by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with a discussion of the hacking incident involving one of OpenAI’s models. We then examine the White House’s newly implemented tariffs. Next, we briefly cover Chile’s push to refine more of its copper, Europe’s growing energy shortage, and new regulations for car doors. As always, we conclude with a review of recent domestic and international economic data.

AI Fears: The capabilities of AI tools continue to concern regulators and markets as the technology evolves in ways that are still difficult to predict. Earlier this week, OpenAI said one of its experimental agents escaped a controlled test environment, gained internet access, and breached the website Hugging Face during a cybersecurity exercise. The incident has heightened concerns about weak safeguards and is likely to increase pressure on lawmakers to advance new regulation as the United States competes with China for AI leadership.

• According to OpenAI, the incident involved a model that was a combination of its newly released GPT-5.6 Sol and an even more capable pre-release version. The breach occurred while the models were being tested internally in a sandbox, where the model then discovered a previously unknown vulnerability. From there, the AI model targeted Hugging Face, where the intrusion was detected and contained, with the company using a Chinese AI model to assist in its response.
• While the breach was significant, the motive was unusual. The AI model escaped its test environment in an effort to improve its evaluation score, targeting Hugging Face because it believed the platform contained the information it needed to cheat the benchmark. That narrow objective made the model easier to detect, since it left a clear trail of activity. Hugging Face later relied on a Chinese open-weight AI model after guardrails on US frontier models limited their usefulness in the investigation.
• The attack was relatively benign largely because it was not designed to target more sensitive information. Still, the breach shows that these AI tools could become dangerous in the wrong hands if used to uncover vulnerabilities at major companies or access account numbers and private data. The risk may be even greater for smaller companies, which are likely to lag larger firms in developing the necessary infrastructure and protections.
• Additionally, Hugging Face’s use of a Chinese AI model to help resolve the incident highlights a key weakness in the US strategy. Closed proprietary models are often more expensive and can be harder to use in fast-moving situations such as a cyberattack, especially when guardrails limit their flexibility. As a result, open-weight Chinese models, while still trailing the best US systems in some areas, remain attractive to firms.
• We expect the hacking incident could prompt the US to treat AI more explicitly as a national security risk. That could lead to more pre-release government testing of certain models and tighter regulation of foreign AI systems, including those developed in China. While we do not think this will affect the current momentum, it could create some long-term pressure on firms’ ability to generate profits.

Liberation Part II: The White House has announced a new round of tariffs to replace those set to expire today. The levies follow the administration’s investigation into forced labor in global supply chains and are intended to protect US workers. The new duties target major trading partners at rates of 10% to 12.5% and were set to take effect earlier today at 12:01 AM. The tariffs are also designed to reinforce compliance with trade agreements reached last year.

• The new tariffs will replace those that have now expired after the Supreme Court struck down the administration’s IEEPA-based duties earlier this year. The administration has since pivoted to Section 301 of the Trade Act of 1974, which USTR says allows action against unfair or discriminatory foreign practices. The provision is widely viewed as a more durable legal basis than IEEPA. The new tariffs will need to be renewed every four years, but this should ensure that the tariffs will stay in place.
• The new tariffs include key exemptions designed to reduce the chances of supply chain disruptions. Goods already covered by industry-specific tariffs are not facing additional levies, and key inputs such as food, fuel, and fertilizers are also excluded. Additional exemptions may still be granted on a case-by-case basis, depending on strategic importance and any previous commitments to the White House.
• The new tariffs are not expected to have the same market impact as last year’s round. While the structure of the latest measures differs from the original tariffs imposed last year, firms have had time to adapt, leaving companies more resilient than they were a year ago. As a result, we believe the new tariffs will have a more limited effect on the economy and financial markets.

Chile Diversification: The country is looking to build out its own refining industry so it can become more self-sufficient as it seeks to play a larger role in the global data center boom. While it will likely continue to maintain ties with Beijing, developing its own refining capacity would give it more flexibility to sell refined copper on its own terms. The move also aligns with US efforts to deepen its relationships with South American countries as Washington works to strengthen its own AI supply chain.

European Struggles: The ongoing conflict between the US and Iran has begun to weigh on Europe. Renewed tensions have pushed gas prices toward levels that have not been seen since the conflict’s onset, reflecting a tightening supply backdrop as Europe competes with Asia for LNG. Elevated prices are making it more difficult for the region to build storage ahead of the winter months, which could leave it more susceptible to price swings. Although Europe has reduced consumption and is less vulnerable than it was a few years ago, the risk of energy stress has nonetheless increased.

