by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our perspective on why private credit exposure to software companies has attracted heightened scrutiny. We then examine how the White House is seeking to ease war-related supply chain stresses. Next, we highlight key market developments, including signs of a potential broadening of the Middle East conflict, rating agency views on software-sector debt, and new consumer efforts to secure tariff refunds. As always, we include a summary of recent US and international economic data releases.

Private Credit & AI: Concerns about private credit are deepening as AI-related risks to software companies weigh on sentiment. On Thursday, JPMorgan Chase announced it would restrict lending to several private credit institutions following a preemptive markdown of loan portfolios, particularly those exposed to the software sector. This tightening follows a turbulent few weeks for the $2 trillion market, with several major funds forced to cap redemptions or offload assets to manage a surge in withdrawal requests.

• JPMorgan’s decision to curb lending to certain private credit funds follows a move to mark down the value of loans linked to those vehicles on a portfolio-by-portfolio basis. Unlike typical markdowns driven by missed interest or principal payments, these adjustments are largely tied to loans made to software companies that the bank views as particularly vulnerable to disruption from advances in artificial intelligence, which has pressured valuations and collateral quality.
• The write-down appears to reflect the bank’s evolving view of AI-related risks. Under lending agreements with the affected funds, the bank can periodically re-evaluate leverage based on the overall quality and valuation of the collateral backing the facilities. In this case, the markdown was applied to a relatively small subset of borrowers and is therefore not considered large enough to pose any meaningful systemic risk.
• JPMorgan’s decision to limit lending underscores that, even if major banks are not the primary lenders in private credit markets, they still provide an important backstop by financing those lenders. Large banks supply critical liquidity to private credit funds through credit lines and other financing facilities, enabling those funds to extend loans, often on more flexible terms than tightly regulated banks can offer directly to borrowers.
• A pullback in this type of bank financing, therefore, points more toward a gradual tightening in overall financial conditions than an immediate deterioration in the underlying quality of corporate debt. However, the optics of the move are likely to compound negative sentiment, especially in the wake of recent stresses in parts of the consumer loan market. In our view, as long as credit remains accessible to private borrowers, any retrenchment by private funds should remain relatively limited in scope.

Resolving Supply Chains: The White House has explored alternative strategies to address disruptions in trade through the Strait of Hormuz, which have pushed crude oil prices above $100 per barrel for the first time since August 2022. The president has called for a temporary suspension of the Jones Act to facilitate additional crude shipments and, in parallel, authorized the purchase of Russian oil cargoes already en route. These measures aim to mitigate rising costs as supply disruptions from the ongoing conflict continue to worsen.

• The Jones Act is a century-old maritime law that requires cargo transported between US ports to move on vessels that are US-built, US-owned, and US-crewed. The proposed 30-day exemption would specifically apply to ships carrying petroleum products and would mark the first such waiver since 2022. The measure is expected to increase shipping capacity and ease bottlenecks by allowing a broader fleet to operate, particularly on routes serving East Coast ports.
• Additionally, mounting concerns over supply disruptions have encouraged the United States to modestly soften its stance on Russia. On Thursday, Washington issued a second authorization allowing the sale and delivery of Russian crude that was already loaded on vessels and stranded at sea. While most of these cargoes are not expected to head to the United States, they are intended to help ease global prices by enabling key buyers such as India to absorb the stranded barrels and reduce competition for new supplies.
• Beyond these measures, the White House is evaluating additional strategies to mitigate the supply-side shocks triggered by the conflict. The Department of Energy has already committed to releasing 172 million barrels from the Strategic Petroleum Reserve, with the potential for further drawdowns. Additionally, the administration is weighing an unprecedented move to intervene in financial markets by directly purchasing oil futures contracts to dampen price volatility.
• White House efforts to stabilize energy prices have created a temporary ceiling on volatility, with $100 a barrel emerging as a key pivot point for Brent crude. However, this stability is fragile. As long as the Strait of Hormuz remains blocked, the persistent deficit in physical supply will force increasingly costly supply chain adjustments, likely worsening the inflationary outlook for the coming months.

War Broadening: The conflict in the Middle East continues to show signs of spilling beyond the Gulf. On Friday, Turkey reported that NATO forces intercepted a third Iranian missile that had entered its airspace. These incidents are likely to reinforce concerns that the war will be prolonged and could draw in additional countries, with any further widening of the conflict likely to put upward pressure on oil prices by heightening the risk of new supply disruptions.

