From the pandemic to structural shifts in labor, a housing Supercycle, a meme bubble, and the rise, fall, and rise again of crypto, it’s no wonder there is a heightened level of angst in the world.  Growing populist movements in both parties here and abroad are a clear byproduct of this anxiety, cultural, economic, or otherwise.   Suffice to say, if the market reflected sentiment or polling data, we’d be in a sustained bear market, but alas, the major indices continue to surprise us with their resilience, if not buoyancy. Will the matters at hand prove the indices are right to be optimistic for looking out into the future or is this false bravado that will wash away in the months ahead?  If March was any indication, perhaps reality is setting in, where if not for a furious rally on the closing day of the month, we would have experienced the worst month in nearly 4 years.  To close out the first quarter, in the final month the S&P 500 was down 4.98%, the Nasdaq 4.70%, the MSCI World Ex-US off 8.39%; even the broader bond market logged a negative 1.75% in March.  Many major indices entered correction territory, down more than 10% from their peaks earlier this year.  Looking even more closely at the markets, over 40% of constituents in the S&P 500 and over 60% of the Nasdaq were in a bear market (down 20% or more).  We have seen something similar with rolling recessions in sectors of the economy when looking at homebuilders, manufacturing, and now the software industry, where layoff announcements have been percolating.   

From Venezuela to the Persian Gulf: Oil as Strategic Weapon

So, what gives? In the aftermath of the high and by some accounts sustained inflation brought on by supply shocks and excessive fiscal stimulus, the one clear bright spot in getting prices under control had been the persistent decline in fossil fuel prices after the spike seen four years ago when Russia invaded Ukraine.   The combination of a well-timed strategic petroleum reserve release, further supply growth from US frackers, and slack global demand took oil prices from $120 a barrel to the high $50s or low $60s, where we spent much of last year.  As a result, production levels had been moderating, if not declining somewhat, based on the demand dynamics and unfavorable economic conditions curtailing supply. 

Oil, however, is a strategic asset, not just a fuel source, and once again, expanding geopolitical ambitions have disrupted the welcome equilibrium between supply and demand, keeping the lid on prices.  Perhaps still bubbling with self-confidence from the successful bombing campaign of Iran's nuclear sites in June of 2025, earlier this year, the Trump Administration’s global ambitions led to the toppling of despot Nicolas Maduro in Venezuela. In something out of a Hollywood script, the “narcoterrorist” and his wife were scooped up in a clandestine extraction that took little time and even less expense to accomplish.   Venezuela, once the top global exporter and a founding member of OPEC in 1960, had allowed its infrastructure to crumble as grift and corruption ran rampant, nationalizations and sanctions crippled investment.  Global markets seemed to shrug at this coup, with prices barely budging, as participants likely realized that the combination of Maduro’s second in command remaining in charge suggests no real regime change (though she appears more pliant with US policy at present) and that any material increase in output will plausibly take shape over the course of years, not months.  In a somewhat awkward moment, at a business roundtable of oil executives, Darren Woods, the CEO of ExxonMobil, in January this year, told President Trump the country was “uninvestible”. It seems it may take some time to make any real impact on global supply.   Eliminating the flow of heavy crude to the teapot refiners in China, however, was a strategic win for the administration, where much of the black-market crude was finding a home, circumventing sanctions. 

