by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our thoughts on Anthropic’s latest AI model and provides an update on the war in Iran. Next, we examine the growing tensions between China and Japan, discuss the expanding uses for humanoid robots, and analyze how renewable energy has made Europe more resilient to energy shocks. As always, we include an overview of recent domestic and international economic data.

New AI Tools: Anthropic just released its latest AI model, Opus 4.7, which is an upgrade from its previous model but still trails its more advanced, yet controversial and unreleased, Mythos model. The new model is designed to handle more complex software engineering tasks that require less human supervision. The development of this AI tool is likely to further establish Anthropic as one of the top AI companies while also pushing the limits of AI’s overall capabilities — and potentially its risks.

• Opus 4.7 has outperformed its competitors in key benchmarks. According to Anthropic’s internal research, the new model beat out peers such as Gemini and ChatGPT in areas including agentic coding, visual reasoning, agentic financial analysis, and cybersecurity reproduction.
• Anthropic’s AI tools are starting to find their way back into the government. Despite an ongoing lawsuit with the Pentagon over Anthropic’s “supply chain risk” designation that the company alleges was unlawful retaliation (the White House had decided to cut ties after a dispute over using Anthropic’s tools for military purposes), the White House recently allowed federal agencies to use the Mythos tool as a way to address cybersecurity risks.
• Anthropic’s new tools seem to foreshadow the growing trend toward AI adoption. Although it is not yet clear what impact the adoption of these technologies will have on the market, it is becoming evident that several industries may be at risk of being disrupted. This is likely to cause significant upheaval, as some companies’ business models may be jeopardized. On the bright side, the new technology should lower barriers to entry for many industries, which could pave the way for more competition.
• New AI models are becoming more widely available and are likely to be incorporated into business models. We believe that firms best able to adapt to the technology will be best positioned to profit from the AI transition compared to those that do not. We also suspect that software companies with their own proprietary data are likely to emerge as potential winners in the transition.

Iran Impact: The White House announced that progress is being made to end the US-Israeli war with Iran, but it is still not clear when it will end. On Thursday, President Trump announced that Israel and Lebanon had reached a 10-day ceasefire agreement. Additionally, there were reports that Iran and the US were looking to extend their own ceasefire agreement by another two weeks. However, while the president has implied that Iran has already made key concessions that could potentially end the conflict “fairly soon,” it still appears that the two sides remain far apart.

• Outside of the US, there does not seem to be much optimism that a deal will be reached imminently. Officials representing countries from the Persian Gulf and Europe suggested that an agreement could take up to six months. The disagreement is largely driven by whether Iran will be allowed to enrich uranium, with factions within the Iranian regime still showing an unwillingness to give it up permanently, while the White House has entertained halting production for a set number of years.
• The delay in reopening the strait is likely to weigh on global growth. German officials have already reduced their growth outlook for the year by half, from an expected 1.0% to 0.5%, leaving the country facing yet another period of stagnant growth. Meanwhile, Asian economies are also feeling the pressure. The IMF has stated that energy shocks are presenting challenges in the Asia-Pacific region, and may need to revise its growth expectations down by 1–2% cumulatively over two years, from 4.4% in 2026 and 4.2% in 2027, if the situation were to become severe.
• That said, the involved countries are working on the best way to keep the strait open once a peace deal is finally reached. The European Union is assembling a coalition — one that may or may not include the United States — to help ensure that the strait remains open afterward. So far, officials have outlined a three-step plan: first, political and diplomatic cooperation; second, logistical support for those trapped in the strait; and third, military assurances to guarantee freedom of navigation.
• While there is some pessimism that slower growth could hurt market performance, this view may be a “glass half full” situation. For one, securing the strait after the conflict is likely to prompt other countries to develop their military capabilities as they prepare to assume greater global security risk, which should boost defense stocks. Second, the energy shock should benefit publicly traded commodity companies. Therefore, there is still a significant opportunity abroad, even in the face of these headwinds.

China-Japan Tensions: Beijing has accused Japan of a “provocative” act after a Maritime Self-Defense Force vessel transited the Taiwan Strait. This marks at least the second such passage since 2024 and is likely to add strain to relations between two of the largest Indo‑Pacific economies. The deployment appears aimed at pushing back against China’s increasingly assertive posture toward Taiwan and signaling Tokyo’s readiness to play a more active security role in the event of a crisis involving the self‑governing island.

AI Robots: In a sign that AI is becoming increasingly common, Poland released a video of its humanoid robot chasing away boars. While the robot was made in China, its use for everyday work signals that the threat from AI models may extend beyond software and high-skilled service work. The use of these robots is likely to increase in manufacturing; however, political resistance could grow if it leads to job displacement.