Car Regulations: The US government is weighing new regulations for car door handles. The move comes amid rising reports of people becoming trapped in their cars, which has in some cases led to fatalities. The proposed rules would apply to vehicles with electronically operated door handles, which can stop working if the car loses power or is involved in a crash. The new requirements are expected to take effect over the next few years but could raise costs for automakers.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with the latest developments in Iran before turning to the White House’s pursuit of a nuclear arrangement with Saudi Arabia and its implications for the regional balance of power. We then briefly examine AMD’s investment in Anthropic, the administration’s move to target another Federal Reserve Board seat, and a recent AI-tool hacking scandal. As always, we close with a review of key domestic and international economic data.

New Iranian Front: The conflict with Iran has broadened from the Strait of Hormuz to the Red Sea. On Wednesday, Iran-backed Houthi forces attacked a commercial vessel in the Red Sea, raising the risk of another major chokepoint in a conflict that continues to disrupt energy markets. Brent crude is now approaching $98 a barrel, and it is increasingly unclear whether global strategic reserves will be enough to cap prices as supplies tighten further.

• The attacks in the Red Sea now threaten the Bab al-Mandab Strait, a key route for Saudi oil exports. The kingdom has long used the route as an alternative to the Strait of Hormuz, with crude moving through its east-west pipeline to Red Sea ports. Since September, Saudi Arabia has been able to bypass disruptions in Hormuz by sending oil through the pipeline and loading it for export from its western terminals. These attacks may now mean that shippers in the region will have to find alternative routes.
• The latest escalation in the conflict is poised to amplify worries regarding the depletion of strategic petroleum reserves amid ongoing hostilities. According to the Department of Energy, stockpiles have receded to their lowest level since 1983, reflecting a drawdown of 104 million barrels from the 172 million-barrel planned release. Meanwhile, the International Energy Agency has utilized roughly 290 million barrels of the 400-million-barrel reserve established at the inception of the release program.
• Oil prices have edged higher but are still expected to remain below the peaks seen at the onset of the crisis, at least in the near term. China continues to scale back its overall purchases, which has eased demand-side pressure. On the supply side, refiners have ramped up production significantly as they look to help fill the global supply gap left by the crisis. As a result, oil markets appear poised to avoid the worst-case scenario envisioned at the start of the conflict.
• The latest clash reflects the normalization of geopolitical shocks that continue to disrupt trade. The latest developments in the Red Sea are another example of how trade flows have become less reliable. Reduced trade freedom is likely to increase inflation volatility, making price stability a growing concern for central banks. As a result, longer-duration bonds may face more volatility as yields become increasingly sensitive to geopolitical uncertainty.

Nuclear Agreement: The White House has agreed to support Saudi Arabia’s development of a civilian nuclear program, a move that could open the door to larger-scale uranium enrichment capabilities across the Middle East. While officials emphasize that the program would be subject to monitoring to prevent military use, the decision comes amid ongoing efforts to bring Iran into compliance on its nuclear activities. The initiative is expected to heighten fears about a potential regional arms race, with significant implications for stability in the region.

• The multibillion-dollar, thirty-year deal will allow Saudi Arabia to collaborate with American companies to develop its nuclear infrastructure. The agreement comes with several conditions designed to ensure oversight, including the exclusion of foreign competitors and a joint study to assess the project’s viability. Officials have argued that the arrangement will prevent Russia and China from establishing a foothold in the kingdom’s nuclear sector. Meanwhile, Saudi Arabia has emphasized that the deal would enable it to capitalize on its untapped uranium reserves.
• That said, the agreement will likely need congressional review before it is finalized. Lawmakers have already raised concerns that the deal could destabilize the region. Many in Congress are expected to push for safeguards that would prevent Saudi Arabia from enriching uranium or reprocessing spent fuel, both of which could create a pathway to nuclear weapons. That uneasiness is amplified by Saudi Arabia’s past reluctance to renounce those activities or to accept more intrusive inspection standards.
• The willingness to support Saudi Arabia’s civilian nuclear ambitions recalls the old “twin pillars” approach, when Washington relied on both Saudi Arabia and Iran as regional counterweights. In effect, the policy would give Riyadh greater strategic capabilities at a time when efforts to constrain Iran’s nuclear program remain unresolved. That makes the Saudi deal look less like a standalone initiative and more like a potential fallback if talks with Tehran fail.
• The move to allow Saudi Arabia to develop nuclear capabilities could trigger a regional arms race, though we believe the implications will unfold over the next few years rather than in the coming months. Should the country continue down this path, increased defense spending by regional powers could heighten tensions and raise the risk of conflict. That said, we expect uranium producers and global aerospace and defense contractors to benefit from the resulting military buildup.

