Recent employment data fell far short of expectations, sparking fears of an economic recession, yet corporate profits have hit record highs. Behind this contradictory phenomenon, artificial intelligence (AI) technology is severing the long-established link between the job market and corporate profits.
The August nonfarm payroll report showed the U.S. added just 22,000 jobs that month, significantly below economists’ expectations of 75,000. More worryingly, the annual job growth figure through March was revised down by 911,000, meaning more than half of the jobs previously believed to have been created were overestimated. After revisions, the average monthly job growth plummeted from 147,000 to just 70,000.
Hiring has nearly stalled, the unemployment rate has climbed to a four-year high, wage growth has cooled, and previous months’ job data was revised downward. This is the worst jobs report since the pandemic, and these indicators typically signal an impending economic recession.
Yet, in stark contrast, corporate earnings performance has been remarkable, providing the main thrust for the summer stock market rally. Data shows that the average corporate earnings surprise in the second quarter was 8.8%, the highest in 39 years. Among S&P 500 Index companies, 92% reported an average profit growth of 10.6% in Q2.
This deviation from traditional economic patterns stems from AI innovation. A June report from research firm Chmura pointed out: Since the launch of ChatGPT, the impact of generative AI on the labor market is directly visible in hiring demand. From October 2022 to now, job postings have declined by 25%, while the S&P 500 Index has risen by 53%. Over the same period, the Information Technology sector soared by over 100%, while job postings for computer occupations plummeted by 53%.
AI is rewriting the economic rules: Companies are using AI applications to streamline their workforce while maintaining high productivity, thereby achieving profit growth and rising stock prices. This transformation is still in its early stages. A blog post from the New York Fed noted that as AI integration deepens, firms anticipate more significant layoffs and scaled-back hiring.
Taking Goldman Sachs as an example: Work that previously required six bankers two full weeks to draft an IPO prospectus can now be 95% completed by AI in minutes. This foreshadows a substantial reduction in future labor demand in the financial industry.
The current market presents a “tale of two economies”: on one side is the innovative, dynamic AI economy, and on the other is the traditional economy under pressure. Data shows that the “Magnificent Seven” stocks achieved profit growth of 26% last quarter, while the other 493 companies in the S&P 500 grew by just 2%.
For investors, the key question is how to capitalize on AI investment opportunities. Suggestions include focusing on the upcoming “Economic Singularity” by investing in leading AI companies set to benefit directly, or concentrating on the humanoid robotics field, particularly opportunities related to Tesla’s Optimus robot.
Morgan Stanley estimates that AI could add up to $16 trillion in value to the S&P 500 over time. As AI helps companies generate more output with fewer workers, the “profit per employee” metric will become a key indicator for measuring the effectiveness of AI implementation. Although an AI bubble risk may eventually materialize, analysts believe the AI boom is likely to continue for at least the next 12 months.
In this era of reshaping traditional economic relationships, investors need to recognize that the historical correlation between the job market and stock market health is weakening. Positioning in leading AI companies might be the key to gaining growth in the new economic environment.
