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On Magnificent US Earnings, AI’s Impact On Jobs & UK’s Woes
“Truly magnificent!” are Joe’s words for the collective March-quarter earnings strength of the S&P 500 companies that have reported results so far. He shares his takeaways from the data. … Also: Melissa scours employment data to learn how much creative destruction AI has wrought so far. Over time, we think AI will create as many jobs as it destroys. … And: Political instability in the UK has driven 10-year gilt yields to highs not seen since the 2008 financial crisis. What’s spooking bond investors, explains William, is the prospect of a less fiscally responsible prime minister if Keir Starmer steps down. Another big uncertainty is whether the BOE will tighten monetary policy to quell higher inflation.
Artificial Intelligence: To Infinity & Beyond!
Before the Age of AI, economists were taught that there are only three factors of production, namely, Land, Labor, and Capital. The job of economists is to optimize the allocation of these scarce resources to maximize output (i.e., real GDP). Now, economists should recognize that there is a fourth factor of production, namely, Data. This resource is unlimited. But until AI, it wasn't very useful because it was very expensive to collect, process, and analyze. The Data Revolution that started in the mid-1960s was all about processing as much data as quickly and as cheaply as possible. A great deal of progress has been made in doing so since the IBM mainframe computer was introduced on April 7, 1964 until now, after OpenAI introduced ChatGPT on November 30, 2023. As a result of this progress, the share of nominal capital spending in high-tech has increased from around 20% to a record 55% over this period (chart). The Digital Revolution increases the incentive to create more Data (a.k.a. Information), especially now that AI tools can process so much more of it, increasing its value as a factor of production by boosting productivity. This is the story we've often told before, and it is the story the stock market is now discounting, especially in semiconductor stocks in general and in memory stocks in particular (chart). All the data increases the demand for "compute." It further increases the demand for memory because all data must be stored indefinitely unless it is voluntarily deleted. This is our Buzz Lightyear Theory (BLT) of AI, which is taking the Data Revolution "to infinity and beyond." That's even more exciting and bullish than our Roaring 2020s scenario. We recognize that our exuberance might be irrational. It might be a jinx. If China invades Taiwan tomorrow, then we will have made the top in the AI trade. Other than that event, we are struggling to figure out what else could go wrong with our BLT. (Also see our March 24, 2026 QT titled, "Thanks for the Memory.") The AI trade helps to explain why the Russell 2000 is soaring to new highs. The Information Technology sectors of the S&P 400 and S&P 600 have considerably outperformed the Information Technology sector in the S&P 500 so far this year (chart). We are also getting more exuberant about the US economy. So far, it is acing the latest stress test, i.e., the war in the Middle East. Q2 real GDP is tracking at 3.7% (chart). Here's more happy news: (1) JOLTS. Today's JOLTS report for March showed a solid increase in hires that exceeded separations by 176,000, confirming the 178,000 increase in nonfarm payroll employment during the month (charts). The JOLTS job openings series ticked down in March (chart). But INDEED's weekly job postings has been moving higher recently through the week of April 17. (2) Redbook Retail Sales. Same-store retail sales grew 7.8% y/y in the week ending May 1, a slight acceleration from the prior week and well above the 2025 full-year average of 5.8% (chart). The four-week moving average rose to its highest pace since September 2023. Importantly, the Redbook measure excludes gas station sales. (3) ISM Services PMI. The services sector expanded for the 22nd consecutive month in April, though the headline index eased slightly to 53.6% in April (down from 54.0% in March). The manufacturing and services PMI remain in expansionary territory (chart). Rapidly rising energy prices during March and April have boosted the prices-paid indexes of both purchasing managers' surveys (chart). The data are consistent with a resilient economy expanding at a healthy pace but experiencing some inflationary pressures. Taken together, today's data send a clear and consistent message: the labor market is holding firm, consumer spending is resilient, and inflation risks remain elevated. Message to Kevin Warsh: The Fed's easing bias is on borrowed time.
The War's Impact On Emerging Markets
Among the many economic ripple effects from the war in Iran, the inflation-economic growth balances in developing market economies have been upended. Currencies are plummeting relative to the dollar. William examines economies affected the worst including net energy importers India and Indonesia as well as Japan, where the yen-carry-trade risk has returned. … As net exporters of commodities, Latin American economies are faring much better. Toby sees opportunities for investors in Latin American stocks, particularly those of Brazil and Mexico.
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