by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our views on the newly proposed trade tariffs. We then turn to the SpaceX IPO and its implications for AI‑related trades. Next, we briefly address the recent executive order on AI risks and the progress of the US‑EU trade agreement. We also provide updates on tensions in the Middle East and the war between Russia and Ukraine. As always, we conclude with a review of recent domestic and international economic data releases.

Trade Tariffs: The White House has proposed a new round of tariffs on foreign goods as it seeks to reinstate the import taxes that were struck down by the Supreme Court earlier this year. The move follows an investigation into trade practices that alleged certain partners were handling goods produced with forced labor. Under the proposal, tariffs would be set at 10% for imports from Canada, Mexico, the European Union, Taiwan, and the UK, while imports from China, India, Japan, South Korea, and Brazil would face a 12.5% rate.

• The new tariffs come as the US seeks to maintain pressure on trade partners to honor agreements reached last year. After the Supreme Court ruled that tariffs imposed under the International Emergency Economic Powers Act were unconstitutional, the White House began searching for replacement levies grounded in a legal framework more likely to withstand judicial scrutiny, aiming to preserve its ability to use tariffs as an enforcement tool.
• The latest tariffs were introduced under Section 301 of the Trade Act of 1974. Under this framework, the administration must conduct a country‑specific investigation and provide opportunities for consultation and hearings before any measures take effect. The new tariffs are expected to begin in July, as the levies imposed under Section 122 of the Trade Act expire, and are likely to include exemptions for selected products, such as beef and coffee, depending on the country of origin.
• The overall impact of these tariffs is likely to be limited, as most firms have already adapted to similar measures. Many companies that could pass higher costs on to consumers have largely done so, while others have developed workarounds in response to last year’s tariff regime. Consequently, we do not expect a lasting or material market reaction to the new measures.

SpaceX IPO: The Musk-owned company is positioning itself to become the first major satellite and artificial intelligence firm to go public, potentially establishing a blueprint for future IPOs from companies such as Anthropic and OpenAI. The company is reportedly targeting a share price of $135, aiming to raise approximately $75 billion, an amount that would make it the largest IPO on record. A SpaceX IPO would likely serve as a key gauge of investor appetite for AI-driven businesses as the sector moves toward public markets.

• SpaceX is expected to set the terms of its IPO this week. Market participants generally anticipate that SpaceX and other AI‑focused firms will be met with strong demand when they come to market. The company has already used the deal’s prominence to push underwriting banks to accept lower fees, while employees have organized to secure specialized advisory and wealth‑management services designed to maximize the value of their post‑IPO equity.
• A move to the public markets will inevitably sharpen the focus on valuation. The company is expected to list at a multiple in excess of 100x. Recent disclosures show its AI segment posted an operating loss of $6.4 billion in 2025 and a further $2.5 billion loss in the first quarter of the current year. At the same time, SpaceX has secured sizable commitments from Anthropic that are projected to generate more than $1.25 billion in monthly payments through 2029.
• While the IPO will likely generate substantial excitement, it may also suggest that AI enthusiasm is nearing a cyclical peak. Historically, many IPOs see strong first‑day gains before fading in subsequent weeks, with some even dropping below their opening‑day levels.

AI Order: President Trump signed an order aimed at addressing AI‑related cybersecurity risks without putting the US at a competitive disadvantage. The measure is lighter than what many experts had sought, making testing of advanced AI tools subject only to a voluntary 30‑day government review rather than the tougher 90‑day process that was floated in May. Although relatively modest, it still helps lay the groundwork for more stringent AI regulations as associated risks become clearer.

Europe Trade Deal: The European Parliament has advanced the trade agreement it reached with the US, moving it closer to final approval. The deal still requires a plenary vote scheduled for June 16. Under the agreement, the EU would remove tariffs on US industrial products, while EU exports to the US would face a tariff cap of 15%. The deal is expected to help prevent a deterioration in transatlantic relations, as the White House has signaled it would move to impose new tariffs if the pact is not approved by July 4.

Iran Attacks: Tensions clearly remain elevated despite the ceasefire between the US and Iran, as evidenced by the Iranian missile strike on an airport in Kuwait. The attack follows a cooling in peace talks, with Tehran reportedly viewing Washington’s stance as an attempt to force an unconditional surrender. It also underscores the risk that any renewed fighting could spill over into neighboring states, broadening the conflict across the Middle East. The shaky ceasefire continues to support high energy prices.