Renewable Backup: Power futures for Europe are now trading below their pre-war levels, as the region’s renewable energy generation has helped ease the burden. The region has particularly benefited from solar power, which has helped supplement energy needs, especially for products that rely on gas generation. While the EU is still likely to depend on oil and gas for energy, its use of renewables suggests that the region may be more resilient to energy shocks than it has been in the past.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with a discussion on the renewed surge in AI enthusiasm as a key market theme. We then share our perspective on the EU’s push to strengthen its competitiveness and strategic autonomy from the US. Next, we provide an update on the ongoing conflict in Iran, outline potential implications for the broader Persian Gulf region, and assess why the Fed chair nominee may encounter obstacles in the coming weeks. As always, we include an overview of recent domestic and international economic data.

AI Momentum: As the market’s focus shifts away from the conflict in Iran, AI momentum has begun to resurge. On Wednesday, footwear company Allbirds announced that it was abandoning sneakers to enter the AI infrastructure space under the rebrand NewBird AI. The move arrives as investors grow increasingly fixated on the transformative, and potentially disruptive, impact of AI on traditional business models. While this shift fuels “bubble” concerns, it also underscores the market’s growing consensus that AI will play a foundational role in the future economy.

• The decision by a company once known for making shoes for Silicon Valley to pivot from footwear to data centers underscores the growing centrality of AI. Before the shift, the firm sold its apparel business to a brand management company for $39 million. It now plans to channel those proceeds into AI infrastructure projects, specifically, graphics processing units, to meet the increasing demand. Although the pivot seemed to come out of left field, investors responded enthusiastically, sending the stock up as much as sevenfold.
• Allbirds’ move into AI infrastructure comes amid surging demand to expand AI capacity. The need for cloud computing and chips has driven a wave of investment, with businesses racing to increase supply. That demand has also drawn in Elon Musk, who is raising funds to build Terafab, a venture aimed at supplying chips to tech companies. Meanwhile, Jane Street, a quantitative trading firm, has invested in CoreWeave in order to gain access to its cloud services.

• The growing ubiquity of AI investment has become a crucial pillar supporting the broader economy. In fact, when looking at overall investment spending, the tech sector has dwarfed all other segments of the economy throughout 2025. This high level of spending is likely to continue into the current year, as major tech companies — including Alphabet, Meta, Amazon, and Microsoft — have all revised their capex expectations upward to meet the demand for AI.
• While overall AI momentum has cooled from last year’s levels, the technology remains a key pillar supporting the economy and markets. Allbirds’ surprising shift into AI infrastructure may have raised eyebrows, but the market’s enthusiastic reaction signals that its risk appetite hasn’t faded. With the Iran conflict showing signs of ending, we expect risk-taking to pick up, likely lifting equities in the short term. This momentum could persist, especially given signs of limited supply chain impact.

EU Autonomy: The European Union continues to take steps to reduce its overall dependence on the US. In terms of security, Brussels has attempted to promote a “buy European” approach as it looks to develop its own domestic defense industries and ramp up military spending. Additionally, there are signs that Europe may be moving toward deregulation to improve competitiveness and foster its own national champions. These changes suggest that European markets may become more attractive over the coming years.

• Europe’s need for autonomy has started to create friction within NATO. Following threats from the White House over Greenland and pressure on the EU to spend more on its own security, the bloc has decided to create a fund to raise $1 trillion in additional funding for its rearmament. The push has come at the expense of some of its allies, as Europe looks not only to build up its own military capabilities but also to make its supply chains more resilient, which could come at the expense of its NATO partners.
• Additionally, there have been signs that the European Union has started to loosen its regulations. On Thursday, Brussels proposed relaxing merger rules in an effort to better compete with the US and China. This shift marks a major change for a region that has long prioritized regulation to protect consumers from the outsized power of corporations and suggests that Europe may now be looking to establish its own national champions.
• Europe’s push for greater autonomy is a response to the realization that it can no longer build its economy on the back of US security protection and trade access. As a result, European nations will have to rely on one another to meet those needs. The EU’s decentralized nature, where influence is balanced regardless of country size, complicates this interdependence. While the proposed Capital Markets Union aims to ease tensions, a true fiscal union may be the necessary endgame for stability.
• While the US is still an attractive destination given its deep capital markets, large consumer base, and overall technological advantages, Europe presents a major opportunity, particularly for those looking for value. The EU’s transition may not be as smooth or as quick as investors would like, but we believe the trend is clearly underway. That is why we see significant opportunities for growth in the European market going forward.

