by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a discussion of the Pentagon’s decision to relieve a US aircraft carrier that has faced a long deployment due to the drawn-out war in Iran. We next review several other international and US developments that could affect the financial markets today, including a report showing that net migration to Israel has now fallen for two straight years and a court decision approving the US administration’s suspension of a rule that had exempted small-value imports from tariffs.

United States-Israel-Iran: Showing how the downsized, post-Cold War US military is strained by today’s security crises, reports say the Pentagon will soon relieve the USS Abraham Lincoln aircraft carrier from its role in the Iran conflict and replace it with the USS George Washington. The swap comes as reports say the Lincoln is saddled with food shortages, intolerable plumbing issues, plunging morale, and a spate of attempted suicides. The Lincoln has now been deployed for 250 days and hasn’t made a port call in a record 200 days.

• It has long been evident that the post-Cold War downsizing of the US military and defense industrial base went too far, but nationalist, populist political trends and fiscal considerations have impeded the rebound in US defense spending.
• Especially with the unexpectedly long war in Iran, those problems are now becoming more evident. We suspect the result will be continued and even accelerated defense spending hikes, which will probably benefit a wide range of defense contractors.

US National Security Policy: President Trump yesterday signed an order that the US Navy stop using its new electromagnetic catapults to get jets airborne from aircraft carriers and instead revert to using steam catapults. The move will require extensive redesign of the Navy’s new Ford-class carriers, likely costing billions of dollars. It could also increase the risk that delivery of the ships will fall behind schedule. The move comes despite years of resistance by the Navy and associated defense contractors.

• The president has periodically complained that the new electromagnetic technology is too complex and prone to failure. Indeed, the USS Gerald R. Ford, the first ship in the new class of carriers, experienced many issues with the new catapults during its construction and initial deployments.
• All the same, shifting back to steam catapults will require future Ford-class ships to be extensively redesigned to accommodate the steam generators, piping, and other needed equipment. The vast amount of piping and the reliance on mechanical equipment rather than electrical equipment will also require each carrier to have more technicians. In turn, that will expand the size of the crew and require more bunks, bathrooms, eating facilities, and food storage areas.
• All told, analysts expect that shifting the future Ford-class carriers back to steam will increase each ship’s annual operating cost by about $100 million.

US Trade Policy: The US Court of International Trade yesterday ruled that President Trump was within his rights last year when he suspended the de minimis exemption, which allowed packages worth $800 or less to enter the US tariff-free. As a result, foreign firms sending cheap goods to the US, such as China’s Temu and Shein, will continue to be subject to tariffs. Reports say suspending the exemption generated an additional $1 billion in US tariff revenues in 2025.

• Separately, the White House today said President Trump will impose new import tariffs of as much as 100% against foreign drones and drone components, based on national security concerns.
• The new tariffs are broad, but they are expected to mostly affect drones from China, which some analysts believe have compromised parts and software that China could use for surveillance or sabotage.
• The new tariffs should remove competition for key US-based drone companies, including AeroVironment, Red Cat Holdings, and Unusual Machines.

United States-China: A new report led by White House trade adviser Peter Navarro said more than 40 countries are helping China evade the high import tariffs the administration has imposed against it. The countries range from Asian manufacturing powers such as Vietnam and Malaysia to Western Hemisphere countries such as Canada and Mexico. According to the report, the countries face relatively lower US import tariffs, so Chinese firms ship nearly finished products to the countries, complete the goods there, and then send them to the US as non-Chinese goods.

• To stop this practice, the report suggests new measures including the use of artificial intelligence tools at the border to scan cargo and documents, and tightened standards that define a product’s country of origin.
• If measures such as those are put into place, the result would likely be new trade tensions between the US and China.

Germany: Chancellor Merz’s cabinet on Wednesday approved a proposal to give the country’s BND intelligence service more aggressive powers, including the ability to carry out acts of sabotage and conduct offensive cyber operations.

• Until now, Germany’s spies have been limited to information-gathering operations due to intentional restraints put in place after World War II to prevent a repeat of the abuses perpetrated by the Nazi spy apparatus.
• The Merz reform shows how European leaders now see the threat from Russia to be dangerous enough that they are willing to take national security steps that were previously seen as taboo.

Switzerland: In a flash estimate, the country’s second-quarter gross domestic product was up 1.5% from the previous period, after stripping out price changes and seasonal variations. The surprisingly strong growth marked a significant acceleration from the increase of just 0.4% in the first quarter. It also marked the country’s best GDP growth since 2021, largely due to strong chemical and pharmaceutical exports as well as healthy services activity.

Israel: An interesting article in the Financial Times today shows net migration into Israel turned negative in both 2024 and 2025 — something that had only happened in three other years over the last century. According to the article, the outflow stems mostly from dissatisfaction with the right-wing government of Prime Minister Netanyahu and the stresses of the Israeli war with Hamas in Gaza. For investors, the negative net migration could be seen as a yellow flag and further dampen interest in the once high-flying Israeli stock market.

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