Software Assured? Ratings agency S&P Global has offered some reassurance that the debt backing software firms is unlikely to face broad, sector-wide downgrades. In a report published this week, it said that while AI has the potential to fundamentally reshape parts of the software industry, the impact on credit quality is expected to play out on a case-by-case basis and over a longer period, rather than triggering an immediate, uniform shock.

Tariff Refund: Retailers are facing a new wave of consumer litigation following the Supreme Court’s invalidation of IEEPA tariffs. A proposed class-action suit against Costco asserts that shoppers should receive any tariff refunds the company recovers from the federal government, arguing that higher retail prices effectively forced consumers to pay those duties. This case highlights the broader regulatory and accounting mess following the February ruling, as both the government and private sector struggle to interpret how to process and distribute refunds.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with an update on the war in Iran, focusing on rising tensions around the Strait of Hormuz. We then review the February CPI report and assess how the Middle East conflict could shape the path of inflation. Next, we highlight key market developments, including shifts in the US trade strategy and China’s recent incursions into Taiwan’s airspace. As always, we include a summary of recent US and international economic data releases.

Rising Tensions: Trade tensions have escalated following reports that shipping lanes in the Strait of Hormuz are becoming increasingly impassable. On Wednesday, an attack on six oil tankers in Iraqi waters signaled the growing risks for vessels navigating the region. The incident has raised concerns that the war is showing signs of becoming prolonged and that trade throughout the region is likely to remain restricted, leading to a significant rise in oil prices due to renewed fears of a supply shock.

• Rising tensions in the Strait of Hormuz have underscored Iran’s capacity to prolong the conflict well beyond earlier expectations. The latest attacks came about just as the United States had tried to reassure shippers by destroying Iranian mine‑laying vessels, warning Tehran over the use of naval mines, and considering naval escorts to safeguard commercial traffic and keep the waterway open.
• These incidents have reignited fears of prolonged disruptions to trade flows, despite a historic, coordinated effort to stabilize markets through strategic oil releases. On Wednesday, the International Energy Agency said member countries will collectively release 400 million barrels, with Japan initiating the first drawdowns and the United States planning to contribute 172 million barrels from its Strategic Petroleum Reserve.
• Additionally, there are growing signs that Iran is prepared to widen the scope of its attacks to ensure that more countries bear the costs of the war. On Wednesday, the United Arab Emirates reported that it had intercepted another wave of missiles after Iran threatened to target Israeli‑linked banks in the region. US officials have also warned of indications that Iran is considering plotting strikes as far afield as California, underscoring the expanding geographic reach of its threat posture.
• Despite the latest attacks, it appears that Iran may be seeking an off‑ramp from the conflict. Tehran has reportedly signaled a willingness to de‑escalate in exchange for international guarantees that the United States and Israel will halt military strikes on its territory. While this is unlikely to bring both sides to the negotiating table on its own, it does suggest that Iran recognizes it cannot prevail in a direct confrontation and may be looking to limit further escalation.
• While we remain cautiously optimistic that the war will begin to wind down over the next couple of weeks in line with the president’s timeline, we are increasingly mindful that its economic and market aftershocks could persist for months. In our view, this evolving backdrop continues to favor value over growth, and we advocate for maintaining broad diversification away from riskier market segments, particularly as the conflict’s trajectory remains uncertain.

Inflation Risk: The latest CPI report offers fresh evidence that inflation is holding mostly steady but not quite enough to fully dispel concerns about renewed price pressures. According to the BLS, both headline and core inflation held steady in February at 2.5% and 2.4%, respectively, reinforcing the view that some of last year’s inflationary momentum is easing. In a world without the current conflict in the Middle East, this pattern likely would have opened the door to more serious discussions about a potential summer rate cut.

• The modest headline inflation reading reflects gradually easing underlying price pressures, particularly in services, even as some energy components ticked higher. In February, shelter inflation continued to exhibit tentative moderation, with its annual pace the slowest since August 2021. By contrast, the energy index rose for the month, driven by gains in gasoline and natural gas, while electricity prices edged slightly lower after strong increases over the past year.
• The inflation report indicates that price pressures are gradually returning to more normal levels but there are signs that they were starting to lose steam while moving toward the Fed’s 2% target. Shelter inflation has moved back into its typical historical range, and core services inflation, while still slightly elevated, is drifting closer to its longer‑run pace. Goods inflation, which has been influenced by shifting tariffs and supply‑chain costs, also appears to be stabilizing after prior bouts of volatility.