AI Cycle: AMD has agreed to invest up to $5 billion in Anthropic. The move comes as the chipmaker seeks closer ties with AI startups and a stronger foothold against Nvidia. Under the deal, Anthropic will purchase up to 2 gigawatts of AMD’s latest AI chips. The arrangement highlights a growing pattern in the AI boom, in which firms invest in customers who then buy the investor’s products. This financing trend has not yet dented sentiment, but it has sparked reservations about earnings quality and questions about the rationale behind capex spending.

Fed Attack: The White House is planning to review the collapse of Silicon Valley Bank as part of a broader effort to potentially remove one of the Fed governors. The report is expected to examine how the Fed supervised the bank, which was overseen at the time by Governor Michael Barr, who served as the vice chair for supervision. The Trump administration is considering whether the supervisory failures that preceded the collapse could provide grounds to remove Barr from his seat on the Federal Reserve Board.

AI Risks: An OpenAI agent autonomously discovered vulnerabilities in the Hugging Face website and successfully breached its security. The incident occurred after the AI, designed to operate on human instructions, escaped its test environment, accessed the internet, and extracted login credentials. This breach is expected to stoke cybersecurity concerns both because it follows similar warnings from the developer of Anthropic’s Mythos model and because it underscores the urgent need for robust safety guardrails.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with the latest developments in Iran. We then discuss the White House’s move to maintain the current trade regime even as some tariffs are set to expire on Friday. Next, we briefly cover the Treasury’s concerns about tax-strategy abuse, progress on crypto legislation, and the formation of a new political party in Turkey. As always, we conclude with a review of recent domestic and international economic data.

Iran Escalation: Tensions between the United States and Iran are intensifying as the renewed conflict enters its eleventh day. On Tuesday, President Trump threatened to target Iran’s nuclear facilities in the coming days, vowing further military action if Tehran does not de-escalate. The threat comes as Iran-aligned Houthis have announced they will block shipping in the Red Sea, raising the risk of a wider regional confrontation. Oil prices have continued to climb amid persistent concerns over supply disruptions, as attacks on key trade routes undermine global energy flows.

• The current pressure campaign appears to be part of a broader Trump administration strategy to force Tehran back to the negotiating table. In a recent interview, the president suggested that the US has precise intelligence on critical infrastructure in central Iran and threatened military action unless Iran agrees to engage in “meaningful” discussions. He also issued a warning to the Houthis, vowing to respond forcefully if they disrupt maritime shipping, though such disruptions have not materialized to date.
• That said, there are signs of a tentative appeasement effort. Behind the scenes, the United States has moved to strengthen ties with Lebanon, including the White House’s decision on Tuesday to lift a four-decade ban on flights to the country. This step coincided with a meeting between President Trump and Lebanon’s president and appears to be part of a wider effort to re-engage diplomatically, particularly as Lebanon has pressed Israel to withdraw its troops from the country’s southern region.
• The Middle East conflict has produced a mixed market response. Oil prices have continued to climb, with Brent crude pushing above $90 a barrel for the first time since May, adding to inflation concerns and putting upward pressure on Treasury yields, which have drifted back above 4.6%. Equities, meanwhile, have held up relatively well as investors return to chipmakers and buy the dip following recent weakness.
• While the war in Iran remains the primary geopolitical risk, markets seem more focused on the strength of AI-related momentum. Although the conflict may persist, we do not expect it to be the main driver of equity performance over the next several days unless talks lead to a major breakthrough or US involvement appears to deepen. In our view, the elevated uncertainty argues for limiting exposure to the riskier segments of the market.

