by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

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

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

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

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

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

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

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

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

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

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