Iran Update: Tensions in the Middle East appear to be easing. Lebanon and Israel are weighing a potential ceasefire, while the US and Iran are reportedly discussing a two-week extension to their existing ceasefire agreement as talks continue. Still, a peace deal does not seem imminent. Iran and the US remain far apart on a broader agreement that would address the reopening of the Strait of Hormuz, Iran’s nuclear program, and sanctions relief for Tehran. Despite the lack of a comprehensive deal, markets already appear to be pricing in the belief that conditions will not worsen.

Next Phase for the Middle East: With signs that tensions between Iran and the US are easing, Gulf Coast countries are already looking for ways to repair some of the damage incurred during the conflict. Several nations, including Qatar, Abu Dhabi, and Kuwait, have turned to private markets as a way to raise funds for their rebuilding efforts. Meanwhile, Saudi Arabia is considering canceling its struggling LIV Golf franchise as it seeks money to rebuild its territory. The push is likely a sign that some of the damage caused by the conflict will take a while to fix.

Fed Chair Hold Up: Senator Thom Tillis continues to threaten to hold up the confirmation of Fed chair nominee Kevin Warsh. The outgoing senator has pushed the White House to drop its investigation into the Federal Reserve; otherwise, he will stall the confirmation process. Tillis currently holds the deciding vote and could potentially delay the confirmation, which might force Jerome Powell to stay on beyond the end of his term in May, something the White House is urgently looking to avoid.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with a discussion of potential challenges surrounding the leadership transition at the Federal Reserve. We then provide updates on developments in Iran, the implications of the global memory chip shortage, the potential for renewed tariff increases, and signs of additional strain in the relationship between the United States and its allies. As always, we include an overview of recent domestic and international economic data.

 Fed Pressure: Nearly a month before Fed Chair Jerome Powell’s term is set to expire, controversy is mounting over what will follow. His potential successor, Kevin Warsh, has made financial disclosures that have raised questions about potential conflicts of interest. Separately, US prosecutors have dropped by a Federal Reserve construction site, a move that suggests that Powell may still be under investigation. These developments are likely to fuel scrutiny of the Federal Reserve’s future composition in the coming months.

• Ahead of his Senate confirmation hearing, Kevin Warsh released financial statements showing a net worth of nearly $131 million, making him potentially the richest Fed chair in history. While he has not been accused of any wrongdoing, his wealth is likely to become a target for lawmakers questioning whether he will take advantage of his position for personal gain. In preparation for the hearing, Warsh has announced that he will step down from his advisory roles with various companies.
• Meanwhile, a recent visit by federal prosecutors to the Federal Reserve’s Washington headquarters project underscores that Powell remains entangled in a criminal inquiry over whether he misled Congress about the ballooning cost of the renovation. Although the Fed chair has not been formally charged, the renewed attention to the case is widely seen in Washington as a reminder that the White House will look to discourage him from remaining at the Fed beyond the official end of his term in May.
• The potentially rocky confirmation of Kevin Warsh, together with an ongoing investigation by US authorities, underscores the uncertainty surrounding Powell’s position at the end of his term. At the March FOMC press conference, Powell affirmed that he would remain as Fed chair until a successor is formally appointed. He has also left open the possibility of remaining on the Federal Reserve Board, which would make him the first former chair to do so since Marriner Eccles in 1948.
• Although Senator Thom Tillis has stated he will vote against Kevin Warsh’s confirmation as long as the investigation of the Fed is ongoing, Warsh is still expected to be confirmed as Fed chair this month. His hearing is likely to be more contentious than those of prior nominees, as he is expected to face questions about his independence given the White House’s attempts to pressure the central bank to lower rates. He may also face scrutiny over some of his outside ties, which could further dent his chances.
• The fate of Kevin Warsh and Fed Chair Powell is likely to have an impact on bonds. If Warsh were not confirmed, it would likely reduce the chance of a rate cut this year and potentially add volatility to the bond market, as the FOMC clearly feels content standing pat. Meanwhile, Powell’s decision to stay on could lead to a power struggle over the direction of policy. Although we remain confident that the transition will be orderly, we will be looking for any signs that it may not be.

 Iran Update: US and Iranian officials are showing signs of progress as they work toward a peace deal. President Trump has suggested that extending the ceasefire may be unnecessary, noting that the war is close to being over. Meanwhile, Israel has praised the US-brokered talks between it and Lebanon as a potential breakthrough toward ending hostilities, a key condition for Iran before it would agree to a deal with the United States. Although no formal agreement has been reached yet, there is growing optimism on both sides that one could be finalized imminently.