Operation Epic Fury and Iran's Scorched Earth Response

Emboldened by the success of that mission, the US shifted its focus back to the Middle East, moving significant military assets to the Gulf region. After failed negotiations over the country’s nuclear ambitions suggested diplomacy would likely yield little tangible benefit and only buy time for Iran to restore and replenish its weapon stockpile, the United States, along with Israel, decided to attack the Persian state on February 28th.  Hopes of a quick victory like those during Operation Desert Storm (1991) or the toppling of Baath party with the invasion of Iraq in 2023 have been dashed, and the prospects of a more protracted conflict put real pressure on fuel prices globally and stock markets around the world.  The combination of what appears to be poor planning, shifting military objectives and a determined, formidable adversary have resulted in lack of confidence in a swift and decisive outcome leading to a sharp rise in energy prices, with West Texas Intermediate crude nearly doubling from the prices seen earlier this year and remaining around $100 today; a psychological level as much as an economic one.  Iran’s counterattacks with the use of more crude military hardware, mainly in the form of drones, have damaged critical infrastructure across much of the region, resulting in storage capacity being filled up, wells being shut in, and shipping grinding to a near halt.  The Straits of Hormuz, a vital shipping lane where nearly 20% of global hydrocarbons are transported daily, has become the chokepoint. Comments from Iran suggest traversing the 21-mile strip will be perilous for the foreseeable future or carry with it a toll for passage, creating a potential unwelcome precedent that could have far-reaching implications if other nations used that approach for other global trading hubs and throughways.  It’s not just crude oil and natural gas that have been impacted. Urea, an input into fertilizer, and helium, a noble gas used in semiconductor manufacturing, are in a supply crunch that will be felt for months, not to mention tourism has evaporated in the likes of Dubai and Abu Dhabi.  There are eerie similarities to the supply chain crunch and bullwhip effect we experienced during the pandemic and with Russia’s invasion of Ukraine.  The process of unwinding the impact is far slower and more painful than the speed at which the damage is initially inflicted.   

Understanding Iran: Three Potential Outcomes

It’s important to understand Iran, both from a geographical and demographic perspective, as well as from the societal/ideological lenses.  A nation of contrasting terrain, with high jagged mountains and large swaths of flat desert regions, the country is about one-third the size of the continental US, with a population of 90 million people. Iran’s population is largely comprised of Shia Muslims, but it is home to a small Jewish contingent, the largest outside of Israel in the Middle East, and a notable Christian population as well.  While Islam is the religion of the overwhelming majority, there are significant philosophical differences in large parts of the population. Estimates suggest the moderate population makes up about 70% of the country, with the hardliners accounting for the difference.  Iran saw a small uprising as part of the Arab Spring (2011) that was quickly repressed, but it has seen growing protest movements over the last decade as crippling sanctions and younger Iranians find little hope for a prosperous future.  While grassroots movements toppled autocrats like Mubarak, Ben Ali, and Gaddafi, the firm grasp on power by Islamists has meant those uprisings have been squelched quickly and with brutal force.  Despite a majority of Iranians seeking change, today hardliners still account for 200 of the 245 elected lawmakers, though it seems fair to question the legitimacy of those elections.  The country’s has a vast, complex military structure, perhaps best known for their elite Islamic Revolutionary Guards, they also have a sizable conventional army, the Artesh and are augmented by a volunteer paramilitary called the Basij, estimates of the size of this group ranged widely but suffice to say it is a formidable presence in society.

As we see it, there are three potential outcomes here, and we’ll do our best to provide odds of those possibilities below. 

Status Quo with Diminished Iran (70%)

Here, the war ends as the US and Israel feel they have accomplished their primary tactical objectives and negotiate something of a ceasefire with the current hardliners maintaining rule over the country.  This probably looks like the closest thing to what we have been experiencing in the 47 years since the toppling of the Shah; the idea of overcoming a deeply embedded anti-Western government, who happen to be those who control the weapons and the communications apparatus seem unlikely. Oil supplies and transportation recede back to prior levels, though risk premia exist in the prices, creating more incentive for investment and regulatory arbitrage, which could conceivably favor countries such as the US and Russia.

Another Quagmire (28%)

In this scenario, enough damage to the political system creates a power vacuum, possibly resembling something like what we see today in the likes of Libya, Iraq, or Syria, where small factions have regional control but the notion of a nation state withers.  This diegesis likely means the killing of the new Supreme Leader, Mojtaba Khamenei, and a revolving door of figureheads unable to find constituents to coalesce around their leadership or being taken out by Israeli or US forces.  Here, oil prices remain north of $100 based on inconstant supply from the OPEC member and rebel groups willing to disrupt supply (lines) based on ideological issues with the West.  This is the least optimal scenario.

