Markets remain driven by AI-led FOMO despite rising Middle East tensions, as equities stay resilient while oil volatility signals geopolitical risk and supply concerns.

Key Highlights

  • Equity markets prioritise AI-driven growth over geopolitical oil risks, sustaining rally momentum.
  • Volatility divergence shows oil markets pricing risk while equities remain complacent.
  • Concentrated positioning in mega-cap tech creates asymmetric downside risk under shock scenarios.

A familiar paradox is back at the centre of global markets this spring. Oil tankers are taking longer routes around the Arabian Peninsula, war-risk insurance premia in the Gulf have widened, and policymakers in Washington, Brussels and Riyadh are once again on near-permanent shuttle diplomacy. And yet the S&P 500 is within touching distance of its all-time high, the Nasdaq 100 is up double digits year to date, and call-option volumes on the largest US semiconductor and hyperscaler names are running well above their five-year averages. Investors, in short, look more frightened of being underweight artificial intelligence than they do of a Middle East shock.

That dynamic - what traders on bank desks have started calling FOMO trumping oil - is the defining behavioural feature of the May 2026 tape. It explains why headline risk produces only shallow drawdowns, why implied volatility on equities keeps fading even as oil-market gauges flash amber, and why hedging activity has shifted from outright protection toward cheaper, more tactical structures. For institutional allocators, the question is no longer whether to participate in the AI-led rally; it is how to size it given a geopolitical backdrop that refuses to cooperate.

Background

The current cycle began taking shape in late 2024, when generative AI capital expenditure broke decisively higher and was then re-rated again through 2025 as agentic systems moved into enterprise production. By early 2026, hyperscaler capex guidance had pushed past consensus expectations for a third consecutive quarter, and a small cohort of mega-cap names - anchored by Nvidia, Microsoft, Alphabet, Meta Platforms, Amazon and Broadcom - was delivering the bulk of S&P 500 earnings growth. That concentration is now both the engine and the vulnerability of the index.

Geopolitical risk re-emerged as a first-order concern from late 2025, when a fresh round of confrontations in the Eastern Mediterranean and the Red Sea coincided with Iran-aligned strikes on Gulf shipping lanes. Brent has oscillated in a wide band through the spring, and the OVX, the CBOE oil volatility index, has spent extended periods above its three-year average. Conventional risk models would suggest that a shock of this size in the world's most strategically sensitive energy corridor should be associated with at least some compression in equity multiples. So far, it has not been.

How positioning got here

Fund-flow data from the major prime brokers show that systematic strategies - CTAs, vol-control funds and risk-parity overlays - rebuilt equity exposure aggressively through the first quarter as realised volatility collapsed. Discretionary long-only managers, having been caught underweight tech for much of 2024, used the early 2026 wobble to add exposure rather than reduce it. Hedge-fund net leverage in US equities is once again near multi-year highs, with the bulk of gross sitting in semis, software and AI-adjacent power and grid names.

Latest Developments

Over the past fortnight, headlines have come thick and fast: an attack on a chemical tanker near the Strait of Hormuz, fresh sanctions language from the US Treasury, and a sharp tone from regional capitals about military posture. Brent briefly probed higher on each headline before settling back as physical buyers reported no immediate disruption to crude liftings. Front-month spreads in the Brent and Dubai complexes have flattened and steepened in turns, signalling that the market is repricing scenario probability rather than reacting to a confirmed supply loss.

In equities, the response has been even more telling. The S&P 500 has logged only shallow intraday drawdowns on each escalation headline, with dip-buying typically arriving inside the same session. The Nasdaq 100 has outperformed on most risk-off days, a counter-intuitive pattern that reflects the now-dominant role of AI capex stories in shaping marginal flows. Defensive sectors - staples, utilities ex-AI infrastructure, healthcare - have lagged, even as their fundamentals have not deteriorated.

Volatility surfaces tell two stories

The VIX has stayed anchored in the mid-teens for much of the period, while the OVX has frequently traded ten or more points higher in absolute terms. That gap between equity and oil-market fear is unusually wide. Skew on S&P 500 options remains elevated relative to outright vol, suggesting investors are paying up for tail protection while keeping at-the-money hedges light. In single names, call skew on AI leaders is at multi-year extremes, consistent with a chase-the-rally bid rather than a defensive posture.

Market Impact

The cleanest expression of the FOMO-over-oil trade is the relative performance of the equal-weighted S&P 500 versus the cap-weighted index. The cap-weighted benchmark has continued to grind higher, while the equal-weighted version has been broadly range-bound. Breadth, by most internal measures, remains narrow. New highs are concentrated in a handful of mega-caps and their direct beneficiaries - power, cooling, networking, advanced packaging - while the broader cyclical complex has been more sensitive to oil and rates moves.

Energy equities have behaved like a partial hedge rather than a directional bet. Integrated oil majors have outperformed the broader market on geopolitical days but given back relative gains as front-month crude has retraced. Refiners have been more volatile, caught between stronger crack spreads on supply-disruption fears and demand worries linked to global growth. Defence stocks, by contrast, have continued to compound, with order-book visibility extended on multi-year programmes and European NATO members continuing to step up procurement.

Rates, credit and the dollar

Treasury yields have largely shrugged off the geopolitical noise, with the front end anchored by a Federal Reserve still characterising policy as moderately restrictive. The dollar has firmed modestly on safe-haven flows but has not broken out of its recent range against the euro or yen. Investment-grade credit spreads remain near their cycle tights; high-yield has widened only marginally and is still far inside its five-year average. None of these markets is signalling acute stress.

