by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment will first address recent doubts about the AI boom, then examine other critical market developments, including the trade calm between the US and China, the eurozone’s pivot toward new trade partners, and a call for the resignation of an FOMC member. We will conclude with an overview of other global and domestic factors shaping the financial landscape.

AI Spook: US equities sold off sharply on Tuesday after an MIT study cast doubt on the commercial viability of generative AI. The research, which drew from a significant dataset of interviews, surveys, and deployment analyses, revealed a staggering 95% of AI pilots did not produce a meaningful boost to revenue or productivity. This finding directly challenges the high valuations of AI-focused companies, prompting the market downturn.

• However, the study suggests that the models’ poor performances stem less from their technical quality and more from flawed corporate integration. The report found that companies partnering with external AI specialists achieved a 67% success rate — double the 33% rate of those that relied solely on in-house development.
• While slow adoption cycles are typical for new technologies, the current pace raises serious questions about the tech sector’s massive capital expenditures and potential overcapacity. For context, Alphabet’s projected 2025 capex of $85 billion exceeds France’s entire military budget for 2027. This aggressive build-out of AI data centers, intended to meet anticipated demand, risks creating a significant capacity glut and fuels concerns about a brewing bubble.

• The market’s gains remain narrowly concentrated in the Magnificent 7, even as concerns over tariffs have subsided. This persistent lack of breadth heightens the market’s vulnerability to a sentiment-driven pullback. Given these concentrated risks and elevated uncertainty, we advise investors to maintain a disciplined and prudent approach to portfolio construction.

US Satisfied: The White House is leaning toward maintaining the status quo with China, its largest rival. Signaling this intent, Treasury Secretary Scott Bessent stated the US is “very happy” with the existing tariff structure. This position was reinforced last week by the administration’s decision to extend the trade deal deadline by 90 days into November, suggesting a deliberate pause to de-escalate tensions.

• The significant tariff revenue collected on Chinese imports is a major factor in the White House’s support for the status quo. These duties are the primary contributor to US import tax receipts, and available evidence suggests the financial burden is largely falling on Chinese exporters rather than American consumers.

• The current period of trade calm is a positive for the market, as it mitigates the risk of further supply chain disruption. Given the recent weakness in the Chinese economy, US trade negotiators now possess significant leverage to secure concessions. Consequently, we remain optimistic that the administration can reach an agreement, which would substantially reduce market uncertainty.

State Stablecoin: Wyoming has launched the first state-sponsored stablecoin, the Frontier Stable Token (FRNT), to cement its status as a blockchain hub and attract investment. Backed by a 102% reserve of US dollars and short-term Treasurys, FRNT will leverage blockchain technology to offer faster, cheaper transactions for businesses and consumers. The timing of its unveiling at the state’s Blockchain Symposium, coinciding with the Jackson Hole Economic Symposium, signals the industry’s aspiration to compete against the traditional financial system.

Eurozone Looking Elsewhere: ECB President Christine Lagarde has urged the EU to strengthen its relationships with non-US countries. While she affirmed the importance of the eurozone’s relationship with the US, she also stressed that the region should strive to keep its economy more export oriented. These were her first comments since the EU struck a deal with the US. Referring to the new arrangement, she also stated that she expects growth to slow due to trade uncertainty.

Economic Bellwether: Despite apparent corporate optimism from home improvement retailers about consumer health, earnings results have been mixed. Home Depot missed estimates and warned that tariffs may force price changes. In contrast, competitor Lowe’s beat estimates and raised its outlook, benefiting from its acquisition of Foundation Building Materials. This divergence may partly reflect a slowdown in housing activity, a potential sign of economic uncertainty.

Israel Call Up: The Israeli government has announced that it will call up 60,000 reservists as part of its ongoing military operations in the Gaza Strip. The decision was made two days after Hamas reportedly accepted a ceasefire agreement that closely mirrored a proposal from the previous US administration. Despite the potential for de-escalation, Israel has stated its intent to continue its offensive, citing the goal of eliminating the threat posed by Hamas. While the conflict is expected to persist, analysts believe it is unlikely to expand regionally.