Trade Wall: The White House is moving to reimpose tariffs before the current measures are set to expire on Friday. This week, the president announced a new round of tariffs, including reciprocal duties on Canadian goods over trade practices affecting products that were previously protected under the USMCA. He also said he would impose restrictive tariffs on generic pharmaceutical products, starting at 100% in 2028 before rising to 200% in 2029. The moves underscore his effort to build a new trading regime.

• The decision to raise tariffs follows the United States’ refusal to renew the July 1 trade agreement with Mexico and Canada. The president has said that Canada maintains discriminatory trade practices and has responded by imposing reciprocal tariffs intended to push Ottawa to change course in exchange for relief. The tariffs were increased to 50% on about 500 Canadian goods, representing roughly 2% of bilateral trade.
• Separately, the president’s push to raise tariffs on pharmaceutical companies reflects a broader effort to reshore strategically important sectors. The new tariffs will apply only to generic drugs and are set to take effect in two years. The measure targets companies that have been accused of undercutting domestic competitors, even though many of their products are made using US intellectual property. The change is intended to curb competition and protect domestic producers.
• The use of tariffs for both reciprocal and restrictive purposes stems from a shift away from a trade system that once prioritized free trade. The push to add tariffs to Canadian goods will likely face pushback from both sides of the aisle, as lawmakers seek to shield voters from a possible rise in the cost of living. Meanwhile, the pharmaceutical tariffs should give drugmakers time to adjust their supply chains and become more domestically oriented.
• While trade policy is important to households and firms, its impact on markets has been limited over the past two years. We think this illustrates the White House’s relatively accommodative approach to imposing tariffs in order to avoid disruptions, as well as the market’s broader focus on earnings, which has largely remained resilient despite rising trade uncertainty.

Tax Abuse: The US Treasury Department has raised concerns about popular tax-minimization strategies known as “tax alpha.” These practices include Section 351 conversions, box-spread ETFs, dividend-shifting between ETFs, and products designed to offset ordinary income. While the Treasury stopped short of announcing new restrictions, it confirmed plans to actively evaluate regulatory tools to address these strategies. The push by the Treasury to reduce the use of loopholes comes as the government looks to address the growing fiscal deficit.

Crypto Breakthrough: The Clarity Act is gaining momentum as both parties work to finalize the bill. The legislation would establish a framework for regulating the crypto industry. On Tuesday, the president agreed to ethics rule changes that had prevented Democrats from backing the bill previously. Although the measure is close to a vote that is expected to draw bipartisan support, debate continues over who will enforce the rules.

Turkish Opposition: A new opposition party is emerging as a potential threat to President Recep Tayyip Erdoğan’s hold on power. The party is being formed by Özgür Özel, who has faced legal pressure and investigations, and he plans to build a broad opposition coalition ahead of the next election. Reporting suggests the new party could quickly become a major political force, though there are concerns about a possible government crackdown. As a key NATO ally, any shift in Turkey’s leadership could also affect US foreign policy.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with what appears to be the start of a new US effort to erect protectionist import tariffs on dozens of countries around the world, starting with Canada. We next review several other international and US developments that could affect the financial markets today, including a move by China to partially lift its ban on refined fuel exports and potential new US steps to bar domestic firms from using Chinese artificial intelligence models.

United States-Canada: The Trump administration yesterday said it will impose a new 50% tariff on a range of Canadian goods, but with exemptions for energy, potash, fish, and several other categories. The new tariffs are expected to affect about $20 billion of the $383 billion in Canadian goods imported into the US (using figures from last year). According to the White House, the new tariffs aim to offset the burden from Canadian rules that it says discriminate against the US.

• The new tariffs against Canada serve as a reminder that US trade policy can still shift dramatically in ways that could affect US and foreign stocks.
• In fact, reports say the president is also mulling new tariffs on dozens of other countries as his 10% global duties are set to expire later this week.

United States-Israel-Iran: Now that the June ceasefire between the US and Iran has effectively collapsed and both sides are launching attacks against each other again, AAA yesterday said the average price of gasoline in the US has again risen above $4.00 per gallon, though it remains below the $4.56 peak reached in May before falling to $3.79 earlier this month. If sustained, the resurgence in gas prices could cause a rebound in the consumer price index and further complicate Republican prospects in the November elections.

China: On a more positive note, new reporting details how Beijing this month has lifted its ban on refined fuel exports, at least in part to take advantage of high global prices and ample inventory levels. However, the reports say that even as the government allows refiners to resume their exports, they can only ship fuels under allocated quotas while keeping their inventory levels above their end-February levels. The resumed exports could still help limit the price of global energy products, but not as much as if Chinese refiners could again export freely.