• Renewed turmoil in the Middle East has reignited concerns that supply-chain stress will once again feed into the inflationary pipeline. As higher energy and raw-material costs filter through the production process, core goods prices could face sustained upward pressure. Services may face “cost-push” inflation as energy-intensive services like air travel — currently facing rising fuel, insurance, and rerouting expenses — are likely to face margin pressure due to the conflict.
• The supply chain risks emanating from the Middle East could collide with surging demand pressures stemming from last year’s tax bill. Beyond stimulating household consumption, the legislation’s aggressive investment incentives have triggered a significant capital expenditure boom. The resulting scramble for materials to build AI data centers has already tightened markets for critical inputs like aluminum and energy, a situation poised to worsen as the conflict in the Middle East persists.
• While the current hostilities are contributing to higher inflation, the full magnitude of the impact remains unclear at this time. At present, we do not anticipate a return to the peak inflation levels seen in the post-pandemic era as the current supply-chain disruptions lack the breadth of the 2021–2022 lockdowns. However, the duration of the conflict remains the critical variable. We expect the resulting inflationary pressure to push back the timeline for the Fed to achieve its 2% target, a dynamic that will likely weigh on bonds.

Tariff Wall: The White House is preparing a new trade investigation targeting major partners as it seeks to reimpose tariffs recently struck down by the Supreme Court. The probe will focus on economies with excess manufacturing capacity. While the administration has pivoted from now‑illegal IEEPA tariffs to temporary duties tied to current account imbalances, those measures will expire after 150 days unless Congress intervenes. The new investigation is therefore likely to stoke concerns about renewed tariff hikes and greater trade policy uncertainty.

China’s Moves: Beijing sent warplanes into Taiwan’s airspace on Wednesday in a provocative move that signals rising tensions. The incursion followed a period of relative calm, during which China appeared to scale back such flights after trade and diplomatic talks with the United States. However, the move seems to be a test of what China can get away with while the US is focused on the Middle East, potentially setting a precedent for future actions.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with what Oracle’s earnings signal about the AI investment cycle, then examines how the US’s difficulty in securing passage through the Strait of Hormuz illustrates the challenges of confronting smaller asymmetric adversaries. We next highlight key market developments: the IEA’s reserve release, Google’s provision of AI technology to the Pentagon, and Israel’s expanded Red Sea presence. As usual, the report includes a summary of recent US and international economic data.

AI Maturing: Oracle surprised investors with a stronger‑than‑expected earnings report, though its financial statements also revealed a developing concern. On Tuesday, the company said revenue from its cloud infrastructure business surged 84% to $4.9 billion in the quarter ended February 28, outpacing prior growth of 68% and topping analyst estimates. While these results were warmly received, the release was not without controversy as Oracle’s aggressive AI‑related capital spending has pushed its free cash flow into negative territory for the first time in decades.

• The revenue beat reassured investors that Oracle is starting to turn its substantial AI-related bookings into actual sales. While the company now counts more than 700 AI and cloud infrastructure customers, a significant portion of its remaining performance obligations remains tied to a single partner. OpenAI’s roughly $300 billion cloud infrastructure deal represents a substantial share of Oracle’s reported $553 billion AI-driven backlog.
• Oracle has effectively emerged as a proxy for the broader AI infrastructure trade that rose to prominence last year, driven by investor focus on surging demand for cloud computing and storage capacity. This theme has been cemented by generous data-center tax incentives and supportive federal and state policies, which continue to encourage heavy capital investment while keeping the near-term tax burden low.
• Much of the market’s attention has centered on tech companies’ readiness to build out infrastructure and their tendency to keep raising the bar. Just this quarter alone, Meta, Alphabet, Microsoft, and Amazon signaled as much as $700 billion in combined capital expenditures for 2026 as they race to keep pace with demand. Nvidia, meanwhile, estimates that trillions of dollars’ worth of infrastructure still needs to be built.
• While the AI build-out has delivered strong returns, it has also fueled growing concerns that an industry once considered capital-light is becoming capital-heavy. This shift has drawn scrutiny, as much of the spending has come at the expense of free cash flow and is increasingly being financed by debt. Although deploying cash in this way is often viewed as a sign of confidence in future investment opportunities, it also raises questions about a company’s ability to return capital to shareholders down the line.
• Although we remain confident that tech momentum still has room to run, we suspect that the heavy spending on infrastructure could lead investors to place a higher premium on profitability and strong cash flow. As a result, we could see sharper pullbacks if companies disappoint and a more muted upside if they beat expectations. We continue to believe that diversifying beyond tech could be beneficial for wealth preservation.