• The two sides are expected to meet for a second round of talks sometime this week. Discussions between Washington and Tehran to end the conflict are largely being built around Iran’s nuclear program. As mentioned in yesterday’s Comment, the two are in disagreement over how long to suspend Iran’s uranium enrichment program, with the US preferring 20 years and Iran offering only five years. However, the president has also pushed for a permanent end.
• While there has been consistent talk about a pathway to end the conflict since it began in late February, there does seem to be some momentum to get a deal done. At the start of this month, the president stated that he would not like the conflict to extend beyond two to three weeks, a timeline that gives negotiators roughly nine more days to find a solution.
• The end of the conflict is likely to trigger a sizable relief rally; however, its sustainability will depend largely on the next phase. As companies report their results over the coming weeks, we will pay close attention to their outlooks to gauge how the conflict is impacting their supply chains. Companies that demonstrate resilience are likely to perform better, while those hurt by the conflict may experience greater volatility. At this time, we remain optimistic that domestic firms should be well positioned following the conflict.

 Tech Supply Crunch: The escalating conflict in the Middle East, coupled with the surging demand for AI infrastructure, has triggered a significant shortage in memory chips. This supply-demand imbalance is projected to drive up consumer electronics prices — particularly smartphones — while forcing margin compression on manufacturers. Ultimately, this shortage underscores the persistent vulnerability of global supply chains and highlights how the intensive resource needs of AI are beginning to disrupt adjacent industries.

 Tariff Return: The US plans to return tariff rates to their previous levels by July. On Tuesday, Treasury Secretary Scott Bessent stated that the new round of Section 301 tariffs will allow the rates to remain in place, citing prior legal victories. The clause would permit the US to intervene if a study reveals that certain countries have benefited from trade due to excessive industrial capacity or forced labor practices. The move is expected to raise tariffs while also giving firms more certainty about future rates.

 UK-US Trade: In a sign of deteriorating diplomatic ties with the US and its allies, President Trump indicated that he may revise the trade agreement he negotiated with the UK last year. The move follows Prime Minister Keir Starmer’s recent criticism of Washington’s actions and its reluctance to assist in ongoing international efforts. In Washington, the prime minister’s remarks are being viewed as evidence that the once “special relationship” between the US and the UK is under growing strain.

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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 war in Iran, where a tanker loaded with Iranian cargo has passed through the Strait of Hormuz today to challenge the new US blockade on the country. We next review several other international and US developments with the potential to affect the financial markets today, including data showing a marked decline in China’s trade surplus and Canadian Prime Minister Carney’s success in finally cobbling together a majority in his country’s parliament.

United States-Israel-Iran: Less than a day after the US began enforcing its blockade against Iranian ports, reports today say Saudi Arabia is urging the US to reverse course. According to the reports, the Saudis fear Iran will carry out its threat to retaliate against the blockade by attacking ports in Saudi Arabia and elsewhere in the region or closing the Bab el-Mandeb — a Red Sea chokepoint crucial for the kingdom’s remaining oil exports.

• In an early test of the blockade, the shadow-fleet tanker Elpis this morning passed through the Strait of Hormuz after taking on a cargo in Iran. The transit of the Elpis is likely intended to see just how strongly the US will enforce its blockade. As of this moment, we’ve seen no indication of whether the US Navy will stop the ship or not.
• New reports say one key point of contention in the talks to end the war is that the US is insisting on a 20-year moratorium on Iran’s nuclear activity, including uranium enrichment. In response, Iran is insisting it will not commit to more than five years. While that sounds like an unbridgeable gap, it does suggest that an eventual compromise could be reached with a moratorium somewhere in the middle, such as 10 years.
• Separately, the Organization of the Petroleum Exporting Countries said oil production in March was down 27.5% to just 20.8 million barrels per day, marking the biggest OPEC output drop on record. The decline in production illustrates how dramatically the war has disrupted output and exports in the region.
• Meanwhile, the International Energy Agency today said global oil demand fell 3.4% in March and is expected to drop a further 1.1% in April to just 100.4 million barrels per day, reflecting price hikes and supply disruptions from the war in Iran. Excluding the coronavirus pandemic, the quarterly drop in demand was the steepest since the Great Financial Crisis and will leave demand at its lowest in more than three years.
• Even as the US and Iran engage in negotiations to end the war, commentators in recent days have increasingly warned that Israel’s effort to create strategic buffer zones in southern Lebanon, Syria, and Gaza could lead to it being involved in “forever wars” similar to the US experience in Iraq and Afghanistan. If such a scenario comes to pass, it could threaten social cohesion in Israel and tarnish the country’s hard-won reputation as a rising star in stock sectors such as technology.