China-Philippines: After more than a year of calm around the disputed Second Thomas Shoal in the South China Sea, where the Philippines maintains a grounded navy ship as an outpost to deter China’s efforts to take control of the outcropping, Chinese coast guard personnel and Philippine sailors in small boats clashed with one another yesterday using paddles, sticks, and batons. One Philippine sailor was reportedly injured in the melee before it ended.

• The fight at Second Thomas Shoal is further evidence that China is trying to take advantage of Washington’s current effort to ease bilateral tensions to establish a kind of détente with Beijing.
• As the US pulls its punches with China on issues such as trade and technology policy, it appears that Beijing has started to see what kind of territorial aggression and other initiatives it can get away with. The risk is that the Chinese will go too far and force the US to act, potentially sparking a sudden, new escalation of tensions.

United Kingdom: As expected, newly minted Prime Minister Andy Burnham has begun his term with an expensive new fiscal proposal that would subsidize household energy prices this winter. By removing the value-added tax from electricity bills, the move would cut about 45 GBP ($60) off a typical annual electricity bill and would cost about 850 million GBP ($1.1 billion) in 2026-27, based on estimated electricity prices. The proposal has quickly generated accusations that the government hasn’t clarified how the policy would be funded.

US Politics: In Maine’s election for the US Senate, Democrat Troy Jackson has consolidated the support of his party and is now expected to become the Democrats’ new official candidate after the initial candidate, Graham Platner, withdrew over a scandal. Jackson is a former state Senate president, a small-time lumberman, and a progressive Democrat who supports Medicare for all, abortion rights, and economic populism. However, he began his political career as a Republican who embraced conservative social policies.

• Despite morphing into a progressive Democrat from a conservative Republican, it is unclear how widely Jackson will be supported in the November mid-term election.
• Incumbent Republican Sen. Susan Collins is considered a formidable opponent with ample financial resources to protect her seat.

US Artificial Intelligence Industry: After our discussion in yesterday’s Comment about the new, open-source Chinese AI models that rival cutting-edge US models at a fraction of the cost, new reports say the US government is considering a ban on US firms using the Chinese models. The discussion mostly revolves around the security risks from using a geopolitical rival’s AI, but a ban would also insulate the US firms from competition and help protect their huge investment in models and computing capacity.

• Just as cheap Chinese products have decimated other US industries over recent decades, the powerful, inexpensive new Chinese AI models could potentially make the costly US models uncompetitive. Fear of such a development has already begun to weigh on the stock prices of major US firms related to AI and the AI infrastructure boom.
• Importantly, new reports say Beijing is mulling restrictions on Chinese firms exporting some aspects of their AI technology. For example, the government is considering banning Chinese firms from transferring key model training data overseas or allowing their model weights to be downloaded by foreign users. However, China would still let overseas customers access the models and services.
• If the US administration fails to ban the Chinese competitors, investors could be spooked and the AI frenzy could come to an end. If the administration does impose a ban, it could keep the AI boom going for a while yet, though at a steep economic cost.

US Stock Market: Consistent with investors’ increasing concern about the big, AI-related tech firms that dominate the stock market, a useful Wall Street Journal article today highlights how market prices and breadth are currently diverging. The article notes that there have been 52 trading days so far this year when the S&P 500 price index went in one direction but most stocks in the index went the other way. That ties 2000 for the third highest number of such instances this century, and the year is barely over half-way finished.

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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 weekend events related to the war in Iran. We next review several other international and US developments that could affect the financial markets today, including the naming of a new prime minister in the United Kingdom and the latest Chinese threat to the US’s cutting-edge artificial intelligence models.

United States-Israel-Iran War: The Iranian military continued to launch missile and drone strikes against US military bases throughout the Persian Gulf region over the weekend, killing at least two US troops at the Muwaffaq Salti Air Base in Jordan. The US had already been escalating its attacks on Iran again to short-circuit its effort to control the Strait of Hormuz, but we believe that because of President Trump’s “Jacksonian” approach to foreign policy, he will likely respond to the US troop deaths by ratcheting up the attacks even further.

