Key Takeaways:
The U.S. economy is delivering a paradox: record stock prices alongside shrinking payrolls.
The S&P 500 has climbed 13% this year to records even as total U.S. payrolls shrank in July — the fifth contraction in 12 months — a divergence that defines what economists call a "jobless boom."
"While I appreciate the impact AI is having on GDP, that can't be the only driver of the loan growth that we're seeing given the industry dispersion and the geographic dispersion," Bill Demchak, chief executive of PNC Financial Services, said on an earnings call.
Real GDP grew 1.5% annualized in the second quarter, yet S&P 500 earnings excluding Amazon and Alphabet rose 32% in the period, according to FactSet. Median earnings growth across the index accelerated to 13% from 8% two years ago, Bank of America data show. Banks and small-cap stocks have outpaced the Magnificent Seven this year, with the Russell 2000 adding 0.61% on Wednesday while the Dow slipped 21.58 points to 53,770.27.
The disconnect carries stakes for the Federal Reserve, which now faces a 40% implied probability of a September rate hike after July CPI matched forecasts at 3.4% annually. If AI lifts output without adding jobs, the jobless boom could persist — but consumer demand financed by falling savings, and hundreds of billions in data-center debt issuance, can't run forever.
The labor market tells the other half of the story. Private payroll growth has averaged just over 50,000 per month over the past year, a pace virtually unprecedented outside recessions. The unemployment rate hovers just above 4%, held down less by hiring than by a shrinking labor force as baby boomers retire and immigration dries up. Job openings sit at postpandemic lows, according to Indeed, and annual earnings growth of 3.2% is the weakest since before the pandemic — evidence that employers are not competing for talent.
Stripe chief executive Patrick Collison recently polled his 1.5 million followers on X about their economic outlook; 13,000 respondents on average expect growth to double to 4.3% over five years while employment falls about 8%. That "AI-optimist" scenario is unlikely to play out in full — employment almost never collapses by that much, and never while output is soaring — but the direction matches what markets are pricing.
The stock market's disconnect from GDP is not a valuation bubble, at least not yet. In a bubble, prices typically outpace earnings and inflate multiples; instead, earnings have risen faster than prices over the past year, pushing the S&P 500's multiple lower. Deutsche Bank found the phrase "broad-based" cropping up repeatedly in earnings calls, and total revenue for the index excluding energy and financials, adjusted for inflation and currency, is up about 8% — well ahead of GDP.
The last time payrolls contracted this frequently outside a recession was in the early 1990s, when productivity gains from information technology allowed companies to grow output without adding workers. That episode preceded a sustained equity rally, though it also coincided with a sluggish labor market that kept wage growth contained for years.
Consumer demand has held up despite weak wage growth because households have been saving less, while private investment depends on hundreds of billions of dollars of new debt to finance data centers. Neither can continue indefinitely. The S&P 500 closed at 7,748.50 on Wednesday, up 0.26% and within 0.58% of its 52-week high, with the Nasdaq Composite adding 0.54% to 26,588.49. Treasury yields eased to 4.68% after the inflation print, while Brent crude held near $88.98 a barrel on Strait of Hormuz tensions.
If AI delivers even a fraction of what optimists expect, the jobless boom could extend. If not, the divergence between a record-setting stock market and a stagnant labor market will eventually resolve — and history suggests it will be stocks, not payrolls, that give way.
This article is for informational purposes only and does not constitute investment advice.