Ukraine Responds: Ukrainian drones struck an oil terminal in St. Petersburg in apparent retaliation for recent Russian attacks on Ukrainian cities. In our view, the conflict cannot continue indefinitely given the constraints both sides face. Ukraine is limited by ammunition and manpower while Russia is operating under growing fiscal and economic pressure. Recent strikes of this kind look less like an escalation toward total war and more like an attempt by Kyiv to improve its leverage ahead of an eventual return to negotiations.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with a discussion of Big Tech’s escalating bet on AI and its implications for the broader economy. We then turn abroad to examine the latest developments in Russia’s invasion of Ukraine. Next, we provide updates on negotiations between the US and Iran, Anthropic’s push toward an IPO, and the White House’s decision to lower select tariffs. We conclude, as always, with a review of recent domestic and international economic data.

AI Build Out: Heavy infrastructure spending remains a top priority as companies race to meet accelerating demand for compute capacity. On Monday, Google announced plans to issue equity to help finance additional data center expansion, becoming the latest firm to tap external funding for these capital-intensive projects. This wave of investment, driven by AI, continues to provide incremental support for economic growth. However, as investment continues to build, there is a risk that the economy may become increasingly dependent on AI as a key source of growth.

• Alphabet, Google’s parent company, plans to raise more than $80 billion in its first equity offering in over two decades, marking a notable shift in how large technology firms are financing elevated capital spending. Historically, these companies have relied on cash reserves and debt to fund investment. Turning to equity issuance suggests that management views its stock as a relatively attractive, lower-cost source of capital compared with traditional alternatives.

• Alphabet’s AI spending reflects a broader push across the technology sector to expand capacity in response to surging cloud demand. Major players — including Meta, Microsoft, and Amazon — are collectively committing roughly $750 billion in capital expenditures this year to scale infrastructure, raising the possibility that such spending may begin to crowd out other forms of investment. Notably, investment in data centers has already exceeded spending on public transportation in 2026.

• This scale of spending remains a key pillar of investment growth, significantly outpacing most other sectors. Recent GDP data shows that since 2025, technology investment — defined here as software, power, and communications infrastructure, and technology equipment — has largely crowded out other forms of investment. This dominance underscores both the magnitude of the AI-driven shift in the economy and the increasing reliance on it as a primary engine of growth.
• As long as the buildout continues, it should provide a stabilizing force and reduce the likelihood of a meaningful downturn. However, if that momentum were to reverse, replacing this primary engine of growth would be challenging. While we think technology exposure is good for its growth potential, we also recommend an allocation to value as a source of capital preservation, particularly during periods of heightened uncertainty.

Russia Under Pressure: There are growing signs that the tide may be turning against Moscow. Reports on Monday indicated that financial officials warned President Putin that the war in Ukraine is becoming increasingly unaffordable, with concerns it could push the fiscal deficit to unsustainable levels. Mounting tension within the Kremlin over how to continue financing a conflict now well into its fourth year highlights the difficult trade-offs facing the Russian economy and may begin to reopen the door to renewed peace negotiations.

• Pressure to rein in spending comes as Russia’s fiscal position shows clear signs of deterioration. The economy is facing a combination of weaker GDP growth, declining oil and gas revenues, and rising debt-servicing costs. While authorities have attempted to cut expenditures outside of defense and social programs, it remains uncertain whether these measures will provide a durable, long-term solution.
• While negotiations between Russia and Ukraine have largely stalled, there are signs of renewed momentum toward resuming talks. This shift comes as Russia faces mounting setbacks, with Ukraine demonstrating an ability to defend its territory and push back Russian forces. Ukrainian President Volodymyr Zelenskyy has indicated a desire to see meaningful progress by winter. At the same time, reports suggest President Trump has sought to enlist Xi Jinping’s support in pressuring Putin to return to the negotiating table.
• However, Moscow is showing little sign of backing down. On Tuesday, Russia launched a large-scale barrage of missiles and drones against Kyiv and other Ukrainian cities, following through on earlier warnings that it would carry out “systematic” strikes after urging foreign nationals and diplomatic staff to leave the capital. These attacks are part of Moscow’s effort to intensify operations and try to tilt the battlefield momentum back in its favor as it looks to regain leverage.
• There are growing indications that some form of a deal may be possible in the coming months. Given mounting economic and military strains on Russia and increasing US pressure on all parties to move toward a negotiated outcome, we see a roughly 50% probability of a ceasefire or framework agreement emerging over the next 6-12 months. If we are correct, it could provide a tailwind for global risk assets, particularly in Europe, and especially if any agreement includes easing of sanctions on Russian energy.