Trump Broadens Attack: President Trump has called for the resignation of Federal Reserve Governor Lisa Cook following allegations that she falsified bank documents to receive favorable mortgages. This move is consistent with the president’s stated objective to reshape the Federal Open Market Committee (FOMC) with members aligned with his economic views. The demand for her resignation comes as the president intensifies his pressure on the central bank to lower interest rates at its next meeting.

Japan Government Bonds: Japan’s super-long-term government bonds have recently attracted strong foreign investment, with aggregate buying reaching a record $63 billion in recent months. This surge in demand is primarily driven by foreign investors looking to capitalize on rising interest rates, which have increased amid concerns over higher government spending. Additionally, a weaker US dollar is playing a role, as investors seek to benefit from a stronger yen, particularly if the Bank of Japan follows through with plans to tighten its monetary policy.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment will begin by analyzing how a potential US government stake in Intel could signify a shift in economic models. We’ll then examine other critical market developments, including China’s economic slowdown, India’s push for stimulus, and the Democratic Party’s potential rebrand. We will conclude with an overview of other global and domestic factors shaping the financial landscape.

Intel State-Owned: The Trump administration is reportedly exploring a stake purchase in a struggling chipmaker — a move that comes after the president previously pressured the company’s CEO to resign over alleged ties to China. The potential investment would deliver a much-needed cash infusion as the company races to construct a new US-based semiconductor plant. This signals a notable shift in US economic policy, marking a departure from the traditional hands-off approach to private industry.

• The potential US investment reflects the government’s growing willingness to influence corporate operations, as evidenced earlier this year when the Trump administration secured a “golden share” in the Nippon-US Steel merger. That deal granted Washington veto power over key decisions, including worker layoffs, and signaled a more interventionist approach to domestic industry.
• US government investment in equities could bolster share prices, particularly in strategic industries. However, such intervention may also constrain corporate decision-making and potentially limit value-creating moves that are politically unpopular. As a result, investors are likely to scrutinize these companies more closely, ensuring they maintain operational efficiency despite political constraints.
• That said, we believe companies closely aligned with the government’s agenda could benefit from protective measures aimed at shielding them from foreign competition. Such policies may also help ensure these firms remain viable in the long run, offering domestic businesses a potential competitive advantage over time.

China Slowdown: The world’s second-largest economy is experiencing a widespread slowdown, with the effects of the trade war becoming increasingly apparent. Retail sales, factory activity, and fixed-asset investment have all decelerated, while the real estate sector has continued to decline. Additionally, unemployment has risen, increasing from 5.0% to 5.2%.

• The country’s sharp slowdown in growth suggests that the economy’s early resilience was short-lived, largely due to a temporary surge from businesses trying to get ahead of new tariffs.
• While this economic weakness could prompt further policy stimulus, there are clear signs that the Chinese economy may be in more serious trouble, especially since Beijing has reportedly told firms to resist absorbing the cost of tariffs.

India Stimulus: In his Independence Day speech, Prime Minister Narendra Modi pledged additional economic stimulus measures to bolster India’s self-reliance and insulate the economy from the impact of global tariffs. Among the proposed steps is a reduction in sales taxes on goods and services. His announcement comes as India and the US continue trade negotiations, with lingering disagreements over American farm and dairy product imports.

Rare Earths: China continues to solidify its stranglehold on global rare earths production, currently controlling approximately 90% of the world’s supply. Authorities have recently warned domestic firms that excessive stockpiling may result in reduced allocations, signaling tighter central control over these strategic resources. The irreplaceable role of these minerals in tech manufacturing strengthens China’s market control, exposing AI-dependent firms to serious supply chain risks.

Japan: Japan’s economy expanded for a second consecutive quarter, reducing fears of a potential recession. In the second quarter, real GDP grew by 0.3%, following an upward revision of the prior quarter’s growth. This stronger-than-expected performance is likely to pave the way for the Bank of Japan (BOJ) to consider a rate hike. A move toward tighter Japanese monetary policy, combined with sustained economic growth, would likely put downward pressure on the US dollar by strengthening the Japanese yen.

