by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with our perspective on the president’s nominee to lead the Federal Reserve. We then outline our views on AI in light of the recent tech sell-off. Next, we cover the eurozone’s economic resilience, the openness of US allies to investment from China, and the conclusion of the civil war in Syria. We round out the piece with a summary of key economic data from the US and global markets.

Next Fed Chair? The president announced on Friday his intention to nominate Kevin Warsh, a former Fed governor, as the next chair of the central bank. This move follows months of speculation during which several other figures were also viewed as leading candidates for the role. Financial markets have responded cautiously as Warsh’s traditionally hawkish stance on inflation appears to conflict with the president’s push for more accommodative policy, leaving investors unsure which impulse will ultimately shape Fed decisions under his leadership.

• The president’s choice follows a period in which he also weighed the appointing of Director of the National Economic Council Kevin Hassett, current Fed Governor Christopher Waller, and BlackRock Chief Investment Officer Rick Rieder. Each was, at various points over the past year, viewed as a leading contender in betting markets, with Rieder considered the frontrunner as recently as yesterday.
• While there was some concern that Warsh’s past hawkish statements could hurt his chances of leading the Fed, they may ultimately have been what won the president over. President Trump’s initial preference for Kevin Hassett reportedly backfired after pushback from Wall Street, where investors worried he might prove overly loyal, but Warsh, who has also advised the president, has been viewed as a safer choice given his support for a smaller Fed balance sheet and a lower inflation target range of 1–2% rather than 2%.
• The market’s initial reaction has included a firmer dollar and softer equity prices, as investors interpret his likely appointment as a sign that policy rates could remain elevated for now. That sentiment could shift if Warsh signals a greater willingness to lower interest rates or to take a more flexible approach to the balance sheet — perhaps by slowing the runoff of mortgage-backed securities — which would align more closely with the president’s push to ease borrowing costs and support housing affordability.
• Warsh’s arrival could directly challenge the Fed’s current communication strategy. He has publicly called for a “regime change,” arguing that the present system suffers from a credibility gap. This stance is pivotal because the existing approach has, in our view, provided markets with valuable insight into policy debates and supported Powell’s efforts to build consensus. Altering this balance could carry substantial implications for forward guidance and could pave the way for more dissent.
• We suspect that Warsh’s appointment will likely lead to a less accommodative Fed policy compared with the other candidates under consideration. Ultimately, much will depend on how closely he intends to coordinate with the White House on policy decisions. For now, we believe the market’s expectation of two rate cuts for the year appears reasonable, though the outlook remains uncertain.

Tech Concerns: A sell-off in risk assets on Thursday was driven by investor concerns that AI infrastructure investments may take longer than expected to deliver profits. The catalyst was earnings reports from two of the sector’s biggest spenders, Microsoft and Meta. While one surpassed expectations, the other fueled skepticism about the broader payoff from the AI investment surge among mega-cap tech firms. The reaction underscores a decisive market shift toward a results-focused mindset, as scrutiny of escalating capital expenditures intensifies.

• Microsoft’s earnings report served as a reality check for the AI boom, with guidance coming in weaker than expected. The company disclosed higher-than-anticipated capital expenditure and a slowdown in cloud revenue growth, signaling potential pressure on near-term profitability. The downbeat results weighed on the broader tech sector, prompting investors to reassess their exposure to companies with significant AI-related spending.
• On a brighter note, Meta demonstrated how AI can be deployed effectively. The company reported an acceleration in revenue, showcasing its success in leveraging AI to boost ad growth and user engagement. Its strong performance underscores how eager investors are to reward companies that translate AI investments into tangible profitability across their platforms.
• The sharp reactions to both Microsoft and Meta highlight a shifting investor sentiment toward AI-focused companies. Early in the AI boom, investors showed little concern over heavy infrastructure spending, as many firms financed growth with ample cash reserves. Now, with companies increasingly turning to debt to fund these investments, worries are mounting that they may be expanding capacity too quickly to justify their current valuations.
• We don’t believe the AI rally is close to being over. Thursday’s market reaction likely reflects not a loss of faith in AI itself, but rather growing investor pressure for companies to demonstrate tangible returns on their substantial AI investments. As a result, earnings performance is becoming a progressively important driver of valuations compared with previous periods. That said, we suspect the skepticism is likely to be short-lived as we still believe the sector will be able to generate strong earnings overall.
• While “pure‑play” AI stocks tend to dominate the headlines, the companies enabling the physical build‑out — such as miners, materials suppliers, and energy providers — stand to benefit from the significant power and infrastructure demands of AI data centers. These businesses often trade at more reasonable valuations than high‑profile AI names and should remain relevant given ongoing needs for energy and critical materials, even if the pace of AI expansion moderates.

Eurozone Growth: The eurozone economy expanded by 0.3% in the fourth quarter, surpassing expectations of 0.2%. The stronger-than-expected growth reflects continued economic resilience following the relaxation of tariffs introduced in 2025. Germany was among the biggest surprises, recording its first annual expansion since 2022. Momentum across the bloc is expected to strengthen this year as member nations ramp up stimulus spending on key sectors, including infrastructure and defense.

Chinese Openness: UK Prime Minister Keir Starmer is seeking to strengthen investment ties abroad, signaling a broader shift as countries look to diversify away from reliance on the United States. The move has drawn criticism from the White House, which has warned that such partnerships could carry consequences. For many leaders, the renewed interest in engaging with China appears to be a strategic effort to gain leverage in negotiations with Washington, particularly as the US presses for greater concessions.

Syria Stabilizing? The Kurdish-led Syrian Democratic Forces (SDF) have signed a comprehensive agreement to integrate their military and civilian institutions into the Syrian state, effectively bringing an end to years of self-rule. This historic move, following nearly 14 years of civil war, signals a path toward a unified government in Damascus. This integration is widely seen as a major milestone that could lead to greater long-term stability across the Middle East.

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