by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with an analysis of the de-escalating tensions in the Middle East following a cease-fire agreement. We then examine the mounting political headwinds facing AI, North Korea’s growing assertiveness, and the New York Fed president’s latest outlook on inflation. As always, we include a comprehensive summary of recent domestic and international economic data.

The De-escalation: The US and Iran have agreed to a two-week ceasefire that will reopen the Strait of Hormuz, marking a major step toward de-escalation. The breakthrough comes ahead of scheduled peace talks on Friday, which are aiming to reach a broader agreement to end the conflict. Although strikes are still ongoing, markets have responded positively to the easing of tensions, reflecting growing optimism that the worst of the confrontation may be over.

• The emerging ceasefire framework reportedly draws on a 10-point Iranian proposal. This blueprint calls for the lifting of all sanctions, an end to Israeli strikes against Hezbollah and Lebanon, and security guarantees against future attacks. Additionally, it also includes a demand for formal recognition of Iran’s right to levy regulated transit tolls in the Strait of Hormuz. These terms currently represent an opening negotiating position rather than a finalized deal.
• Whether the newly announced two-week ceasefire will hold remains uncertain. Iran has tied the reopening of the Strait of Hormuz to a controversial $2 million transit fee per vessel, framed as a mechanism to help fund reconstruction. Despite this diplomatic opening, Kuwait, Qatar, and the UAE were all hit by Iranian strikes in the hours following the announcement. At the same time, Israel has halted direct attacks on Iran but continues its assault on targets in Lebanon.
• Easing tensions have supported a broad improvement in risk sentiment. Domestic and international equity futures, along with US Treasurys, rallied overnight on the back of the ceasefire reports. At the same time, crude futures and other commodities have retreated on expectations of smoother supply chains and reduced disruption risk. The dollar also weakened as optimism grew that potential Federal Reserve rate cuts may remain on the table.
• Assuming the ceasefire holds, the next phase will center on how the global economy absorbs the damage from the conflict. Much of the immediate focus will be on how quickly trade flows normalize as vessels resume shipments through the Strait of Hormuz. Attention will also turn to assessing the extent of the damage to energy and port infrastructure and how long it will take to bring key facilities back online.
• In turn, any recovery in activity is likely to remain fragile over the coming weeks as markets watch for concrete progress in fully restoring traffic through the strait. We do not anticipate an immediate reversal in prices, as the supply shock is likely to linger and may be exacerbated by increased demand. Even so, in the near term, greater clarity around supply conditions and geopolitics should underpin renewed risk appetite, particularly toward domestic equities.

Silicon Valley Charm: Growing concerns about AI’s impact on society are beginning to slow its nationwide expansion. Several states are weighing new limits on data center construction because of their heavy consumption of electricity and water. Fears over potential labor market disruption are also fueling public backlash, with some arguing that the pace of AI adoption should be deliberately restrained. As the midterm elections near, the pushback is increasing the chance that AI could face more legal hurdles as it looks to expand.

• AI has emerged as one of the most polarizing topics in America. A recent NBC News poll reveals a dismal -20 net favorability rating for the technology, placing it below even ICE in the public’s esteem. In fact, among all categories surveyed, only the Democratic Party and Iran received lower marks. This widespread skepticism suggests that curbing the downside effects of AI is becoming a top priority for voters.
• So far, lawmakers in more than 10 states have introduced bills to restrict or temporarily halt new data center development. Two other states, including Wisconsin and South Dakota, have already rejected similar proposals. Maine has gone further, becoming the first state to impose a moratorium on new data centers until November 2027 while it studies the facilities’ economic and environmental impacts.
• Tech companies are increasingly turning to public outreach to improve perceptions of AI and shape opinion. OpenAI, for example, has floated populist‑sounding ideas such as a four‑day workweek and the creation of a public wealth fund that would widely distribute gains from AI to citizens. More broadly, there are growing signs that major firms now accept that some form of regulation is inevitable and see cooperating with policymakers as a way to reassure a wary public and reduce political blowback.
• We remain confident that the AI infrastructure buildout still has substantial momentum, but we also see early signs that it could lose steam in the coming months as political and energy constraints intensify. A moderation in spending could, in turn, lend relative support to more fundamentally sound companies, as investors may increasingly prioritize current profitability and balance sheet strength over distant growth potential in an environment of elevated uncertainty.

North Korea: Pyongyang has stepped up its power projection in an effort to send a message to its rivals. On Tuesday, North Korea launched its second missile in as many days, following an incident in which a South Korean drone reportedly entered its airspace. The provocation appears to be driven in part by a desire to pressure the US to resume talks without any preconditions for denuclearization. While Iran dominates the headlines, investors should not lose sight of the geopolitical risk posed by North Korea.

Fed Talks: New York Fed President John Williams has offered a fairly modest view of inflation following the conflict in Iran. During an interview with Bloomberg, Williams acknowledged that while the rise in energy prices is likely to impact headline inflation, he does not believe it will have a major effect on core inflation. His view suggests that he is unlikely to favor a rate hike this year. It also serves as another sign that the Fed may be more patient with raising rates and could be open to at least one rate cut before the end of the year.

View PDF