China: The March trade surplus totaled just $51.0 billion, less than half the surplus in March 2025. Exports in March were up just 2.5% on the year, slowing sharply from the 22.0% rise in January and February. The slowdown in exports reflected not only the continued fall in Chinese exports to the US, but also a decline in shipments to the Middle East because of the war in Iran. Meanwhile, Chinese imports in March were up 28.0% year-over-year, accelerating from their increase in January and February. In sum, the data points to more economic headwinds.

China-Philippines: The Philippine government today said it found cyanide on Chinese boats seized around a disputed shoal where Manila had grounded a warship to use as a base and assert its sovereignty. According to Philippine officials, it appears that the Chinese planned to poison the local fish population to deny a vital food source for the troops on the grounded ship and also weaken the reef supporting the vessel. The incident could signal renewed China-Philippine territorial tensions in the South China Sea and a renewed risk of conflict.

Singapore: Citing higher energy prices caused by the war in Iran, the Monetary Authority of Singapore yesterday said it would allow the country’s currency to appreciate more than previously expected, essentially implementing a tightening of monetary policy. That marked Singapore’s first monetary tightening in approximately four years. The move will likely threaten to slow economic growth in Singapore and could weigh on the country’s stock prices.

Canada: In by-elections yesterday, Prime Minister Carney’s Liberal Party was expected to win enough seats to take a slim majority in the national parliament. Carney was also able to convince several lawmakers to switch parties to join the Liberals in recent months. If Carney is successful in achieving a majority for the Liberals, he would be more likely to pass economic reforms that could help Canada weather the US administration’s tougher trade policies against Canada.

US Economic Growth: New studies from Goldman Sachs and Stanford University suggest the boost in consumers’ tax refunds this year will be essentially offset by the rise in energy and other commodity prices because of the war in Iran. As a result, many economists are now tempering their expectations for US economic growth this year. Importantly, while the increased tax refunds will be matched by the rise in energy prices on a macro basis, the research suggests that lower-income households’ refunds will be more than offset by their increased energy costs.

US Electric Utility Industry: New research says a group of 51 investor-owned utilities now plan a combined $1.4 trillion in capital spending in the coming five years, up from a five-year projection of $1.1 trillion just last year. The jump largely reflects a need to upgrade the national power grid for data centers and other facilities related to the artificial intelligence boom. For the utility companies, a key risk is whether state regulators will approve the plans. For consumers, approval of the plans threatens to raise electric rates and boost price inflation.

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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 war in Iran, including a new US threat to blockade ships traveling to and from Iranian ports and an Iranian warning that it would respond by attacking regional ports. We next review several other international and US developments that could affect the financial markets today, including new signs that the UK is working to at least partially reverse Brexit and new reports that the artificial intelligence boom is producing a shortage of computational power.

United States-Israel-Iran: The US-Iran peace talks in Pakistan at the weekend ended with no deal, mostly because the Iranians wouldn’t accept US demands to reopen the Strait of Hormuz to free and unfettered shipping or promise to give up their nuclear program. The Iranian side said lower-level technical officials would keep talking, but President Trump later said the US would up the ante by blockading passage through the strait to prevent Tehran from re-arming or selling its oil on world markets. Iran threatened to retaliate for the blockade by attacking regional ports.

• The failure of the talks will raise the odds that the US, Iran, or both could soon re-start their attacks, especially with a third US aircraft carrier and more ground troops set to arrive in theater within days. For the US, the focus would likely be an attempt to open the strait – an effort that could involve ground troops or other risky operations. In turn, that could mark a return to unbridled attacks and even more disruptions to the world’s energy and commodity markets.
• President Trump yesterday also said the US Navy would hunt down and stop any commercial vessels that pay a toll to Iran to pass through the strait. The statement will further raise the risk when shipping through the waterway.
• Of course, countries around the world are already suffering economic damage from the war. Researchers at Capital Economics have issued a new forecast that Qatar’s gross domestic product will shrink by 13% this year, the United Arab Emirates’s by 8%, and Saudi Arabia’s by 6.6%.
• Separately, media reports over the weekend said the Chinese government is preparing to send new shoulder-fired anti-aircraft missiles to Iran in the coming weeks. Although it has already been reported that China has been aiding Iran with chemicals, dual-use equipment components, and the like, any provision of lethal weapons would mark a significant escalation and eventually risk drawing China into the conflict.
• Iranian sources said the country’s new Supreme Leader, Mojtaba Khamenei, suffered severe facial and leg injuries during the US-Israeli airstrike that killed his father at the start of the war. However, the sources say Khamenei is recovering. Going forward, any facial scars on Khamenei could have political significance, providing a reminder of the US-Israeli attacks with every public appearance.
• Reflecting the failure of the Pakistan talks and the new US threat to blockade Iranian ships, the price for Brent crude oil so far today has jumped 6.7% to $101.55 per barrel.