• The expectation of US retaliation caused global oil prices to surge over the weekend, with the price of near Brent futures jumping about 6% to more than $90.00 per barrel. Nevertheless, oil prices have retreated so far this morning. As of this writing, they are only slightly above where they were late last week.
• Separately, Iran’s successful attacks have prompted questions about how the country is improving its technology so rapidly. US officials and military analysts say Iran’s missiles now fly faster and are more maneuverable than before, suggesting the country is getting help from Russia and/or China. If so, the continued attacks could inflame US tensions with those countries as well.

Russia-Ukraine War: At a defense industry conference late last week, CIA Director Ratcliffe said the average Russian recruit arriving on the front lines in Ukraine survives only 20 to 30 minutes before being killed or wounded. The statistic shows how violent the Russia-Ukraine war has become and how efficiently Ukrainian drones and other military technologies can kill. It also helps explain why so many Western defense firms have begun seeking deals with Ukrainian companies to gain access to their technologies and processes.

Japan: Defense Minister Koizumi on Friday said in an interview that Japan must begin debating whether and how it might adopt nuclear weapons, especially considering the precedent of Russia’s invasion of Ukraine and the way that France and Finland have responded by seeking a stronger nuclear deterrent. The statement underlines our expectations that the world could be on the cusp of a new nuclear arms race. Such a development would likely boost uranium prices.

China: Investment funds closely aligned with the government yesterday announced that they have bought approximately $8.9 billion worth of domestic stocks related to artificial intelligence, taking advantage of the sharp pullback in prices for the equities on Friday. The purchases by the “national team” suggest the government is deliberately trying to prop up the market. In response, the Chinese market has performed better today than many other Asian markets.

India: Thousands of youth-led “Cockroach” protesters demonstrated against India’s weak educational system today in New Delhi as the national legislature opened a new session. In response, police tried to disperse them by firing tear gas and beating the protesters with sticks and plastic batons. Even though Prime Minister Modi’s pro-business party recently did well in regional elections, the incident illustrates how the Cockroach movement appears to be gaining steam and could eventually threaten Modi’s grip on power.

European Union: The EU this week begins enforcing new rules that largely ban companies from destroying unsold clothes or footwear. The ban was approved in 2024 to help curb overproduction, reduce waste, and keep valuable materials in circulation for longer. Under the new rules, large companies will be prohibited from incinerating or sending to landfills unsold clothes, accessories, and footwear, including products returned by customers.

• The ban is anticipated to be especially problematic for luxury goods makers, which try to support their products’ high prices by strictly limiting what’s available on the market.
• Now, rather than destroying unsold merchandise, luxury firms may be forced to hold it in inventory and offer discounts to get it sold — initiatives that could hurt their ability to maintain high prices.

United Kingdom: Former Manchester mayor Andy Burnham today becomes the UK’s seventh prime minister in the last decade. Based on his left-wing reputation, Burnham is expected to push for an early package of spending hikes to boost economic growth. Over the longer term, he is also likely to push for measures to shift power out of London, give voters more control over public utilities, and increase spending on public housing.

US Artificial Intelligence Industry: Chinese AI firm Moonshot unveiled its new Kimi K3 open-source model on Friday, with third-party assessments suggesting it is more capable than the most cutting-edge US models, at a far lower price. The development has caused deep concern that the US models could soon become uncompetitive on both performance and price. In turn, that could prompt investors to rethink the value of the US’s leading AI firms and other stocks dependent on the AI investment boom.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with an assessment of the latest escalation in the US-Iran conflict. We then turn to chipmakers, where there are signs that investors have grown hesitant to support capacity expansion plans. Next, we examine Iraq’s collaboration with an oil company to develop a route bypassing the Strait of Hormuz, China’s push to become an AI powerhouse, and the president’s election interference claims. As always, we conclude with a review of recent domestic and international economic data.

Escalation in Iran In another sign of escalating conflict, US forces have intensified their attacks on Iran. On Thursday, local news agencies reported that American forces have begun targeting airports, bridges, and railways as part of a broader effort to further degrade Iran’s military capabilities. The strikes represent a major escalation, signaling that Washington is following through on its plan to use aerial bombardment to cripple the country’s infrastructure. The latest developments suggest the conflict could worsen heading into the weekend.

