The world is crazy but stocks are up?

A markets mystery has perplexed some analysts this year: Why are stocks sitting near all-time highs while the global economy is rocked by geopolitical conflict and inflation pressures?

Why it matters: The usual retort is that the stock market is not the economy, but a new report from Moody's offers a more nuanced explanation:

• Markets have adjusted to the new economic world order — you just have to know where to look.

How it works: You can see the change in bond markets, where government yields have risen across most advanced economies. In corporate bonds, investors have moved away from riskier debt.

• And it's visible under the hood in the stock market, where certain sectors are struggling.
• Software stocks have fallen this year, thanks to AI, as have those for autos, consumer goods and apparel, as consumers struggle with higher prices.
• The new hot sectors, meanwhile, are energy, because of the Iran war and other conflicts, and hardware and semiconductors, as investors flock to the picks and shovels of the AI boom.

The big picture: There have been huge economic shifts since the pandemic.

• Until then, we were in a post-2008 financial crisis regime. Inflation ran lower than central bank targets. Governments were able to borrow money cheaply. Low interest rates helped fuel companies' growth.
• With rates near zero, investors flocked to investments that offered a return: high-growth tech, long-dated government bonds, loans to riskier businesses.

Where it stands: That era is over. "In the last few years, we've moved to a different era," says Atsi Sheth, chief credit officer at Moody's Ratings.

• It's all about geopolitical uncertainty, higher government deficits, demographic changes and policies shaped by economic-security concerns.
• Inflation is higher, and so are borrowing costs. The yield on the 30-year U.S. Treasury has traded above 5% for the longest period since the beginning of the financial crisis, per Bloomberg.

Zoom in: First, pandemic supply-chain disruptions and demand imbalances drove higher prices. Today, it's the war and other tensions, like:

• The cost of AI. In their heyday, software companies could grow with relatively little capital and throw off cash for investors. Now, hyperscalers require huge amounts of capital expenditure for AI.
• Government debt. Governments are borrowing more money, in part to deal with rising geopolitical tensions, and that's helping raise borrowing costs for countries and all of us. (Checked mortgage rates lately?)

The intrigue: The market seems calm on the surface, Sheth says. "But then you look lower."

What to watch: There are risks. All that AI spending might not pay off. And Sheth notes that investors are still betting that governments will step in if turbulence rises.

• Some investors bank on the TACO trade — the idea that if geopolitical pressures get too hot for the markets, President Trump will try to dial down the temperature.
• But there's no guarantee of that.

The bottom line: Investors are coping with the new economic paradigm — so far.