Mixed Message: Oil prices remain volatile as the White House continues to send mixed signals about the war’s progress. On Tuesday, President Trump encouraged oil tankers to take the risk of passing through the Strait of Hormuz, a move later reinforced by a US general who said the military was considering ways to escort the vessels. However, market sentiment quickly shifted after reports surfaced that Iran had deployed mines in the strait, prompting the White House to announce that it was not ready to provide naval escorts at this time.

• The controversy over transit within the strait underscores that the US’s continued demonstration of military dominance may no longer be enough to ensure safe passage. Over the last four years, modern weaponry has evolved in ways that enable smaller nations to sustain prolonged engagements. Iran, for instance, has increasingly relied on inexpensive weapons such as drones to strike targets across the region. Ukraine has used similar tactics in its fight against Russia.
• This shift toward low-cost, high-impact warfare has made modern conflicts far less predictable. The resilience of smaller adversaries has made it far more difficult to compel outright, unconditional surrender in modern wars. Rather than seeking to defeat a stronger rival outright, these states can rely on cheap, easily produced weapons to prolong the fighting and steadily raise the political and financial cost of maintaining dominance over a region.
• Iran’s ability to inflict outsized damage relative to its economic and military weight has become a major source of market uncertainty. This is reflected in recent oil price swings, which underscore investor unease as Iran disrupts traffic through the Strait of Hormuz — even after much of its conventional military capacity has been degraded. The underlying concern is that the conflict could broaden to include more countries.
• While we remain cautiously optimistic that the conflict will conclude within the president’s stated four-to-five-week window, we recognize that the probability of a more protracted campaign is rising. This lingering uncertainty is likely to weigh further on market sentiment in the near term, particularly for risk assets. In our view, investors should focus on broad portfolio diversification, which can include exposure to precious metals and value-oriented sectors.

Strategic Reserve: Japan has announced it will be the first country to draw on its strategic reserves in an effort to cool energy prices. This follows a coordinated move by IEA members to undertake the largest collective release of strategic stocks in history to offset supply lost from the blockade of the Strait of Hormuz. While this action is likely to put near-term downward pressure on oil prices, it could also create significant future demand once markets stabilize and reserves need to be rebuilt.

Google Defense Contract: Tech companies are deepening their ties with the Pentagon. Alphabet will provide AI agents to handle unclassified, routine tasks, highlighting Washington’s growing use of AI to boost efficiency and manage staffing. This could leave the Defense Department more dependent on private tech firms for daily operations, while making those firms more reliant on government contracts. We see this as another step in the blurring of the line between the public and private sectors.

Israel’s New Base: Israel is moving to establish a foothold on the Red Sea as it prepares to confront key Houthi strongholds and safeguard maritime trade routes. The planned security presence builds on Jerusalem’s recent decision to recognize Somaliland, a breakaway region of Somalia, as an independent state. A base on Somaliland’s coast would enhance Israel’s ability to counter Iranian-backed proxies in Yemen. The expanding presence underscores how Israel is positioning itself as an increasingly important power in the Middle East and Red Sea basin.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest news on the Iran War and discusses how challenging it will be to end the conflict in the near term. We next review several other international and US developments with the potential to affect the financial markets today, including the European Union’s plans to adjust its environmental and tax policies to shield investors from higher energy prices and new survey results suggesting artificial intelligence isn’t having much impact on corporate hiring plans just yet.

United States-Israel-Iran: After global stocks tanked early yesterday on a surge in energy prices related to the war in Iran, they reversed and ended with decent price gains after President Trump said in an interview that the war was substantially finished. We recognize that the threat of much higher gasoline prices and other economic disruptions could force the president to wind down the war. However, we think ending the war and dislodging US forces will be easier said than done. Geopolitical and economic tensions in the region are likely to continue.

