Labor Market

AI excels at IQ but fails miserably at EQ. Hence, AI will obsolete any job that relies on IQ, including many graduate-level jobs. But high-EQ humans will be in high demand to pair up with AI, and many of these jobs will be middle income jobs. We discuss the implication for the economy and markets. Plus, a new tactical trade is underweight global tech versus healthcare.

We take stock of earnings, AI capex and the labor market and explain why we think the repeated new highs in the S&P 500 are justified.

Improving job growth keeps Fed rate cuts off the table, but evidence of labor market tightening will be required before rate hikes become part of the discussion.

The global economy has weathered the oil shock reasonably well so far. However, the risk of a recession will increase meaningfully if the Strait of Hormuz remains closed into June.

So far, there is no evidence of second-round effects from the oil price shock showing up in the US economy. Fed rate hikes are off the table unless those effects emerge.

FOMC participants are coalescing around the idea that the funds rate will stay on hold for some time, an outcome that is now well priced in the bond market and that will not materially change under a new Fed Chair.

We do not expect the oil shock to have a lasting effect on inflation. Looking further out, a variety of structural forces will influence inflation, including fiscal policy, globalization, demographics, and AI.