China-Taiwan: As the leader of Taiwan’s opposition Kuomintang Party, Cheng Li-wun, ended her visit to China and wrapped up her talks with General Secretary Xi, the Chinese government said it will take nearly a dozen steps to ease travel to and from the mainland, such as restoring direct flights to Taiwan. The announcement likely aims to bolster Cheng’s political stature in Taiwan and undermine the current conservative, anti-China government.

• Separately, a senior Taiwanese official said the government will carry out its first-ever joint exercise between the Interior Ministry and other departments to escort ships carrying natural gas and oil during a potential Chinese naval blockade.
• The drills suggest the war in Iran has alerted Taiwan to the risk of disrupted energy supplies, which China could use as a nonlethal way to pressure the island to unify with the mainland.

European Union-United Kingdom: As opinion polls increasingly show Britons now regret Brexit, Prime Minister Starmer is reportedly planning to propose legislation that would insert EU rules into UK law with minimal parliamentary oversight. The law would apply to rules in certain policy areas, such as food safety standards. According to Starmer, the legislation would help cut business costs and bring down prices. In our view, it may also signal further re-integration of the EU and UK as the British try to reignite economic growth.

Hungary: In parliamentary elections yesterday, the opposition Tisza Party won approximately 138 of the 199 seats in parliament, beating pro-Russia populist Prime Minister Orbán and securing the two-thirds majority needed to ensure Orbán’s policies can be jettisoned. With this election result, Hungary will probably cease to be a major impediment to the European Union’s anti-Russia policies and will be more likely to hew to basic EU policies such as rule of law.

• The European Commission said it has already begun “immediate engagement” with the expected new prime minister, Péter Magyar.
• Besides pushing Magyar to mend ties with Ukraine, officials in Brussels are urging him to start long-demanded reforms to unlock 35 billion EUR ($41 billion) in frozen EU funds for Hungary.

US Artificial Intelligence Industry: The Wall Street Journal yesterday published an interesting article asserting that the rapid growth in “agentic” AI systems has caused the demand for computing resources to outstrip capacity, forcing firms to ration the resource and even drop product offerings. Anthropic and other AI firms have even faced service outages over the issue. The development illustrates the challenges firms face as AI becomes more widely adopted and may portend higher prices going forward.

US Stock Market: Nasdaq announced on Friday that software maker Atlassian will be replaced by memory chipmaker Sandisk in the Nasdaq 100 index. The move illustrates how the AI boom has scrambled the fortunes of major tech firms, weighing on the market values of software makers while boosting any equipment suppliers to the data-center buildup.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with an analysis of growing concerns that AI tools may be becoming too dangerous. We then examine Hungary’s upcoming elections and their implications for the EU, provide an update on developments in Iran, discuss why OpenAI has delayed expansion plans in the UK, and review a new lawsuit over US tariffs. As always, we conclude with a summary of recent domestic and international economic data.

AI Fears: Treasury Secretary Scott Bessent and Fed Chair Jerome Powell recently met with several Wall Street CEOs to discuss emerging risks from AI. The conversation focused on the cybersecurity threats posed by Anthropic’s latest Mythos models and similar systems. These advanced tools, which can be weaponized to identify and exploit vulnerabilities in servers and web browsers, raise the possibility of AI-driven hacking. Such capabilities reinforce growing concerns that AI could evolve into a source of systemic financial risk.

• The efforts by the White House and the Federal Reserve to assess Wall Street’s vulnerabilities come as the financial system braces for a potential new era of hacking, one marked by increased sophistication and accuracy. According to Anthropic, the company has developed AI tools with offensive capabilities comparable to those of sophisticated state-level actors, which is why it considers the system one of its riskiest products.
• Although the tool has not yet been released publicly, a select group of major technology firms have accessed a sample version. These companies will be able to use the preview version to scan their platforms for bugs and uncover blind spots in their security frameworks. The decision to restrict access reflects the company’s concerns over AI safety and security, which are issues that lie at the heart of its dispute with the Pentagon and that trace back to why its founders, formerly from OpenAI, launched the company in the first place.
• The development of Anthropic’s Mythos has started to expose a troubling reality. The uses of the technology are evolving faster than our ability to understand its implications. This discovery is likely to add further pressure on the US government to establish potential guardrails to help shield the public from the tool’s capabilities. It also highlights the risk and danger that these AI tools could, and likely will, fall into the hands of bad actors.
• The rapid rise of AI is expected to trigger major disruption while simultaneously creating new vulnerabilities in the financial system. If a bad actor were to use, or develop, their own AI tools to hack into the banking system, it could undermine confidence in global finance and potentially spark a bank run. While this is not our base case, we believe that the development of AI‑enabled hacking tools represents a clear and present danger for markets if it is not taken seriously.