• Separately, the Wall Street Journal reported last night that some of President Trump’s advisors have privately urged him to look for an exit plan amid spiking oil prices and concerns that a lengthy conflict could spark political backlash.
• However, as long as Tehran continues to attack regional countries and Israel still wants to strike Iranian targets, it is unlikely that the US could easily withdraw from the war. That’s especially the case if Iran continues to threaten the shipment of oil, gas, and other mineral products through the Strait of Hormuz.
• One official also reportedly said that the president won’t withdraw US forces until he can claim a satisfactory victory. That alone raises the risk that the war could continue, since Iran could well continue to stage asymmetric attacks regionally or around the world for some time to come. Indeed, Iranian officials yesterday insisted they won’t discuss a ceasefire with the US or Israel.
• Separately, after the International Energy Agency yesterday convened a meeting of the finance ministers of top countries, a spokesman said the group is prepared to take all necessary measures, including drawing on strategic stock reserves, in order to stabilize the market. Historically, substantial drawdowns of strategic reserves during geopolitical crises have helped bring down energy prices.
• Despite the difficulty of ending the war soon, investors today appear to be responding to the president’s assurances that it is winding down. Global oil prices are down some 7% so far today, with Brent crude currently trading at about $92.18 per barrel. In turn, that has given a lift to global stock values so far this morning.

European Union: As the Iran War continues to buoy global oil and gas prices, officials in the European Commission have begun exploring adjustments to the EU’s environmental and tax rules to help hold down energy costs for consumers. The national governments of France, Italy, Spain, and other countries are also showing signs they may intervene in their markets to hold down energy costs for consumers. For example, the French government has ordered a series of checks on gasoline stations to root out price gouging.

Japan: New reporting says the government of conservative Prime Minister Takaichi is launching a survey of Japanese ground-water resources that will include tracking the nationalities of users. The initiative has alarmed foreign nationals in the country who fear that Japan’s current wave of anti-immigrant fervor could dispossess them of water needed for personal or industrial uses. The move threatens to scare away foreign workers and investors needed to make up for the country’s ongoing population challenges.

China: The total dollar value of exports in January and February rose 21.8% from the same period one year earlier, triple the expected increase and far more than the 6.6% rise in December. With imports up a relatively more muted 19.8%, the January-February trade balance showed a record surplus of $213.6 billion. The continuing imbalance reflects China’s weak domestic demand and the government’s encouragement for firms to sell their excess production overseas. The record surplus will likely continue to spur trade tensions with other countries.

United States-China: At a forum yesterday, Assistant Secretary of Energy Audrey Robertson asserted that recycling rare metals, materials, and magnets within the US is one of the fastest ways the country can boost its access to critical minerals and sidestep China’s near monopoly on some of them. As the federal government works frantically to boost US critical minerals supplies, the statement suggests investors could find opportunities among recyclers and processors, rather than just critical-mineral miners.

• According to Robertson, “New technology in this space will be a game changer … I think you will see significant gains in the output from recycled black mass and material in the coming 12 months.”
• Black mass is the powdery residue from lithium-ion batteries that contain valuable critical minerals.

US Stock Market: Nasdaq yesterday said it is working with crypto exchange Kraken to offer tokenized stocks on Kraken’s platform. The firms are apparently focusing on the legal and governance details that would give the owners of tokenized stocks the same governance rights as holders of the underlying securities, including proxy voting and dividend payments. Issuing companies would have to opt into the plan. According to reports, Nasdaq and Kraken hope to have the plan up and running by early 2026.

US Labor Market: According to KPMG’s new CEO Outlook Pulse for 2026, only 9% of surveyed chief executives plan to cut their workforce this year because of artificial intelligence. Indeed, fully 55% expect to increase their hiring in 2026 as a direct result of AI, while 36% expect no change in hiring. The data provides a counter-narrative to widespread corporate, individual, and investor concerns about job losses due to AI.

US Airline Industry: The Wall Street Journal reports that the ongoing funding standoff for the Department of Homeland Security has begun to seriously slow security checkpoints at some major airports, including Houston, New Orleans, and Atlanta. Although Transportation Security Administration officers are supposedly working without pay, staff shortages have slowed wait times for security checks to as much as several hours at some airports. The disruptions are increasingly raising the political stakes for the administration.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with reports of new mass protests in Iran that could potentially help spur the US to launch its expected attack on the country. We next review several other international and US developments that could affect the financial markets today, including the nomination of two dovish academics to the Bank of Japan’s policy board and growing concerns in Germany and Canada that their new defense budget hikes will disproportionately benefit large, incumbent defense suppliers.