Regime Change (2%)

Whether with a more pro-Western or more moderate Muslim leadership, similar to what is present in Egypt and Iran pre-1979, relations improve to such an extent that sanctions are lifted and foreign capital makes its way slowly into Iran to tap natural resources. What was once the thriving scene of human civilization witnesses a rebirth 2,500 years in the making.  It would be great to assign greater odds than a mere couple of percentage points here, but that’s perhaps a bit of a fairytale ending, which is hard to see play out.

While perhaps this was meant to have telegraphed and anticipated, the scope and strategic response from the Iranians seems to have caught the Gulf Nations and the US by surprise.  With an existential threat looming, Iran’s scorched-earth approach has meant it will create a significant amount of disruption and damage now and moving forward . As is often the case with heightened uncertainty as to how this will play out, market volatility has jumped sharply and may very well remain elevated throughout 2026, especially given the fact that we find ourselves in a mid-term election year.  Strangely enough, US natural gas prices have not moved meaningfully higher, unlike in Europe and Asia, though the cost of refined products like diesel and jet fuel have sky-rocketed.    Hopefully the near-term pain at the pump will be short-lived, time will tell. The longer prices remain high, the greater the likelihood that the Fed remains on hold, and there is even some chatter about the need to raise rates outside the US, though that seems premature if not altogether counterproductive. 

The market has been moving on three things: the moving goal line of the war’s end date, which seems to oscillate between “over soon” or in another “two or three weeks”, “ what happens with long-term interest rates (keep an eye on 10-year and 30-year Treasury yields), and oil prices.  If we are writing about all those things increasing in the coming months, stock prices are destined to be lower than they are at the time of this piece. 

The AI Disruption Dilemma: Promise or Peril?

Switching gears…Had Operation Epic Fury been an isolated event, the markets may have been more willing to shrug it off like they did early last summer following the impressive tactical assault on the Iranian regime’s missile sites, key personnel, and critical military apparatus, but there have been some other sources of angst festering underneath the surface. Two in particular are worth exploring.

Orwell’s Animal Farm or Cameron’s Terminator series, or better yet, the Matrix trilogy, offer some dystopian Hellscape where Pigs (Tech Hyperscalers) or Robots (Artificial General Intelligence ala Hal 9000) either subordinate all of humanity to their every whim or wipe it out, homo sapiens altogether calling into question our purpose, meaning, or prospects.  Not to be outdone, James Van Geelen and co-author Alap Shah recently published a truly knee-shaking bear case scenario in the widely read Citrini Report.  Here, the two opine that AI is so disruptive to the labor market that the unemployment rate jumps to 10% by 2028, approaching levels last seen during the 2008-2009 Great Financial Crisis. Unlike in past periods of high unemployment, however, the traditional policy tools of loosening monetary policy or fiscal expansion would have little positive impact, as the job losses referenced would likely be more permanent.   For the last 150 years, the US population and Western Society, more broadly, have transformed from a largely agrarian economy to industrial laborers to what is now known as the knowledge worker. In that time, life expectancy has lengthened, and the overall quality of life for human beings on the whole has improved (though if we are being intellectually honest, it has meant that some have been left behind).  Large parts of rural America have been hollowed out with some European countries faring no better, but as GDP has risen, opportunity for those with smarts and work ethic and mobility to carve out a successful lifestyle has followed., But alas if that possibility becomes unattainable, much like how many young people feel about the prospects of home ownership, we must ask the ourselves if that has a lasting impact on psychology and thus animal spirits.  I am not ready to say that AI is the massive displacement force that interrupts the progress for mankind as a whole, though the possibilities for disruption are real, so there stand to be winners and losers alike. What more could we ask for in a market-based economy?  We’ll have more on AI in the coming weeks, as suffice to say it’s commonly referenced, but people’s understanding of the full scope of its present conditions and capabilities is not all that well understood.