US-Iran Tensions: Despite renewed strikes over the weekend, both sides remain engaged in talks, though there is little sign of substantive progress. Iran has warned that hostilities could resume if Washington continues to insist on what it describes as unconditional surrender. At the same time, the White House is seeking to rein in Israeli strikes on Lebanon amid concerns that further escalation could derail negotiations. A return to open conflict would likely weigh on risk sentiment and add to volatility in energy and broader asset markets.

Anthropic IPO: Anthropic appears to be moving closer to a public offering. Reports on Monday indicated that the company submitted draft paperwork for a listing, suggesting an accelerated timeline that may be part of a broader effort to reach public markets ahead of OpenAI. Such a move could help strengthen its positioning in the race to become a leading AI provider. At the same time, the IPO will serve as an important test of investor appetite for AI, where a weak reception could begin to challenge the durability of the AI rally.

Lower Tariffs: The White House has announced plans to lower tariffs on farm and construction equipment in an effort to support industrial investment. Under the proposal, headline tariff rates would be cut from 25% to 15%, with foreign manufacturers that source at least 85% of their steel from US producers eligible for a reduced 10% rate. The measure is aimed at easing trade-related cost pressures on the economy while simultaneously boosting demand for American steel.

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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 hoped-for peace deal is looking increasingly at risk. We next review several other international and US developments that could affect the financial markets today, including a warning from China that it would retaliate if the EU proceeds with protectionist trade barriers against it and a US autoworkers’ strike that threatens to disrupt the production of key pickup trucks.

United States-Israel-Iran: At a meeting on Friday to look at the draft US-Iranian peace deal, President Trump reportedly asked for several changes, especially regarding Iran’s nuclear program. The requested amendments are likely to spur several days of additional negotiations and delay any final deal until later this week. The continued talks will further postpone any normalization of energy and other commodity shipments through the Strait of Hormuz, which will in turn keep alive the risk of further price hikes for energy and other commodities.

• Separately, the US and Iran exchanged fresh attacks over the weekend, with the US striking Iranian air defense and drone sites and Iran retaliating with attacks on Kuwait.
• The continued back-and-forth regarding a peace deal and the threat to it from the new attacks have pushed energy prices higher today. As of this writing, near Brent crude oil futures are trading at $93.67 per barrel, up 2.8%.

China-European Union: After EU leaders met on Friday to discuss new trade barriers against the current wave of cheap Chinese exports, Beijing on Saturday warned that it would retaliate against any additional restrictions. The warning highlights the dilemma faced by the EU: It can either remain wide open to Chinese imports, putting domestic industries at risk, or it can put up trade barriers and possibly invite devastating retaliation.

• Separately, the Organization for Economic Cooperation and Development has released new research showing that nearly 60% of Chinese firms’ global market share gains since 2005 could be attributed to unfair subsidies and cheap loans. The research reflects company-level analysis across 15 industrial sectors.
• The report suggests that Chinese firms received three to eight times more government support on average in 2024 than companies in the other 38 OECD countries.
• The report will likely help incentivize leaders in Europe and beyond to push back more strenuously against China’s enormous excess capacity and predatory trade policies.

China: More broadly, Beijing today also published new rules limiting outbound corporate investment and operations that could result in the transfer of critical technologies. Under the rules, the government will have the authority to conduct reviews of overseas investments that could affect national security. For unapproved investments that have already been made, authorities may order entities to halt investment activities and divest related shares and assets. The rules also allow bans on foreign operations or personnel assignments that risk the transfer of technologies.

• Beijing’s move today shows how the fracturing of the world into relatively separate geopolitical and economic blocs isn’t just about trade barriers.
• Driven by the US-China geopolitical rivalry, restrictions on cross-border investment, technology transfers, and personnel assignments will also have the effect of making the global economy less efficient than it otherwise would be. In turn, that will likely keep price inflation higher and more volatile than in the past.