Iran: Anti-regime protestors and pro-government militias clashed on college campuses across the nation yesterday for a fourth consecutive day. The protests haven’t spread beyond campuses so far, but if they do, there would be a heightened risk of a violent crackdown by the government like the one in early January that killed some 7,000 civilians. In turn, such a crackdown could spur the US administration to launch its long-awaited attack against Iran, potentially sparking political disintegration or an economically disruptive war across the region.

Japan: Prime Minister Takaichi today nominated two dovish academics for positions on the Bank of Japan’s nine-member monetary policy committee, following through with her intention to push through more stimulative monetary and fiscal policies. In response, the yen has weakened some 0.5% to 156.61 per dollar ($0.00639). If concerns about overly dovish monetary policy take hold in Japan, the yen could weaken further, potentially boosting consumer price inflation and drawing the ire of the US.

Thailand: Today, the Bank of Thailand unexpectedly cut its benchmark short-term interest rate from 1.25% to 1.00%, reflecting the country’s persistently weak economic growth and low price inflation. Since the pandemic, the Thai economy has been weighed down by high household debt, weak consumption, and a slow tourism recovery. While the central bank has cut rates to help address those issues, it has also called on the government to take more proactive steps in fiscal, regulatory, and industrial policy to address the problem.

Germany: According to the Financial Times, Chancellor Merz and his government are probing the way major defense firms such as Rheinmetall benefit disproportionately from Germany’s increased military budget. The government reportedly wants to ensure that the hundreds of billions of euros in new defense funds also reach start-ups focused on unmanned systems and military applications for AI and quantum technology.

• We have long believed that changing geopolitics will give a boost to European defense stocks, and that has been borne out over the last few years.
• If the Merz government’s initiative leads to major procurement policy changes, it could remove some of the opportunity for big, incumbent defense firms in Germany and the broader European Union. Over time, however, it could also help spawn a new class of smaller, more agile, and more innovative firms that could eventually list shares.

Canada: The German-style concern about concentrated military spending is also now playing out in Canada. While the government intends to boost its defense budget to 5.0% of gross domestic product by 2035 and channel at least 70% of the total into Canadian defense firms, smaller companies are warning that a risk-averse Ottawa might channel the bulk of increased defense funding to well-established players such as Bombardier or continue with legacy US military providers such as Lockheed Martin.

US Politics: In his State of the Union speech last night, President Trump focused on painting a positive picture of the US economy, while offering several initiatives to address the cost of living. For example, he reiterated his intention to impose limits on investors buying large numbers of homes, and he announced a plan to shield consumers from electricity price hikes caused by AI data centers. He also floated a plan to give citizens without access to a retirement savings plan at work the opportunity to invest in the retirement plan for federal workers.

• Of course, a major goal of the speech would have been to bolster Republican chances ahead of the mid-term Congressional elections in November.
• With public opinion polls showing widespread dissatisfaction with the current economy, it is not yet clear whether the rosy picture painted by the president will do much to help Republican prospects when it is time to vote. As of right now, the polls continue to suggest the Republicans will at least lose their majority in the House of Representatives.

US Artificial Intelligence Industry: AI firm Anthropic, which has touted its strict guardrails on its models, yesterday said it will relax its core safety policy to stay competitive with other AI labs. The move may mean the firm will cave to the Pentagon’s demand for free rein to use Anthropic’s well-regarded Claude model. More broadly, it also signals that competitive pressures may also push other AI firms to loosen their safety standards, increasing the risk of dangerous results from the use of their models.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a review of two key factors behind yesterday’s stock sell-off: a report highlighting inaccurate accounting related to data centers and another report suggesting artificial intelligence will lead to massive economic dislocations. We next review several other international and US developments that could affect the financial markets today, including the first corporate lawsuit demanding a rebate for its tariffs paid and more China-Japan tensions.