PPI Surprise: In July, supplier prices surged beyond expectations, pointing to mounting input cost pressures. The Producer Price Index (PPI) jumped to 3.3% year-over-year, up sharply from 2.3% in the prior year and significantly exceeding the 2.5% consensus forecast. A similar trend emerged in the core PPI, which climbed from 2.6% to 3.7%. The acceleration was largely fueled by trade services; excluding this category, the increase was more moderate, rising from 2.5% to 2.8%.

• Trade services are a measurement of the margins between wholesalers and retailers. They represent the change in the difference between the price that wholesalers and retailers pay for a good and the price at which they sell that same good. When this component increases, it’s a signal that wholesalers and retailers are either passing on higher input costs to their customers or widening their profit margins.
• Earlier this year, we singled out trade services as being an important indicator for understanding the “pass-through” effect of tariffs on consumers. During the pandemic, as trade services began to pick up, there was a corresponding and notable increase in consumer prices. We interpret this as firms using that period to exert their pricing power and protect profit margins in the face of rising costs.
• The biggest unknown now is whether this is a one-time event or a symptom of a longer-term problem. If trade services continue to increase, we would be very concerned that inflationary pressures could start to build, especially if households continue to show the ability to absorb them.
• That said, these surprising readings in both the PPI and employment payrolls are why we believe this is a time for prudent risk-taking as we work to understand the full impact of tariffs on the economy.

Democrat Abundance: As the party prepares for mid-term elections, a new push for deregulation is emerging as part of a broader redefinition of its platform. This shift in sentiment is partly influenced by Ezra Klein’s book, Abundance, which argues that overregulation has hindered urban progress. While not universally embraced, the book’s growing influence suggests a change in thinking, with an increasing number of policymakers advocating for less red tape. This pivot could benefit companies seeking to expand and take advantage of government programs.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment will begin by exploring how a potential Fed leadership shakeup could influence monetary policy. From there, we turn to other critical market developments, including the implications of the Trump-Putin talks, Poland’s investor-friendly reforms to spur domestic equity demand, and fresh signs of AI’s accelerating momentum. We wrap up with an overview of additional global and domestic factors shaping the financial landscape.

 The New FOMC: President Trump has indicated that he is nearing a decision on nominating a new Federal Reserve chair to succeed Jerome Powell, whose term expires in May — or potentially sooner. Among the leading candidates under consideration are Kevin Hassett (chair of the Council of Economic Advisers), former Fed Governor Kevin Warsh, and current Fed Governor Christopher Waller. Other potential contenders may include FOMC members Michelle Bowman and Philip Jefferson.

• The president’s upcoming selection for Federal Reserve chair will mark his second appointment to the FOMC. His recent nomination of Stephen Miran to replace Adriana Kugler on the Federal Reserve Board represents his first FOMC selection this term. During his previous administration, he appointed Michelle Bowman and Christopher Waller to the committee.
• If elected, President Trump’s Fed chair nominee would fill one of four vacant governor seats on the seven-member board, giving his appointees voting control over monetary policy. This shift could significantly influence the central bank’s decision making and potentially reshape its policy approach.
• A potential theme emerging from this shift is a return to a more accommodative monetary policy. Treasury Secretary Scott Bessent has mentioned that the Fed should consider a 50-basis-point rate cut in September, with an additional 150 basis points of cuts expected by the end of the easing cycle.
• The potential for the Federal Reserve to adopt a more accommodating policy, with the possibility of rate cuts, would typically be a positive signal for bond prices. However, a long-term rally — especially for bonds with longer maturities — may be hampered by investor uncertainty about future inflation.

 Trump-Putin Meeting: Trump has issued a warning to the Russian president, stating that Putin will face severe consequences if he does not agree to a ceasefire. These remarks follow the US president’s meeting with European leaders, where they discussed his upcoming one-on-one meeting with Putin. The discussion reportedly focused on ensuring that any potential agreement would be fair to all parties including Ukraine.

