by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

NOTE: There will be no Comment on Monday, February 16 due to the holiday.

Our Comment opens with our take on the recent “AI scare trade” and its role in amplifying market volatility. We then examine the EU’s push to reduce its security dependence on the United States. Next, we discuss White House pressure on firms to align their business models with its policy agenda, Kevin Warsh’s increasingly contentious confirmation battle, and Moscow’s bid to regain access to the US dollar system after the Ukraine conflict. We close with a summary of key economic data from the US and global markets.

AI Transition: AI may be entering a new phase in its product cycle. Renewed concerns about profitability across the tech sector sparked a broad equity sell‑off on Thursday, following Cisco’s earnings report that, despite solid sales, signaled margin pressure from rising memory‑chip costs. Investors also appear increasingly cautious about potential disruptions to established business models as AI‑driven efficiency gains reshape corporate operations. The retreat comes amid mounting doubts about the durability of the recent market rally.

• In its latest quarter, Cisco delivered a clear “double beat,” with revenue and earnings per share both coming in ahead of expectations, underscoring solid demand across its networking and AI‑infrastructure portfolio. The company also lifted its full‑year outlook, signaling confidence in its order pipeline. However, investors remain focused on signs that profit margins are being squeezed, as rising memory chip and other component costs weigh on gross margins and are expected to remain a headwind in coming quarters.

• These profitability and disruption fears are weighing not only on AI market leaders but also on established companies perceived to be vulnerable to replacement by emerging AI tools. The latest market move was triggered by former karaoke-equipment maker Algorhythm Holdings, now repositioned as an AI logistics firm, which announced a new AI tool designed to reduce “empty miles” and significantly boost productivity. The news sent trucking and logistics stocks into a steep decline.
• Growing anxiety about how AI will affect profitability across sectors has helped fuel a broad “AI scare trade” in equity markets, with investors dumping stocks seen as vulnerable to AI‑driven disruption or heavily exposed to AI‑related spending. The sell‑off has been most pronounced in the United States, where high‑profile tech names, elevated valuations, and rapid AI adoption have amplified concerns about earnings sustainability and competitive pressures.
• While we believe the AI trade may still have some momentum, activity over the last few months suggests the sector is moving closer to a maturity phase. As a result, we view the recent volatility in tech as part of a natural shakeout, with investors moving away from hype and beginning to distinguish the winners from the losers. This is why we advocate for portfolios to broaden their exposure, including increasing international allocations, which could help balance the specific US tech risks associated with this transition.

European Independence: There are growing signs that Europe is seeking to make itself less dependent on the United States for its security, with renewed debate over a more autonomous European defense posture. A new survey published this week shows that key NATO countries increasingly view the US as an unreliable ally and doubt that American power can still effectively deter their adversaries. This erosion of confidence has led the bloc to take steps to ramp up its defense capabilities.

• Europe’s push to shore up its own security is also spurring investment in advanced defense technology. France and Germany are in early talks with aerospace firm ArianeGroup about a proposed land‑based ballistic missile system intended to enhance Europe’s long‑range strike and deterrence capabilities. The company has also been in the spotlight for successfully flying the most powerful configuration of its Ariane 6 launcher, which recently lifted off under a European Space Agency mission.
• Additionally, the bloc may be beginning to rethink its stance on nuclear weapons. For the first time since the Cold War, European governments and militaries are quietly discussing how they might develop their own nuclear deterrent if US guarantees weaken. Against this backdrop, there is growing speculation that French President Emmanuel Macron will deliver a new speech outlining how France’s existing nuclear force could provide broader protection to Europe.
• Europe’s changing attitude toward its own defense underscores a broader fracturing of the global order. As the US pulls back from its traditional hegemonic role and broad security guarantees, more countries are likely to step up defense spending to protect themselves. In Europe in particular, years of underinvestment mean this rearmament cycle could provide a meaningful tailwind for global defense and aerospace firms.

White House Pressure: Washington continues to signal a growing willingness to pressure private firms to align with the federal agenda. On Thursday, White House advisor Peter Navarro urged JPMorgan Chase CEO Jamie Dimon to lower credit card interest rates as part of an effort to improve household affordability. Simultaneously, the Army chief of staff warned defense contractors that they must modernize their practices or risk losing government contracts. These moves underscore a shift toward a more interventionist approach to guiding the economy.

Warsh Confirmation: Kevin Warsh appears headed for a tougher‑than‑expected confirmation battle as he seeks to take over the Federal Reserve. Senator Thom Tillis (R-NC) has warned that he will withhold support unless the Justice Department drops its investigation into the Fed’s headquarters renovation, which he argues threatens the central bank’s independence. Because Tillis holds a pivotal seat on the Senate Banking Committee, his opposition could significantly complicate Warsh’s path to confirmation.

Trade Restrictions: The White House is reportedly considering narrowing the scope of its metal tariffs. The shift comes as businesses struggle to plan around complex, hard‑to‑model tariff formulas and as the EU presses for changes as part of trade negotiations with Washington. The policy has also faced mounting criticism because much of the burden has fallen on US firms and consumers. If the administration follows through, we expect trade policy to become less restrictive in the coming months, providing a modest tailwind for manufacturers.

Moscow Wants Dollars? Moscow has floated a proposal to rejoin the dollar-based financial system as part of a broader settlement to end the conflict in Ukraine. Under the plan, Russia and the US would pursue an economic partnership that prioritizes continued fossil fuel development over a rapid shift to renewables, alongside joint ventures in other sectors designed to generate substantial windfalls for US companies. Taken at face value, the initiative suggests Moscow is seeking to rebuild and deepen economic ties with Washington once the conflict is resolved.

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