Big Tech's $500 Billion Infrastructure Gamble

What we do know about AI is that it’s become an expensive endeavor, as the biggest players spend hundreds of billions on the technology’s infrastructure itself, whether that be in chips, real estate, or energy consumption to facilitate the massive computational needs associated with machine learning and inference.  Past capex cycles have required massive sums to be spent, whether it was laying rail lines or fiber optic cable (the latter still drawing vast amounts of capital), though the earlier adopters were not necessarily the winners, as the network effects of those projects took time to develop. The question today is not so much about whether Amazon, Microsoft, or Meta can afford to spend $500BB+ collectively this year and perhaps indefinitely into the future; they can based on the enormous profits these companies generate.  The concern is whether or not they should make those investments or if they would be better off using their enormous free cash flow to pay down debt, buy back stock, grow their dividends, or make strategic acquisitions.   At one time, these businesses commanded massive valuations based on asset-light operations that led to very distinct business lines with limited competition. Now they are starting to look like massive industrial enterprises competing for the same common ground.   Given that backdrop, these companies have seen their premium multiples compress; as a group, they are down about 20% from their October 2025 highs.  We saw their valuations called into question in 2022 after some of the big spending witnessed in 2020-2021, as investments in headcount or the metaverse weighed down income statements. It may not be as easy as dialing back expenses this time around.  This is not all bad news, as investors have been rotating some of their excess exposure in tech and adjacent industries to other parts of the market, whether that be style, size, or geography. That is very healthy and could prolong the bull market, unlike in past cycles where excess portfolio concentration dented the wealth effect and corporate behavior. 

The Private Credit Reckoning: Financial Sector Under Pressure

As bad as it’s been for tech stocks and as good as it’s been for energy, the worst-performing sector in 2026’s first quarter was financials, where worries about Private Credit have dinged alternative asset managers, insurance companies, and money center banks alike.  While private credit has been around for decades, its growth has exploded in size in the aftermath of the Great Financial Crisis (GFC), where regulation and a general unwillingness on the part of banks to lend to lower quality borrowers have seen the industry grow from $50 billion to $3.5 trillion.  When markets grow that fast, it’s likely that underwriting standards have diminished, and the likelihood of cockroaches surfacing has risen.  It’s safe to say that lending is idiosyncratic and defaults will occur at all times and accelerate when the credit cycle reaches peak expansion and begins to turn down. Adding further worry to this market is that many of the companies that benefited from the access to capital are software businesses whose recurring revenue models looked to be perfect for these types of loans.  Not so fast, it appears that several AI tools, like Claude Code, have made writing software exceptionally easy, calling into question the business models of these software companies and, with that, their ability to support their debt. The combination of leverage, opacity, and illiquidity has investors nervous and rushing for the exits, in what has been sold as a sleepy asset class has been anything but.  It’s not to say that there is no utility here, in the coming weeks, we’ll offer a more robust description of the Private Credit universe, who the key players are, and whether there is any contagion risk. It doesn’t appear to be a bold statement here, but the obvious takeaway is that financial conditions have tightened and likely will continue to in the quarters ahead.  One more point on banks, in normal times a steepening yield curve serves as a tailwind for sector, leading to net interest margin expansion (the difference in interest paid to depositors and charged to borrowers),  but these sharp moves in rates can result in a negative hit to their current assets and slow down credit origination as we have seen with the freeze in new mortgage applications and refinancings.  Coming into this year the view was we would see somewhat of a healthy steepening where short term rates would come down quicker than long term rates, but as mentioned earlier in our note, rate cuts if any are likely to be backloaded as we saw in both 2024 and 2025, not to mention that the curve itself has broadly flattened from the 2-year treasury onward over the course of Q1. 

Corporate Earnings Resilience

Maybe the market isn’t whistling past the graveyard. Case in point, the compounding resilience in corporate earnings, projected to grow 14% this year, was recently revised higher, accounting for fatter profit estimates for the energy sector. These attractive margins are likely to be supported if not bolstered by AI, and the likelihood of lower interest rates over time will provide some support to asset prices as well.  So long as the unemployment level remains in the mid 4s and businesses have enough comfort to invest based on a less daunting regulatory environment and some goodies from the One Big Beautiful Bill Act of 2025, we very well may look back on this period as another uncomfortable March.  The third month of the year has started to give October a run for its money as the worst month for markets; it’s been down three of the last 4 years.  March is named after Mars, the Roman god of war, which seems about right…