by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our thoughts on the recent resurgence of AI FOMO. We then turn to geopolitics, discussing the decision by Washington and Tehran to reopen dialogue at the UN summit. Next, we briefly cover the pushback against global AI oversight, the White House’s pick for national security advisor, and the signs of rising AI protectionism. As always, we conclude with a review of recent domestic and international economic data.

AI FOMO: Investors are rotating back into AI-related stocks, driving a tech rally despite elevated long-term yields. While high bond yields present a steeper return hurdle, renewed optimism over AI product demand has outweighed macro headwinds. This rebound follows a recent cooling in the AI trade triggered by stretched valuations, intensifying competition, uncertain monetization, and regulatory concerns. Ultimately, the bounce-back underscores the underlying resilience of the AI trade that has powered markets for the last three years.

• The Nasdaq 100 reached a new record high on Tuesday for the first time since early June, largely fueled by enthusiasm over Muse, Meta’s new AI app. Muse has quickly become a top-downloaded app by moving beyond basic chatbot functions and into handling everyday tasks like booking, scheduling, and shopping. Its success is now encouraging investors to look past the usual AI heavyweights and seek out high-potential, less-popular AI providers.
• At the same time, established AI leaders face mounting headwinds. Intensifying competition from Chinese rivals has forced OpenAI and Anthropic to cut prices in order to defend market share. Beyond margin compression, investor sentiment is being weighed down by a convergence of risks such as stretched valuations, public pushback against energy-intensive data centers, potential regulatory delays, and persistent concerns regarding earnings quality.
• The resurgence of the AI trade may be partially attributed to dynamics that are reminiscent of the 2022-2024 period. During that time, high bond yields meant equities were in growing competition with fixed income for investor capital. Initially, investors began moving away from equities in favor of short-duration Treasurys. However, as AI gained in prominence, investor preferences began to shift, gravitating instead toward companies with high growth potential to compensate for the extra risk.
• The AI trade’s resurgence highlights technology’s enduring momentum and could continue to support the sector. With fixed income offering relatively attractive, lower-risk returns, investors may favor AI-related equities only where the potential for long-term earnings growth justifies taking additional risk. Established AI leaders should remain in demand, but lesser-known beneficiaries may offer greater upside alongside greater risk.

President’s Speech: President Trump provided the world with more guidance on his plan for Iran following nearly seven months of fighting. In a speech to the UN, the president stated his willingness to either allow Iran to rebuild itself or possibly annihilate it. His comments came the same day reports revealed that Iran had stated it was willing to reopen the Strait of Hormuz within seven days if the US would allow for a diplomatic solution. The easing of tensions on both sides has helped create optimism that the two will hold talks.

• Following the UN speech, the Trump administration held talks with Iranian representatives about the ongoing conflict. While no details were disclosed about what was discussed during the meeting, the president did state that the meeting went well and that the two sides would be meeting again soon. Although no official date was given, the president did mention that he believed Iran was awaiting the results of the midterm elections, and that an agreement would likely happen afterward.
• Prior to the agreement, the US had ramped up pressure on Iran. Treasury Secretary Scott Bessent had threatened any country that provides air services to Iran. The move was part of the US maximum pressure campaign meant to further isolate Tehran to push it to come to the negotiating table. So far, Iran has maintained that it will only agree to talks if the US eases military pressure and ends its blockade of Iranian ports.
• The diplomatic thaw has provided some relief in oil markets, which were already benefiting from reports that Saudi Arabia was repairing its East-West pipeline that had been damaged in attacks by Iranian-linked Houthis. Crude prices have fallen for a fifth consecutive day, with WTI approaching $90 a barrel for the first time this month. The drop in oil prices should provide support for equities and bond prices, as it reduces the chance of sustained inflationary strain and gives the Fed justification for holding off on further tightening.

No Global Oversight: President Trump has ruled out a possible global oversight body for AI. He maintained that the potential risks of AI to humanity have been overstated, and that global regulation could jeopardize the US’s lead in the AI race. His comments suggest that the US still wants to maintain control over its AI sector, especially as it competes with China for dominance in the space. The lack of global regulation stands to benefit AI companies.

New NSA Director: The White House has named Marco Rubio as National Security Advisor, making him the first person to hold both that role and Secretary of State simultaneously since Henry Kissinger. He had previously been serving in an acting capacity following Mike Waltz’s departure. The move comes as the White House looks to keep a tight inner circle as it tries to push through its foreign policy agenda. Rubio’s dual role suggests that current policy will probably continue.

AI Protectionism: A group of lawmakers has sounded the alarm over China’s potential access to sensitive US technology, with several senators urging the president to close the loopholes that make such access possible. The appeal comes as Washington and Beijing prepare for talks on trade and AI. Congressional scrutiny could limit the president’s leverage in negotiations with China, though progress toward a deal still looks very likely heading into talks expected this weekend.

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