US Technology Industry: Credit rater Moody’s yesterday warned that a gap in US accounting rules is allowing big technology firms to conceal tens of billions of dollars of potential liabilities for their AI data centers. The problem stems from the firms’ use of special-purpose, off-budget vehicles that don’t require a full accounting of the potential costs of failing to renew a data center lease. The report was one major reason for the downdraft in US stock prices yesterday.

• The report also illustrates the increasingly opaque financial accounting that is helping to support hyperscalers’ stock prices even as they pump billions of dollars into new data center projects.
• In turn, the funky accounting is likely to be taken as one more sign that the sector is in an investment bubble. However, even if it is, it would be very difficult to predict when the bubble might definitively pop.

US Artificial Intelligence Industry: Another factor in yesterday’s market action was a dire report by Citrini Research that warned of massive economic disruption as artificial intelligence begins to outstrip human capabilities. According to the report, “For the entirety of modern economic history, human intelligence has been the scarce input . . . We are now experiencing the unwind of that premium.” Because of this, the report said the repricing of human knowledge will drive down asset values across a wide range of industries.

• Separately, Meta today announced that it has agreed to buy six gigawatts’ worth of AI computing power from chipmaker Advanced Micro Devices, in a deal valued at more than $100 billion that could result in Meta owning as much as 10% of AMD’s stock.
• The deal is only the latest transaction that has raised concerns about daisy-chain financing and excess capital investment related to AI. While such deal announcements initially were taken well by investors, sentiment has shifted, and the Meta-AMD deal could well weigh on technology shares today.

US Trade Policy: Responding to last week’s Supreme Court decision invalidating much of President Trump’s tariff policy, FedEx yesterday became the first US company to sue for a rebate of the tariffs it has paid. According to trade experts, the federal government could now potentially be on the hook for some $160 billion in rebates. We suspect that many firms will sue the federal government for rebates, potentially leading to cash windfalls but also signaling the start of long, complex, and expensive legal cases.

• The administration today began applying its temporary, blanket replacement tariffs at a rate of just 10%, as Trump initially announced, after key trading partners pushed back against his later vow to hike the rate to 15%. However, administration officials say the president still intends to raise the blanket tariff to 15% in the near future.
• Separately, the Wall Street Journal reports today that the administration is considering imposing national-security based tariffs on half a dozen key industries in order to help offset the impact of the court decision. The new tariffs being considered could cover industries such as large-scale batteries, cast iron and iron fittings, plastic piping, industrial chemicals, and power grid and telecom equipment

European Union-United States: In another response to the US administration’s loss of its main trade cudgel, the European Parliament yesterday suspended work on two pieces of legislation needed to implement the US-EU trade deal tentatively agreed to last year. EU officials said US policymaking is now in too much flux to set anything in stone. The move is likely to anger the US administration and lead to retaliation, which naturally could weigh on EU asset values.

United States-Iran: The Wall Street Journal said yesterday afternoon that Chairman of the Joint Chiefs of Staff Gen. Dan Cane and other senior Pentagon leaders have warned President Trump and his administration that a prolonged attack on Iran would carry significant risks, such as US and allied casualties, depleted air defenses, and an overtaxed force. Since Gen. Cane is reportedly trusted by the president, the news means there is possibly less of a chance of the attack going forward. If it doesn’t materialize, one obvious result would likely be a retreat in global oil prices.

China-Japan: The Chinese government today widened its ban on the export of critical minerals and other key goods to Japan, adding 20 major Japanese companies to the blacklist. The prohibited exports include rare earths used in motors and magnets, machine tools, batteries, and semiconductor-making equipment. Affected companies include Mitsubishi Heavy Industries, IHI, and NEC.

• The move is the latest in a long series of actions Beijing has taken to punish Prime Minister Takaichi for her statement last autumn that a Chinese blockade of Taiwan would require a military response from Japan.
• The export ban could cause considerable disruptions for the affected companies, highlighting the importance of geopolitical risk as China becomes more aggressive on the world stage.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an update on the US’s evolving foreign trade policy now that the Supreme Court has invalidated much of the administration’s tariffs. We next review several other international and US developments that could affect the financial markets today, including moves that will likely boost Japan’s defense industry and a spike in violence in Mexico after its government killed a major drug lord.

