by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our perspective on why lawmakers are struggling to regulate AI. We then examine the latest developments in the US-Iran conflict. We also briefly address the spread of the Ebola outbreak to additional countries, the US’s decision to delay certain weapons sales to Taiwan, and early indications that governments are moving to reassure bond investors. As always, we conclude with a comprehensive roundup of the latest international and domestic economic indicators.

Rising AI Pushback: Lawmakers are still struggling to balance the push to promote AI with the need to protect their communities. On Thursday, the president chose to delay the signing of an executive order that would have imposed stricter oversight on the development of AI tools. He is far from the only official wrestling with how best to regulate the technology, yet his hesitation underscores how optimistic government officials remain about AI’s potential benefits. Even so, growing unease among voters is starting to pressure lawmakers to act.

• One factor behind the postponement appears to be divisions within the White House itself. Treasury Secretary Scott Bessent has taken a leading role in advocating for rules to govern AI in the wake of Mythos, which has demonstrated an ability to expose vulnerabilities in the nation’s core infrastructure and financial system. He has been pressing the national security team to move more quickly to put these guidelines into place.
• On the other hand, there are also concerns that imposing too many rules could leave the United States at a competitive disadvantage to China in the AI race. This camp, reportedly led by National Cyber Director Sean Cairncross, has sought to slow the process, arguing against new regulations without a clearer sense of the potential costs. To bridge the divide, officials have pushed for more feedback from outside the White House on how prospective rules might affect both the private and public sectors.
• Public debate over AI regulation is intensifying just as public sentiment toward the technology begins to deteriorate. Opposition to new data centers has been particularly strong in parts of Texas, which now hosts the largest facility of its kind globally. Concerns range from noise and environmental impact to significant energy consumption, with surveys indicating that these projects rank among the least popular local developments.
• While AI continues to exhibit strong momentum, it is likely to encounter increasing political and regulatory headwinds. We suspect such resistance could moderate the pace of earnings growth these firms have recently delivered and potentially weigh on investor sentiment toward the sector. In this context, we continue to advocate maintaining some exposure to value as a potential buffer against a shift in market momentum.

Iran Deal Close? There are growing signs that the US and Iran are moving closer to a potential agreement that could lead to the reopening of the Strait of Hormuz. Iranian officials have signaled that the latest US proposal has helped bridge key gaps between the two sides as indirect negotiations continue. Remaining points of contention appear to center on Iran’s right to uranium enrichment and the authority to impose transit tolls. While talks are still ongoing, the prospect of a deal has begun to ease market tensions as participants await further clarity.

• Signs of progress come as Iran approaches the US deadline for potential strikes within the next few days. Earlier this week, the president warned that an attack was under consideration but extended the timeline following pushback from Middle Eastern countries concerned that they could become targets in the event of a strike on Iran. However, Trump indicated that military action could begin as early as this weekend.
• On Friday night, a UAE power plant was targeted in a drone attack launched from Iraq, forcing the facility to rely on backup generation to avoid broader disruptions. Although Iran did not claim responsibility, the incident is widely viewed as a signal of the potential escalation risks should the US resume military action.
• The prolonged duration of the conflict is beginning to exert a more pronounced drag on the economy. The latest ISM report shows a sharp rise in inventory accumulation, suggesting that demand pressures are broadening. As firms compete more aggressively for limited inputs, this dynamic could contribute to more persistent inflationary pressures and further weigh on global economic growth.
• While signs of progress in the conflict are encouraging, a resolution does not appear imminent, as neither side appears willing to make meaningful concessions. Meanwhile, rising inflationary pressures are likely to weigh on bond prices, prompting investors to reduce duration exposure. In this environment, private credit and business development companies could benefit from their floating-rate structures, particularly as default rates and spreads remain relatively contained.

Ebola Outbreak: Concerns are growing that the Ebola outbreak could spread across Africa. While currently confined to the Democratic Republic of the Congo and Uganda, experts fear the virus may reach three additional countries on the continent. The situation remains critical, with over 500 confirmed cases and 150 fatalities reported to date. Although there is no evidence that the outbreak has reached other continents, international medical response is active; notably, one American citizen is currently receiving treatment for the virus in Germany.

Taiwan Sales on Ice: The Pentagon has informed Taiwan that it will delay certain weapons sales amid the conflict in Iran. While officials maintain that US stockpiles are sufficient, the move reflects a desire to preserve readiness ahead of potential escalation. It may also signal an effort to avoid straining ties with China as Washington seeks Beijing’s support in easing Middle East tensions. That said, the decision could encourage Asian nations to further diversify their defense supply chains.

Bond Yields Ease: Japanese and UK bond yields have eased amid signs that policymakers may act to address supply-demand imbalances. In Japan, the Ministry of Finance has signaled a reduction in long-duration issuance. In the UK, potential Labour challenger Andy Burnham has indicated he would maintain existing fiscal targets if he were to replace Prime Minister Keir Starmer. We expect continued bond market pressure to push governments toward policies aimed at containing further increases in yields.

Note: Due to the holiday, the Comment will not be published on Monday.

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