• Ahead of the meeting, reports indicate that Russian forces have been making tactical advances in eastern Ukraine. This battlefield momentum may be influencing Putin’s negotiating position, as some analysts believe he will use these gains to seek favorable terms for a peace agreement.
• However, Russia’s tactical advances on the battlefield have come at a significant cost to its economy. While the country’s GDP has grown, this expansion has been heavily reliant on military spending. The budget deficit has widened considerably, driven by increased defense outlays and a recent decline in oil and gas revenues. This has led some analysts to express concerns about a looming debt crisis.
• Although the White House has tempered expectations for the meeting, we remain cautiously optimistic that President Trump’s upcoming talks with President Putin in Alaska may establish a pathway toward a ceasefire. We believe that progress in the conflict would likely be supportive of European asset prices.

 Pharmaceutical Tariffs: The US could impose tariffs on pharmaceutical imports within weeks, according to Commerce Secretary Howard Lutnick. This follows a Section 232 investigation launched by the Trump administration, which cited national security risks due to reliance on foreign drug suppliers. While President Trump has floated rates as high as 250%, the plan may begin with lower initial tariffs and gradually escalate them over time.

 Polish Reforms: The Polish government is seeking to generate interest in its domestic equity markets to boost economic growth. A recent proposal, the Personal Investment Account (OKI), would introduce a new savings account that eliminates the 19% capital gains tax on investments up to 100,000 PLN ($27,350). The initiative aims to encourage a greater number of households to invest in the country’s equities.

 China Property Crisis: Beijing is considering a plan for central government-run firms to purchase unsold homes from property developers. This move is the latest attempt by China to support its struggling real estate market, which has been a major drag on the economy. The initiative underscores the ongoing challenges that China faces as it tries to rebalance its economy away from a reliance on debt-fueled property development.

 France Debt: Investors are growing concerned about France’s widening deficit, which has caused the interest rate on French bonds to rise. This has led to a narrowing of the spread between French and Italian bonds, as Italy has simultaneously improved its own debt outlook, making its bonds more attractive. We are closely watching these interest rates in Europe to understand how the region will adapt to the coming era of increased government debt.

 Wealthy Stay in UK: The UK’s crackdown on non-dom tax status hasn’t caused the mass departure of wealthy foreigners that many had feared. Early payroll numbers show that Chancellor Rachel Reeves’s budget plan didn’t scare away as many people as some stories suggested. This is good news for the UK as it tries to fix its budget.

 AI Demand: Foxconn, a Taiwanese equipment manufacturer, has forecast that its server business will generate more revenue than its smart electronics division in the third quarter. This projected shift underscores the resilience of the AI rally, as optimism around technology continues to outweigh trade concerns. This strong demand for AI-related hardware will likely lead to a further increase in tech stock valuations.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment will begin by exploring the market’s optimism for a rate cut at the upcoming Fed meeting. We will then analyze other key stories shaping the market, including the intensifying AI competition between the US and China, diplomatic efforts to bring Iran to the negotiating table on its nuclear program, and the factors keeping crude prices low. We will conclude with an assessment of other major international and domestic developments influencing financial markets.

 September Rate Cut: The latest CPI report aligned with expectations, prompting investors to price in another rate cut at the Fed’s upcoming meeting. The data showed that overall inflation rose 2.7% year-over-year, while core inflation, which excludes volatile food and energy prices, climbed from 2.9% to 3.1%. The increase has largely eased concerns about tariff-driven inflation, giving the Fed more flexibility to shift focus from its price stability mandate and toward maximizing employment.

• The most notable takeaway from the CPI report was that services inflation was the primary driver of price increases in July. Airline fares increased by the most in three years, while medical care and recreational services also contributed to the uptick. Meanwhile, commodity prices, which are more sensitive to tariffs, moderated, largely due to declining gasoline prices.
• Even though the increase in core CPI isn’t ideal, the market seems to believe that Federal Reserve officials will view the impact of tariffs as transitory and instead focus on the labor market. The Fed appears to be split into three groups: some officials want to cut rates, others favor holding them steady, and a final group is still undecided.
• The upcoming payroll report will likely be a decisive factor in the Federal Reserve’s decision on whether to cut rates and by how much. A strong report will probably result in a minimal rate cut, or possibly none at all. Conversely, another weak report would likely prompt the Fed to implement a 50-basis-point cut, compensating for its earlier inaction.
• The market’s attention appears to be divided between monetary policy and trade policy. Investors are seeking clarity on trade deals while also hoping for lower interest rates to improve lending conditions. A rate cut would likely support equity and bond prices but would also put downward pressure on the US dollar.