US Tariff Policy: Responding to the Supreme Court’s decision on Friday invalidating the import tariffs that President Trump had based on an emergency law, the president on Saturday said he will impose a blanket 10% tariff on all countries based on a different law that would allow them to stay in place for 150 days, effective Tuesday. He later said he would raise that tariff to 15%. For some countries that would actually be higher than the rate they had previously negotiated with the US.

• We had long argued that if the Supreme Court ruled against the original tariffs, the administration would pivot to other legal justifications for them. The new legal basis isn’t as advantageous as the one initially used, but the administration is still likely to use it to its maximum effect.
• As a result, we expect that trade policy uncertainty will increase again, especially since the court ruling now raises a question about rebates of the previous tariffs and the validity of foreign countries’ investment pledges to the US.
• Indeed, the renewed trade uncertainty appears to be weighing on global equity prices so far today.

US Nuclear Energy Industry: In a weekend interview with the Financial Times, the CEO of enriched uranium firm Centrus Energy warned that the US nuclear energy industry will face a shortage of the fuel when new sanctions outlaw sourcing it from Russia beginning in 2028. The CEO, Amir Vexler, said his firm is racing to build new enrichment capacity but may not be able to keep up with the demand from planned reactor installations or restarts.

• Vexler’s warning is consistent with our view that increased demand for nuclear energy around the world is likely to put upward pressure on uranium prices at different stages of the fuel’s supply chain. That alone should support robust pricing for uranium going forward.
• In addition, investors should keep in mind that China’s effort to rapidly build up its arsenal of nuclear weapons will also demand a significant chunk of global uranium mine output. That will likely put added upward pressure on uranium prices.

US Airline Industry: The Department of Homeland Security yesterday said it would suspend the TSA PreCheck and Global Entry expedited security programs at US airports due to the partial government shutdown, but later backtracked and said only Global Entry would be suspended. On top of the blizzard that has already canceled or delayed hundreds of flights in the Northeast, the news points to painful, if temporary, disruptions for the US airline industry in the coming weeks.

Japan: The ruling Liberal Democratic Party at the weekend approved a draft law that would scrap the current rules limiting Japan’s defense equipment exports and allow lethal arms shipments. The party is expected to present the draft bill to the government as early as this week. Prime Minister Takaichi can then use her supermajority in parliament to push it into law. In our view, the legislation is likely to spur the development of an important new industry for Japan, potentially helping improve economic growth and boost stock market opportunities.

• Under Japan’s current rules, defense equipment exports are limited to five categories: rescue, transportation, vigilance, surveillance, and minesweeping.
• The proposed rules would assign defense equipment to two categories: arms such as tanks and howitzers, and non-arms equipment such as bulletproof vests. The National Security Council, attended by the prime minister and relevant ministers, would have the authority to approve or disapprove arms exports.

China: New satellite photos analyzed by Janes show that China has launched the first of its next-generation Sui-class attack submarines. The photos show that the nuclear-powered Type 095 sub exhibits advanced acoustic stealth and strike technologies, such as an X-tail rudder configuration and pump-jet propulsion. The new sub illustrates how China continues to rapidly build and improve its armed forces in an effort to dominate at least the Indo-Pacific region and force the US into economic and geopolitical retreat.

Mexico: Under pressure from the US, the Mexican military yesterday killed the country’s top drug lord, Nemesio “Mencho” Oseguera. In response, his Jalisco New Generation Cartel has begun lashing out with a series of attacks on civilian and government targets. It isn’t clear whether the cartel will continue trying to get revenge against President Scheinbaum for her cooperation with the US, or whether it will devolve into an intra-cartel power struggle. Either way, the resulting violence could be a headwind for Mexican stocks in the near term.

United States-Israel-Middle East: In a weekend interview, the US Ambassador to Israel, Mike Huckabee, said Israel has a right to seize vast swaths of land from “the Wadi of Egypt” to the Euphrates, based on the biblical verse in which God granted it to the descendants of Abraham. Huckabee later backtracked, but the statement raises concerns that the US could be working to extend Israeli sovereignty beyond its borders. If so, the policy would likely portend renewed tensions or even war between Israel and the rest of the Middle East in the coming years.

United States-Iceland-European Union: Even though the US administration’s push to take over Greenland has cooled a bit recently, the government in neighboring Iceland is reportedly considering a vote to restart EU membership talks as early as August in order to bolster its security. The move illustrates how the US’s new, more forward-leaning foreign policy is forcing dramatic realignments between countries around the world.

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