Japan: New data over the weekend showed that the Japanese government spent the equivalent of $73.6 billion over the last month to prop up the yen as it slid past 160 JPY per dollar. The figure was larger than expected, highlighting how Prime Minister Takaichi’s government is prioritizing its defense of the yen, at least in part to forestall criticism from the US.

France: Japanese tech investor Softbank has announced that it will invest 75 billion EUR ($87 billion) in a fleet of data centers in France as the country tries to catch up to the artificial intelligence infrastructure enjoyed in the US and China. Although Europe, in general, is far behind in the AI infrastructure race, the deal seeks to leverage France’s unique combination of plentiful nuclear power and fast-tracked approval for AI facilities. In our recent Bi-Weekly Geopolitical Report from May 4, 2026, we argued that investors shouldn’t yet write off Europe’s ability to build up its AI sector.

Colombia: In the first round of the presidential election yesterday, far-right candidate Abelardo de la Espriella came in first with 43.7% of the vote, while Iván Cepeda of the current president’s leftist party came in second with 40.9%. The two will compete in a run-off election on June 21. De la Espriella’s unexpected victory suggests Colombia could be the next Latin American country to see its traditional center-right parties eclipsed by populist far-right parties.

US Labor Market: Almost 1,000 employees with the United Auto Workers are set to walk out on strike over a labor contract at American Axle today. The strike is expected to be especially painful for General Motors, as the targeted plant is a key supplier for GM’s mid- and full-size pickup trucks.

US Artificial Intelligence Industry: AI semiconductor giant Nvidia today announced its new RTX Spark chip, which will be a key component for the first personal laptop computers designed to run artificial intelligence agents. According to Nvidia, new computers using the chip will be “targeted at creators, AI developers and gamers” and priced at the premium end of the market. The new chip and AI computers illustrate how the frenzy over AI is continuing to touch more products and sectors in the economy, suggesting the AI investment craze could continue for now.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our take on the latest progress in US-Iran negotiations. We then turn to AI, focusing on rising compute costs and what they mean for the pace of adoption. Next, we briefly discuss the EU’s push for greater control over critical supply chains and France’s unexpected economic contraction. We also include, as always, a review of recent domestic and international economic data.

New Deal? The United States and Iran have agreed to extend their ceasefire by 60 days, following Treasury Secretary Scott Bessent’s announcement that both sides have reached a preliminary framework for a deal that could reopen the Strait of Hormuz. While the agreement still requires approval from President Trump, it represents the clearest signal to date that the two parties are nearing a broader resolution. Markets have responded quickly to the development, with oil prices easing and Treasury yields falling.

• The White House appears increasingly confident that a deal is close. While details remain limited, Bessent has emphasized that any agreement must meet three core conditions: the reopening of the Strait of Hormuz, Iran relinquishing its enriched uranium, and a full cessation of its nuclear program. In addition, the US is insisting that all transit through the strait remain free of tolls.
• Iran has thus far negotiated in good faith, pressing for the release of approximately $24 billion in frozen assets as part of any agreement. It is also seeking an end to Israeli strikes in Lebanon and some degree of influence over maritime traffic through the strait. On the nuclear front, Iran would prefer to retain its enrichment program but has signaled a willingness to transfer enriched material to China or Russia as a potential compromise.
• The interim deal now awaits President Trump’s final approval, with reports suggesting he intends to take several days to review the terms despite markets already largely pricing in a green light. Following Bessent’s announcement, WTI crude fell below $90 per barrel for the first time in over a month, while the 10-year Treasury yield declined nearly 10 basis points to 4.43%. These moves reflect growing market confidence that a resolution to the conflict could alleviate the supply chain disruptions triggered by the escalation.
• While markets appear confident that a deal will be reached, we remain more cautious. Although the president typically welcomes market reassurance, he has also shown a preference for securing a clear, tangible win — something this framework may not fully deliver. We are cautiously optimistic that cooler heads will prevail. However, a rejection of the deal would likely trigger a sharp market reaction and could raise the risk of renewed escalation.

AI Costs: More firms are beginning to rein in AI spending as usage costs increasingly pressure budgets. On Thursday, Amazon announced plans to dismantle its internal AI leadership board in an effort to discourage the use of AI for its own sake rather than for clear productivity gains. The move follows internal findings that some employees were deploying AI for low-value or unnecessary tasks — a trend increasingly referred to as “tokenmaxxing.” This shift toward tighter controls suggests that the pace of AI adoption may be slowing as firms look to rein in costs.