 China’s AI Push: The country is rapidly expanding its AI capabilities in a bid to rival the US in the field. Recently, China’s open-source AI advancements have drawn significant attention from American tech firms, which have predominantly kept their models proprietary. US observers worry that broader access to these open-source models could accelerate their adoption, potentially establishing them as the global standard.

• These concerns follow the release of several AI models from Chinese companies this year, including DeepSeek’s R1 Model. Other notable releases making an impact in the field are Alibaba’s Qwen, as well as models from Moonshot, Z.ai, and MiniMax.
• Competition from China is a significant risk to the AI sector’s growth, and US companies, particularly those in the Magnificent 7, are facing scrutiny over their capital expenditures. There is some worry that long-term demand may not be sufficient to justify these large investments.
• The US’s reliance on foreign revenue remains a significant concern, particularly since China’s continued ascent could threaten American companies’ earnings. While US tech firms currently maintain some momentum, the stretched valuations of major players and mega cap tech stock’s overwhelming dominance in the S&P 500 suggest that exploring other sectors may also add some portfolio value.

 EU Borrowing: European leaders are debating the structure of joint debt issuance and how to mitigate fiscal spillover risks among member states. One proposed solution would link debt obligations to each country’s spending plans and would necessitate a repayment of borrowed funds if nations exceed their budget allocations. The framework also includes provisions for emergency crisis loans, which would require unanimous approval from all member states.

• A move toward fiscal union within the EU could increase borrowing capacity and lower the cost of borrowing for member states. This, in turn, may help boost asset prices across the region.
• While reforms are expected to face opposition from countries like the Netherlands and Germany, we anticipate that potential progress on EU reforms will be a key driver of sustained optimism for the region.

 Panama Canal: The Panama Canal Authority is preparing to launch a tender for the operation of ports on both the Atlantic and Pacific coasts. This move would allow the Authority to retain ownership of the ports while outsourcing their management to a third party. The decision to maintain control over both ports comes amid rising US-China tensions over the strategic waterway and follows US concerns about growing Chinese influence in the canal’s operations.

• A surge in regional trade, driven by recent US tariffs, has heightened the importance of the ports, particularly for the US, which aims to closely monitor trade flows.
• A potential takeover of the ports illustrates how nations may attempt to remain neutral while navigating the growing rivalry between the US and China.

 Iran Talks: Germany, the UK, and France have issued a joint statement warning they are prepared to reimpose sanctions on Iran unless it resumes nuclear negotiations with the US. The European powers have set an August deadline for Tehran to return to talks or face renewed sanctions. Iran has countered by threatening to withdraw from the nuclear agreement entirely if punitive measures are reinstated.

 Crude Price Weakness: A supply surge and weak demand are expected to pressure oil prices in the coming months. According to the IEA, global inventories are projected to increase by 2.96 million barrels per day, driven by rising production (led by Saudi Arabia) and an economic slowdown concentrated in Asia. However, the agency cautioned that the outlook remains uncertain, particularly if sanctions on Iran and Russia intensify.

 Trump-EU: President Trump is set to speak with European leaders ahead of his planned talks with Russian President Putin later this week. The discussions will focus on a potential land swap deal, which may require Ukraine to cede some territory to Russia in exchange for a peace agreement. Both sides aim to negotiate terms that ensure a fair and lasting resolution.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with President Trump’s extension yesterday of the US-China trade truce, along with additional issues in the bilateral relationship. We next review several other international and US developments with the potential to affect the financial markets today, including another interest-rate cut by the Australian central bank and personnel topsy-turvy at the Food and Drug Administration that has had a big impact on US pharmaceutical stocks.