• The attacks appear to mark the president’s follow-through on his threat to ramp up pressure on Iran, as he seeks a swift conclusion to the war. Earlier this week, the president warned that he would target the country’s bridges and power plants unless Iranian leaders returned to the negotiating table. While the recent campaign has not yet escalated to the worst-case outcome, the president has hinted that his most significant move could be unveiled as soon as next week.
• The president’s escalation appears to be fostering internal divisions within the White House, with competing factions emerging over the necessity of an aggressive approach. Vice President JD Vance used a three-hour appearance on Joe Rogan’s podcast to question the administration’s hawks regarding their strategic calculus, warning that an overly aggressive posture could replicate the Libya experience and precipitate a significant humanitarian crisis.

• Markets have so far shown little concern, with the muted response suggesting investors believe the conflict is contained and oil prices will remain stable despite heightened tensions. We expect this calm to persist as long as supply is not disrupted. However, any meaningful interruption to oil flows could quickly revive inflation fears and prompt markets to price in a higher likelihood of tighter monetary policy.
• It is too early to know whether the escalation will continue, but further action remains on the table. A diplomatic breakthrough with Iran could calm markets and ease regional tensions. Yet, the risk of an expanded US military campaign, even an outright invasion, cannot be dismissed. While that latter outcome faces significant political constraints given the war’s unpopularity, its likelihood increases over time. We expect this uncertainty may trigger portfolio rotations, as investors move to manage risk.

Chipmaker Worries: Growing signs of AI fatigue are emerging, as investors grow increasingly wary of elevated valuations. The latest market reaction followed Taiwan Semiconductor’s earnings release. Despite a strong earnings beat, sentiment soured after the company announced plans to commit an additional $100 billion to its US expansion. While the move is officially tied to strong demand, lingering concerns persist over the role of pressure from the White House in shaping the decision.

• TSMC’s second-quarter earnings failed to impress investors, despite the company’s strong performance. In the second quarter, net profit surged 77% year-over-year, comfortably beating the 51% consensus forecast. This time, however, the spotlight shifted to the company’s expanded Arizona capex, where the costly production ramp-up is projected to pressure gross margins, tempering enthusiasm for the earnings beat.
• The investor pushback appears to reflect concerns that the expanded Arizona capex may be influenced by geopolitical considerations alongside commercial demand. Earlier this year, the president threatened tariffs on countries that did not establish US production facilities. Following TSMC’s announcement, Commerce Secretary Howard Lutnick welcomed the increased spending, characterizing it as an endorsement of the administration’s broader trade and investment strategy.
• TSMC is not alone in facing pressure to expand US production. Just last week, Commerce Secretary Lutnick called out Samsung and SK Hynix — both major beneficiaries of the AI buildout — stating that they too need to bring more manufacturing to the United States. The move appears to be part of a broader US effort to persuade companies that American national security concerns must carry equal weight alongside their commitments to shareholders.
• Although the recent sell-off in chipmakers may prove temporary given the enduring nature of the AI buildout, questions regarding shareholder primacy are likely to emerge as these firms aggressively expand capacity. Consequently, investors may begin seeking returns outside the technology sector to diversify their holdings. We continue to believe a well-balanced portfolio is an excellent strategy for those seeking to mitigate outsized tech exposure.

Hormuz Alternative: Chevron and the Iraqi government are jointly advancing a pipeline project designed to provide an alternative to the Strait of Hormuz. The plan calls for the restoration of two pipelines originally slated to traverse Syrian territory to the port of Baniyas. The project would enable Iraq to resume oil exports that have been constrained by the conflict. Before proceeding, however, Chevron will conduct a feasibility study, given that substantial segments of the route traverse regions with active insurgency risks.

China AI Power? Xi Jinping used his opening speech at the World Artificial Intelligence Conference to present China’s open-source AI ecosystem as an emerging‑market alternative to US-led models. He framed it as a way to ensure that developing economies have a voice in and can help shape the global trajectory of AI. The remarks fit into his broader effort to position China as a standard‑setter in AI and coincided with Chinese startup Moonshot releasing a model pitched as a rival to offerings from OpenAI and Anthropic.

Election Interference? President Donald Trump used a prime-time address to accuse China of interfering in the 2020 US elections as he pushes Congress to pass his SAVE America Act. He dismissed prior US intelligence findings that no foreign actor altered votes in 2020, claiming evidence has been suppressed by the “deep state.” His comments are likely to raise concerns about election security going into the midterm elections as well as possibly undoing the truce with China.

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