 A New Hungary: Hungarian President Viktor Orbán faces his toughest political challenge yet in this weekend’s presidential election. Recent polls place his party behind the opposition, 52% to 39% among decided voters, in what many see as a referendum on Hungary’s future within the European Union. The vote follows mounting criticism of Orbán’s restrictions on free speech, his alignment with Moscow during the war in Ukraine, and speculation that Budapest may seek to further distance itself from Brussels.

• While polls currently favor the opposition, victory is far from assured, as a significant share of voters, nearly one-fifth of those surveyed, remain undecided. Orbán continues to command strong loyalty among his base, and recent redistricting may improve his chances of outperforming expectations. The range of possible outcomes remains wide, with some analysts suggesting the opposition could secure a supermajority while others believe Orbán’s party may still retain its governing majority.
• The election has drawn attention from the White House, which remains closely aligned with Viktor Orbán. Earlier this week, US Vice President JD Vance traveled to Hungary to express support for Orbán and criticize the European Union, accusing it of exerting undue influence over the election. Vance’s visit underscores Washington’s effort to strengthen one of its closest regional partnerships amid mounting geopolitical tensions.
• Moreover, an Orbán defeat could strip Moscow of a key ally within the EU as Brussels seeks to intensify pressure over Russia’s war in Ukraine. Since the conflict began, Orbán has repeatedly obstructed EU and NATO initiatives to deliver financial and military assistance to Kyiv. His removal would likely open the door for a more assertive European stance toward Russian aggression and strengthen regional coordination on security and sanctions policy.
• The Hungarian election is unlikely to have a significant market impact — except perhaps a modest effect on the euro. However, its political implications could prove consequential for Europe. Orbán’s potential removal would likely ease coordination within the bloc on defense policy and military spending. We believe the EU is gradually pursuing greater security independence from the United States, a shift that could benefit European defense and aerospace firms positioned to meet rising regional demand.

 Iran Update: The US and Iran are set to meet in Islamabad to discuss a potential ceasefire agreement. Despite earlier US warnings over Tehran’s efforts to assert control of the Strait of Hormuz, diplomacy now appears to be gaining traction. Israel has agreed to enter direct talks with Lebanon, while Iran remains open to negotiations, though it continues to demand an end to Israeli strikes on Lebanese territory. With the strait still largely closed and the truce largely intact, the upcoming discussions may offer valuable insight into the prospects for a lasting peace.

 UK Stargate: Rising energy costs and red tape have led OpenAI to halt the construction of data centers within the UK. The move comes as the company looks to rein in costs ahead of its planned initial public offering. Its decision to pause construction has been influenced by energy prices related to ongoing conflicts, which have made costs less palatable. Additionally, the company has pushed for regulatory changes to make building more favorable. However, OpenAI does plan to resume construction at a later date.

 New Tariff Fight: A coalition of state governments and small businesses has filed suit against the White House over its new 10% tariffs. The plaintiffs argue that the tariffs, implemented after the recent Supreme Court ruling, effectively undermine that decision. Although the new measures were enacted under a different legal provision, critics contend that the administration’s justification, addressing large and persistent trade deficit, lacks a valid legal basis.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with an analysis of the next phase of the conflict following the cease-fire agreement. We then examine the latest FOMC meeting minutes and their implications for monetary policy. Other discussions include the inroads that the US is making in South America, the potential impact of low fertility rates on economic growth, and signs of backlash against higher energy prices in the EU. As always, we include a summary of recent domestic and international economic data.

The New Phase: A day after the United States and Iran agreed to a two‑week ceasefire, it remains unclear whether the lull in fighting will hold, as early signs suggest both sides are not fully adhering to the deal. On Wednesday, Saudi Arabia reported that its east‑west pipeline had been struck by Iranian drones, while Israel has continued its strikes against Hezbollah targets in Lebanon. The uncertainty has not derailed the planned talks scheduled for Friday, but it has prompted Iran to impose additional restrictions on shipments transiting the Strait of Hormuz.