United States-China: President Trump yesterday signed an executive order extending the current US-China tariff truce for another 90 days until mid-November. With the extension, US tariffs on most Chinese goods will remain at 30% rather than jumping to 145%, and China will continue to allow unfettered exports of its rare-earth minerals (at least in theory). While the extension provides some stability for US-China trade relations, it also likely reflects tough sledding in the trade negotiations between the two countries. Nevertheless, Asian stock prices have soared today in response, with the Japanese and Australian indexes hitting record highs.

• Separately, just a day after reports that Trump struck a deal with chip giant Nvidia allowing the firm to sell its lower-technology H20 semiconductors to China in return for the US getting 15% of the associated revenues, the president said he will discuss a new deal allowing the company to sell more advanced chips to Chinese customers.
• Trump suggested the chips sold to China under the new deal wouldn’t use cutting-edge technology. However, they would be a step up from the H20 chips. That suggests the president may succumb to Chinese pressure for the more advanced chips despite the risk that they could be used for military purposes against the US, so long as Nvidia pays enough to the US Treasury.
• According to the reports, some US national security officials are considering resigning to protest the sale of such advanced technologies to the Chinese.
• At the same time, reports today say Beijing has asked China’s major tech companies to justify their orders of Nvidia’s chips rather than domestic alternatives. The request suggests Beijing is now focusing more on the fact that China’s reliance on chips from Nvidia makes it vulnerable to a US embargo. While the Chinese government may still pressure the US to allow shipments of the chips in the near term, it is probably working hard to reduce or end its use of them in the future.

Russia-Ukraine: Just days before President Trump meets with Russian President Putin in Alaska to try to end his war against Ukraine, reports say Russian forces have broken through Ukraine’s defense lines in its eastern region of Donetsk. The Russian breach is reportedly the most dangerous for the Ukrainians in the last year and may show that the Kremlin is desperately grabbing for territory to improve its position in the Trump-Putin talks on Friday.

Europe: New satellite data confirms that European rhetoric and budget moves to rearm are now leading to actual factory construction and expansion. The data shows European defense firms have broken ground on about 2.8 million square meters of new facilities since the start of 2024, more than three times their groundbreaking in 2020-2021. At the risk of beating a dead (cavalry) horse, we think the figures confirm our long-held view that Europe’s defense rebuilding will be at least a short-term spur for the region’s economy and further boost its defense stocks.

United Kingdom: Chancellor of the Exchequer Rachel Reeves has ordered officials to plan for a further overhaul of the UK’s planning rules to speed up critical infrastructure projects, including construction of a third runway at Heathrow Airport in London. The order comes even though a less ambitious deregulation law is already making its way through parliament. In our view, the initiative is consistent with “YIMBY” moves to ease construction obstacles in the US and other Western countries, all of which could be positive for housing and construction firms.

Australia: The Reserve Bank of Australia today cut its benchmark short-term interest rate by 25 basis points to 3.60%, for its third rate cut this year. To justify the new cut, the central bank cited a modest weakening in the labor market and further evidence that consumer price inflation in Australia is falling back toward the midpoint of its target range of 2.0% to 3.0%. The move appeared to give a further boost to Australian stocks today, while the Australian dollar weakened by a slight 0.1% to $0.6505.

US Economic Data: President Trump last night said he will nominate the Heritage Foundation’s chief economist, AJ Antoni, to head the Bureau of Labor Statistics. Antoni has been a long-time critic of the BLS’s data collection methods, so he is expected to push for updated and improved processes. Nevertheless, since his nomination comes shortly after Trump fired the previous BLS leader for publishing weak job creation numbers, there may be concerns that future BLS reports could be manipulated to make the data appear more favorable.

US Pharmaceutical Industry: The Food and Drug Administration over the weekend said it has reinstated Vinay Prasad as head of the agency’s division for vaccines and other medicines, just weeks after he left the agency in response to pressure from right-wing influencer Laura Loomer. Prasad’s unexpected return has raised the prospect of further policy turmoil at the FDA, driving stock prices sharply lower yesterday for major biotechnology firms.

US Gold Market: President Trump yesterday confirmed that he did not mean to impose tariffs on imported gold, despite administration announcements to that effect last week. Gold prices declined about 1.2% on the news, ending at about $3,400 per ounce.

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