• As AI adoption has accelerated, providers have periodically struggled to keep up with demand given finite computing capacity, leading to the use of quotas and rate limits to manage usage. Anthropic, for example, initially tightened Claude Code limits in response to “unprecedented demand,” but more recently has been able to raise those limits significantly after securing additional compute capacity through a new partnership with SpaceX and other cloud providers.
• Another sign that AI costs are mounting is the trend of companies moving toward public markets. This shift will likely force these firms to prioritize profitability over aggressive market share expansion. Anticipated IPOs from industry leaders like OpenAI, Anthropic, and SpaceX could provide a necessary capital influx; however, these moves will also subject the companies to intense public scrutiny regarding revenue targets and fiscal discipline.
• Despite the hype around AI, questions remain about its ability to generate robust returns on investment. A widely cited MIT study released in August 2025 found that more than 95% of surveyed firms had yet to demonstrate a positive ROI from their AI initiatives. A follow‑up report from PwC in January indicated that 56% of CEOs saw neither higher revenues nor lower costs from AI over the prior 12 months, and only about 12% reported achieving both outcomes.
• AI still appears poised to be a positive force for the economy and markets over time, but we are increasingly focused on the buildup of related risks. Rising implementation and infrastructure costs, in particular, could slow future adoption and make it harder for AI providers to deliver on today’s lofty expectations. In this environment, it remains sensible to maintain broader tech exposure, while continuing to monitor concentration and valuation risks.

EU Chip Takeover: The EU is weighing emergency powers that would allow it to compel chipmakers to override existing contracts in times of crisis. The proposal is intended to reduce the bloc’s vulnerability to economic coercion from the US and China, given Europe’s heavy reliance on imported semiconductors. It also follows the Dutch government’s controversial intervention involving chipmaker Nexperia and underscores how, in a less globalized world, governments are likely to take a more active role in strategic sectors of the economy.

France Contraction: The French economy unexpectedly contracted in the first quarter. According to the national statistics office Insee, GDP fell 0.1% quarter‑on‑quarter, weighed down by weaker exports and soft domestic demand. While some observers view the decline as a one‑off that could be reversed in the second quarter, concerns persist that France’s rising debt burden, new US trade restrictions, and the energy shock linked to the conflict in Iran could pose additional headwinds to growth.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our thoughts on a potential AI tax. We then turn to Federal Reserve policy and the possibility of a rate hike. Next, we provide brief updates on the US-Iran conflict and the rise in semiconductor stocks. As always, we include a review of recent domestic and international economic data.

Taxing AI: In a recent Time op-ed, Senator Elizabeth Warren (D‑MA) called for changes to the tax code that would channel a portion of AI‑related gains into federal revenue and ensure the benefits are shared more broadly with everyday Americans. Her proposal comes as lawmakers search for ways to make rapid advances in AI more politically and socially acceptable to voters. It also lands at a moment when AI is playing a growing role in the economy while facing mounting public backlash over its pace of adoption, perceived equity implications, and the extent to which its expansion is seen as being facilitated by government support.

• Most of her tax proposals are familiar, including a wealth tax and higher capital gains taxes, and do not target AI specifically. However, she is also floating a more novel idea: an excise tax on data centers’ energy usage, which has received limited mainstream attention so far. In her view, such a levy would help large tech firms compensate local communities for higher utility costs tied to surging data‑center demand, and support the competitiveness of US companies in the global AI race.
• The idea of taxing data centers is not new as there has also been a recent push to tax computer processing. The key distinction between taxing energy and taxing computation is that an energy tax applies to the electricity consumed, while a compute tax applies to the volume of computational work itself. An electricity tax mainly nudges firms toward cheaper or cleaner power sources, whereas a compute‑based tax would more directly incentivize reducing or optimizing workloads.

• The renewed push to tax AI comes as major tech companies sharply increase capital spending to keep up with surging demand for the technology. In 2025, Nvidia CEO Jensen Huang argued that computing capacity will need to scale by orders of magnitude — potentially up to 1,000x — to support more advanced, agentic forms of AI. If AI capacity growth continues on this trajectory, an AI‑linked tax on energy use or consumption could become a meaningful revenue source for governments over time.
• While the idea of an AI tax remains purely speculative for now, it could gain momentum heading into the 2028 election. If enacted, such a tax would likely create a headwind for tech companies that rely heavily on data centers, as it would increase their operating costs. However, if AI continues to grow as fast as projected, the tax could also help raise government revenue and reduce the national debt, which might ultimately bring down longer-term bond yields.