• The renewed hostilities appear to be driven in part by factions that never fully embraced the ceasefire. Vice President JD Vance has said the US–Iran agreement applied only to Iran, not Lebanon, underscoring Washington’s view that Israeli operations against Hezbollah can continue under the deal. At the same time, Iran-aligned proxy groups are widely suspected of being behind continued drone and missile attacks on Gulf states and regional infrastructure.
• The ongoing attacks have raised the stakes for both sides ahead of Friday’s talks. It appears that Washington and Tehran are exploring an arrangement to jointly oversee trade through the Strait of Hormuz, with Iran reportedly pressing for a $1 per‑barrel transit toll paid in crypto‑assets and the United States floating a joint‑venture structure that would also entitle it to a share of shipping fees.
• The talks also appear likely to center on Iran’s nuclear program. Vice President Vance, who is set to lead the US delegation on Friday, has stressed that Washington’s stance on uranium enrichment remains unchanged, with meaningful sanctions and tariff relief conditioned on strict limits that prevent Tehran from obtaining a nuclear weapon. Meanwhile, Iran’s 10‑point proposal asserts its right to continue uranium enrichment, which underscores the significant gap that negotiators will need to bridge at the table.
• Additionally, Europe is expected to play a major role in helping secure the strait. The US has asked a UK-led coalition of European allies, as well as Canada and Japan, to present a plan to help manage the strait. At the same time, Iran has pushed for Europe to help ensure that the US and Israel are able to follow through on their commitments to the ceasefire. Europe, which had previously agreed to assist in keeping the strait open prior to the ceasefire, has also backed Iran in its effort to stop attacks in Lebanon.
• Although market sentiment has improved, a sustained recovery will ultimately depend on companies’ earnings outlooks, particularly as they offer insight into their overall exposure to the conflict and how they plan to address these vulnerabilities. In this environment, we think firms that have a solid history of having resilient earnings as well as those who issue dividends should do well as investors are likely to start to prioritizing value over growth.

 Fed Divided: The latest FOMC meeting minutes revealed that Fed officials remain divided on how best to approach policy going forward. While most officials seem to favor holding rates steady for now and cutting later in the year, there was pushback from some members over whether there should be a reference to the possibility of a rate hike, given that inflation continues to run above target. The wide range of opinions reflects the reality that Fed policy could change quite radically over the next few months, depending on the data.

• The main concern stated by Fed officials was the trajectory of inflation. Many argued that price pressures had not eased enough to justify cutting rates even before the recent conflict. They paid particular attention to core goods and especially core services, with the latter seen as more worrisome given its historical stickiness. Others expressed confidence that the adoption of new technologies and ongoing deregulation could lift productivity over time, helping to relieve some of the upward pressure on prices.
• Views on the labor market also appear somewhat divided. Some committee members have voiced concern that job gains remain relatively modest and are concentrated in sectors such as education and health services. Others have emphasized that the unemployment rate has changed little and argue that recent payroll growth is broadly consistent with a cooling labor market and slowing labor‑force growth, suggesting conditions are roughly in line with expectations.
• On the Middle East conflict, Fed officials commented on the risks but acknowledged it was too early to draw firm conclusions. They noted that the recent spike in oil prices could complicate progress toward the 2% inflation target, while also warning that higher energy costs might weaken the labor market by squeezing household consumption. In all, there seems to be more concern with the potential downside risk to employment, even as officials recognized the twin risks of higher inflation and softer labor conditions.
• The latest minutes suggest the Fed is inclined to keep policy on hold for now, while preserving the option to cut rates later if conditions warrant. The officials note the possibility of further tightening but offer little indication if the committee is seriously considering a rate hike this year. This stance is likely to cap further upside in the dollar, especially as other major central banks, including the Bank of Japan and the ECB, appear to be gradually tilting in a more restrictive or less dovish direction.

US-Ecuador: In a sign of Washington’s growing clout in South America, Ecuador has moved to deepen security cooperation with the United States. In a recent interview, President Daniel Noboa said he would support the deployment of US troops in the country to help combat powerful drug cartels. His comments underscore Washington’s efforts to rebuild influence in the region and tighten security ties, which over time could translate into increased US investment and broader market opportunities across South America.

Low Fertility Rates: US fertility fell to a record low in 2025, signaling that population growth is continuing to slow. The decline largely reflects women having children later in life, which tends to reduce lifetime birth rates. Combined with tighter immigration policies, a persistently low birth rate is likely to slow overall population growth, making the economy increasingly reliant on gains in productivity rather than demographics to drive long‑term output.

Energy Outrage: The rise in energy prices has begun to trigger public backlash in Ireland. Protesters have blocked oil refineries in an effort to force officials to address the soaring energy costs that are being driven by the conflict. This outrage reflects the growing pressure that European lawmakers face as they try to soften the impact of higher energy prices. In our view, this could lead to increased efforts to offer subsidies aimed at reducing cost pressures, but it might also prompt the EU to loosen regulations to allow more mining and drilling.

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