Investor Implications

For institutional allocators, the asymmetry of the current setup is uncomfortable. The opportunity cost of being underweight US large-cap tech in a year when AI-linked earnings continue to surprise to the upside is significant and increasingly career-defining. At the same time, the cost of carrying conventional hedges - long volatility, long oil, long defensive sectors - has been meaningful in performance terms. The result is a barbelled posture across many large books: maximum exposure to AI winners on one side, cheap convex hedges on the other.

Cross-asset hedging has shifted toward instruments that pay off in specific scenarios rather than broad market drawdowns. Brent call spreads, OVX call structures, gold call ratios and selective long-volatility positions on energy equities have replaced the more expensive index-level put protection that dominated earlier cycles. Currency overlays - long Swiss franc, long Japanese yen against high-beta emerging-market currencies - have been used to express geopolitical risk without sacrificing equity beta.

Retail flows reinforce the trend

Retail participation has been a meaningful tailwind. Single-stock call buying on AI leaders has been persistent, exchange-traded fund inflows into broad US equity vehicles remain positive, and zero-day-to-expiry options activity is once again pressing record levels. The behavioural signal is clear: a large cohort of investors views any pullback as an opportunity to add, not to reduce, and that conviction is being reinforced by the relentless newsflow around AI productisation, custom-silicon roadmaps and corporate AI adoption metrics.

Risks

The principal risk is that the market is correctly pricing the central scenario but underestimating the tail. A genuine supply shock - for example, a sustained closure or near-closure of a critical maritime chokepoint - would feed quickly into headline inflation, complicate central-bank narratives, and force a re-rating of duration-sensitive growth equities. The same mega-caps now driving the index are, mechanically, among the most exposed to a sharp move higher in real yields.

A second risk is concentration itself. With a handful of stocks accounting for a disproportionate share of index returns, a stock-specific shock - a regulatory action, a capex disappointment, a competitive surprise - could have outsized index-level consequences. Liquidity has been ample on the way up; whether it remains so in a forced-deleveraging episode is an open question.

Macro cross-currents

Beyond geopolitics, there is the question of whether the disinflation process can continue smoothly in an environment of higher energy prices. The Federal Reserve, the European Central Bank and the Bank of England have all signalled patience, but each retains the option to push back if services inflation proves sticky. A hawkish surprise from any of them would likely tighten financial conditions in a market that has been priced for a benign glide path.

Cross-Border Capital Flows

International capital flows reinforce the FOMO dynamic in ways that local sentiment data alone do not capture. European mandates, long structurally underweight the largest US technology names, have continued to add to that exposure throughout the spring. Japanese institutions, navigating a domestic equity market that has performed well but whose currency dynamics complicate hedged returns, have used dollar weakness on softer Fed expectations to top up unhedged US technology positions. Sovereign wealth funds across Asia and the Gulf, while privately more cautious about valuation, have been reluctant to challenge benchmark concentration.

The result is a flow picture in which the marginal incremental dollar continues to find its way into a relatively narrow set of US large-cap technology names. That is exactly the kind of self-reinforcing dynamic that produces durable trends and that, when it eventually reverses, tends to do so abruptly. The current configuration is not unprecedented, but the magnitude of the concentration is, and the geographical breadth of the participating capital base raises the stakes for any future repositioning episode.

ETF flows and passive amplification

Passive vehicles continue to play an outsized role in shaping marginal flows. Index-linked exchange-traded funds focused on US large-cap, technology and AI thematic baskets have seen sustained net creations through the spring, channelling additional capital into the same names that already dominate the cap-weighted benchmarks. The mechanical nature of this flow means that, on the way up, it amplifies the trend; in any future drawdown, it would amplify the unwind. That asymmetric amplification is itself a tail risk that institutional investors are increasingly modelling explicitly.

Behavioural Finance Lens

Beyond the conventional asset-allocation framework, the FOMO-over-oil pattern lends itself naturally to behavioural-finance interpretation. Loss aversion, in this context, has been redefined: the loss most feared is not a drawdown in absolute portfolio value but a drawdown in relative performance against benchmarks dominated by the AI complex. Career risk, agency considerations and the institutional reflex toward conformity all push allocators in the same direction, even when individual conviction in the underlying valuations may be more guarded. Recognising that dynamic is itself a useful step in resisting it where appropriate.

Outlook

The near-term path of risk assets will hinge on the interaction between three forces: the trajectory of the AI capex cycle, the evolution of Middle East tensions, and the credibility of central-bank disinflation guidance. As long as hyperscaler capex remains on its current trajectory and earnings revisions for the AI complex stay positive, dip-buying behaviour is likely to persist. A deterioration on any of these three legs would prompt a more meaningful re-evaluation.

For now, the dominant institutional posture remains constructively engaged but selectively hedged. The lesson of the past several quarters has been that fading the rally has been costly, but so has running unhedged into known event risk. The market is, in effect, paying investors to stay long while making it cheap to insure the worst outcomes - a configuration that tends to persist until something forces a reset.

Conclusion

FOMO over oil is more than a catchy desk phrase; it is a fair description of the revealed preference of marginal capital in May 2026. Equity benchmarks remain bid because the perceived cost of being absent from the next leg of the AI build-out exceeds, in many investors' minds, the discounted cost of a Middle East tail. That calculus could change quickly if the geopolitical backdrop deteriorates materially or if AI earnings momentum stalls. Until then, the path of least resistance for risk assets remains higher, with hedging concentrated in the most convex, lowest-carry instruments available.