Hikes Possible? Nearly a month after the last FOMC meeting, Fed officials appear to be shifting away from an easing bias toward a more tightening-oriented stance. Following Governor Christopher Waller’s call to abandon the easing bias, several policymakers have begun signaling openness to a rate hike later this year. This shift in sentiment will likely place upward pressure on bond yields, as markets begin to reprice the policy path to reflect a higher probability of further tightening.

• On Wednesday, Fed Governor Lisa Cook highlighted a range of risks to the Fed’s price stability mandate, including artificial intelligence related disruptions, tariffs, and escalating tensions with Iran. She indicated a willingness to raise interest rates if inflation remains elevated. In contrast, Fed Governor Philip Jefferson struck a more optimistic tone suggesting that current policy remains well positioned, noting that inflation appears to be cooling, while emphasizing that upside risks to inflation persist.
• Inflation risks are rising as the Federal Reserve confronts a series of overlapping supply shocks. The AI build-out is lifting household utility costs and memory chip prices, while tariffs are increasing import prices. At the same time, the war in Iran is pushing up energy and food costs. These pressures are already feeding into goods prices — historically the more responsive component — but may increasingly spill over into services, where disinflation has proven far more persistent.

• The recent shift in risk sentiment has started to push the 10‑year Treasury yield higher. Market pricing indicates that the 10‑year yield remains highly sensitive to year‑end fed funds expectations. That tight relationship reflects the fact that long‑term yields are largely driven by the expected path of short‑term rates plus the term premium investors demand for bearing inflation, and bond supply risk over time. However, we think geopolitical risks may also be impacting term premia.
• The Fed’s pivot marks the start of a new regime during which the central bank must navigate recurring, supply‑driven geopolitical shocks — something it has not faced at this scale before. This backdrop is likely to complicate monetary‑policy calibration over the next several years, particularly as the global economy continues to deglobalize. In our view, that combination argues for elevated volatility in long‑term rates as the Fed adapts its reaction function to an evolving geopolitical landscape.

Iran Setback: The US on Thursday carried out multiple strikes on Iranian targets in the Strait of Hormuz, underscoring its commitment to keeping the waterway open. Ahead of the strikes, the  US president vowed not to allow any actor to control the strait and warned Oman, a US ally, against supporting any Iranian effort to impose a toll in the region. Although the current truce still appears to be holding, developments on the ground suggest the ceasefire remains fragile.

Chipmakers Rise: AI enthusiasm has propelled chipmakers to their strongest run since the dot‑com era. The PHLX Semiconductor Index is up roughly 75% year‑to‑date, marking its best start to a year since 1999. The move has been driven largely by surging AI‑related capex and earnings expectations, even as macro and geopolitical uncertainty remain elevated. While we see scope for further upside in the near term, we continue to advocate adding value exposure as a way to mitigate concentration risk in AI‑heavy growth names.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our takeaways from the pope’s first encyclical letter. We then turn to the war in Ukraine and its broader implications for modern conflict. Next, we briefly review the strong performance of chipmakers, the Texas primary, and the latest consumer confidence data. As always, we conclude with a summary of recent domestic and international economic developments.

Pope’s AI Warning: Although artificial intelligence is becoming more ubiquitous, there are growing calls for stronger guardrails. Over the weekend, Pope Leo XIV compared the rush to develop AI to the Tower of Babel in Genesis, using the analogy to underscore rising unease about both the pace of innovation and growing overconfidence in its ultimate impact. His remarks come amid broader concerns that the market’s enthusiasm for AI could prove vulnerable to a reversal if expectations run ahead of reality.

• In Genesis 11, the Tower of Babel serves as a cautionary account of human ambition outpacing restraint. The story describes a unified effort to build a city and a tower reaching the heavens — an expression of collective confidence and self-sufficiency. In response, God disrupts the project by confounding their language and dispersing the population, effectively halting progress. The episode is often interpreted as a warning about the risks of unchecked ambition and the limits of human control.
• The pope’s appeal comes at a moment when the rapid rollout of AI is generating significant disruption but, so far, only modest and uneven gains. A recent research paper from the Federal Reserve Bank of San Francisco finds that AI’s impact on productivity has been mixed, with benefits concentrated in a few sectors and slow diffusion elsewhere. Reflecting similar concerns from the private sector, Uber’s COO has acknowledged that the company’s substantial AI investments have yet to deliver consistently strong returns.

