Plus, stubborn inflation, resilient economic growth and small-cap stocks’ resurgence.
I hope this letter finds you preparing for an enjoyable Labor Day weekend filled with rest, relaxation, family and friends. While the holiday has become an opportunity to enjoy a long weekend, revel in the final days of summer and prepare for the start of the school year, it’s worth taking a moment to reflect on the history and meaning of the holiday.
Labor Day celebrates the social and economic contributions of workers and the achievements of the labor movement. While parades and good food and drink have long characterized the holiday, it also historically served as an opportunity for protest and to organize for workers’ rights, including higher pay, better working conditions and shorter working hours.
Much has changed since workers first paraded through New York City in 1882. The U.S. labor market has transformed from an agrarian and manufacturing economy to a service-based one, with a decline in farm and factory jobs and a rise in service, technical and professional roles. Women are part of the labor market. Average human life spans are longer and work weeks are shorter. The labor force’s educational attainment has significantly increased. Technological advancements, globalization and periods of high unemployment and wage inequality have reshaped the economy.
And now we have artificial intelligence (AI).
This week, vaunted AI chip maker Nvidia reported second-quarter revenue of $46.74 billion, a 56% increase from a year ago. Year-over-year revenue has now exceeded 50% for nine straight quarters, dating back to mid-2023, when the generative AI boom started to show up in Nvidia’s results.
Remarkably, the stock sold off a bit on the news and the forecast of Q3 revenue of “only” $54 billion, as the company acknowledged an inevitable plateauing of further increases in their growth rate even while emphasizing how immense the AI opportunity remains. Indeed, Nvidia finance chief Colette Kress told analysts on an earnings call that the company expects between $3 and $4 trillion in AI infrastructure spending by the end of the decade.
What does all this mean for the American worker? Academic research recently released from Stanford University found “early, large-scale evidence consistent with the hypothesis that the AI revolution is beginning to have a significant and disproportionate impact on entry-level workers in the American labor market.”
Strikingly, the findings revealed that workers between the ages of 22 and 25 in jobs with higher AI adoption rates, like customer service, accounting and software development, have seen a 13% decline in employment since 2022. By contrast, employment for more experienced workers in the same fields, and for workers of all ages in occupations with weaker AI applications, such as nursing aides, has been steady or grown. Employment for young health aides, for example, rose faster than for older workers.
But not all uses of AI correlate with declines in employment. The study found that in occupations where AI complements work and is used to help with efficiency, changes in employment rates are lessened. And most companies have yet to deploy AI for day-to-day use, meaning that the job market impact has yet to be fully realized.
As Greek philosopher Heraclitus stated, the only constant in life is change. We can understand why investors are torn between excitement and trepidation given these rapid changes to the job market and economy. This unofficial last week of summer had a tilt toward excitement; financial markets hit all-time highs and the S&P 500 Index traded above 6,500 for the first time.
Economic data releases were mixed, with consumer confidence declining but consumer spending hanging tough, despite stubborn inflation. This morning’s release of the July personal consumption expenditure core price index (the Fed’s preferred inflation gauge) showed an uncomfortable 2.9% annualized growth rate. Retailers like Walmart and Best Buy reported strong results that underscored how resilient consumers continue to be, and Q2 GDP was revised higher to 3.3%, up from the original 3.1% forecast, on upward revisions to investment and consumer spending.
All eyes will now turn to next Friday’s August jobs report and then to the Sept. 16-17 Fed meeting. Investors anticipate the Fed will cut interest rates at least 25 basis points.
But as much as investors and the Trump administration crave that action, it is unclear if it will sustain the stock market rally. With markets trading at these high levels, concerns about valuations very real. Some prominent Wall Street strategists are calling for a correction from here, while others see the relative strength of corporate earnings holding markets at these high levels, with the opportunity for a market broadening. We are more in the latter camp and embrace diversification as an important opportunity as well as a source of defense in periods of stretched market conditions.
Notably, some corners of the financial markets, like small caps, have been on a tear of late, with the Russell 2000 Index rising over 7.5% this month through last night. Smaller company stocks, previously somewhat down and out, have been buoyed by rate-cut hopes and their relative price attractiveness compared to their larger brother and sister companies.
All of us at RWA wish you all a wonderful Labor Day weekend and thank you sincerely for your relationship with us. We are honored to be your partner in decision making and strategy for the changes in your life, including those much beyond labor markets, AI and frothy financial markets.
Written by a human.