• AI remains the dominant market theme, but the related stocks have been highly volatile. They sold off in fall 2024 on worries about frothy valuations after Nvidia’s earnings underwhelmed sky‑high expectations. The group weakened again in early 2025 after DeepSeek’s launch, which investors saw as a competitive threat to leading US AI firms. Another downturn in fall 2025 followed renewed concerns that circular revenue models in the AI ecosystem were undermining the durability of underlying business momentum.

• AI still has strong momentum, but we think the rally is vulnerable to a sudden shock that could reset expectations, even if no such trigger is currently visible. We therefore recommend maintaining some exposure to value stocks as a buffer in periods of uncertainty, given their tendency to outperform during past episodes of market stress. While this diversification can mean some relative underperformance in powerful growth-led rallies, it also supports better capital preservation over time.

The Forgotten War: While there are tentative discussions about ending the US-Iran standoff, the war between Russia and Ukraine appears to be entering a new phase. On Tuesday, Moscow warned civilians and diplomats to leave Kyiv as it announced plans to target “decision‑making centers” in Ukraine’s capital. The escalation comes as Russia seeks to regain momentum after recent setbacks. The ongoing conflict in Ukraine also helps explain why the United States and Iran are struggling to find a clear off‑ramp as markets push for de-escalation.

• Moscow’s decision to escalate the conflict comes as momentum on the battlefield has shifted against it. In recent months, Ukrainian forces have regained some territory, though it remains unclear whether they can decisively tilt the war in their favor. A key concern for the Kremlin is that domestic support for the campaign may be eroding, and authorities have reportedly tightened control over Telegram, a popular social media platform, in an effort to shape and contain the narrative.
• Moscow is contending with setbacks, but Ukraine is also facing mounting challenges. A report on Monday indicated that roughly half of the countries participating in the Czech-led ammunition initiative for Ukraine have pulled out, potentially constraining supplies of badly needed shells and other munitions. Although the specific states that withdrew were not identified, Germany and several Nordic countries are reported to be continuing their military support for Ukraine.
• Ukraine and Iran’s abilities to prolong conflict reflects how cheaper weapons, particularly drones, have made it easier and less costly for states to defend their territory. These capabilities mean that, even if they cannot decisively defeat a stronger adversary, smaller countries can continue fighting and inflicting damage despite losses of key military systems. In this environment, they have little incentive to accept unconditional surrender.
• Similar to the US-Iran conflict, the lack of a clear victory has made it difficult for the two sides to reach an agreement, largely due to concerns about political backlash from the costs incurred. Russia is in a particularly difficult position, as it needs something to show for its massive casualties and the likely continued isolation resulting from the invasion. These prolonged conflicts are likely to become more common, as cheaper weapons make it easier for smaller nations to fight larger ones.

Chip Demand: AI chipmakers Micron and SK Hynix have both crossed the $1 trillion mark as demand for processors that power cloud-based AI services continues to outstrip supply. Memory chip producers, in particular, underscore the centrality of hardware to AI build‑outs and have been among the largest beneficiaries of big tech’s infrastructure push. Yet, while these companies are thriving today, it is important to remember that the chip industry has historically been highly cyclical, with frequent booms and busts driven by shifts in supply and demand.

Texas Primary: Texas Attorney General Ken Paxton defeated Senator John Cornyn in the Republican Senate primary. His victory has created an opening for Democrats, as James Talarico is currently viewed as having a slight edge in early polling. A Democratic pickup of this seat would significantly increase the odds that Republicans lose their Senate majority. Reflecting this shift, the Cook Political Report moved the race from “likely Republican” to “lean Republican.”

Consumer Confidence: The Conference Board reported a modest easing in consumer sentiment in May. The decline reflects persistent inflation concerns, which continue to weigh on household expectations for future prices of goods and services. Compared with the University of Michigan survey, the Conference Board’s measure — typically more sensitive to labor market conditions than inflation — has shown a more moderate deterioration. Even so, the data indicates that household economic expectations remain notably less optimistic than prevailing market sentiment.

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