Summary
The weakening economy will likely lead to a decline in stocks, and investors should be prepared to adjust to this new reality, potentially with the help of a financial advisor.
Economic Outlook
The economy is gently weakening, not collapsing, with signs of weakening in consumer-oriented and business-oriented data, below-average growth, and tariffs being absorbed by companies, making it challenging for corporate earnings to meet lofty targets.
The ISM service sector survey is below 50, indicating more job losses than hiring, with only three periods of meaningful contraction in the last three recessions.
Despite economic weakening, the S&P 500 is at all-time highs, with a bullish trend since mid-June, but overbought levels, with RSI at 70 and MACD at 100.
Market Dynamics
The market breakout is driven by AI companies like Microsoft, Nvidia, and Tesla, which are leading the magnificent seven, but not all are rising, showing divergence compared to the last two years.
July tends to be a good month for stocks, with a seasonal effect benefiting the market, but earnings and the Fed’s July meeting will be important catalysts.
The AI and energy sectors have significant investment potential, with AI helping to invent new technologies and energy being critical for data centers.
Employment Trends
The June non-farm payrolls report was stronger than expected, with 200,000 new jobs and positive revisions for the last two months, making it harder for the Fed to cut rates.
Service sector jobs account for 80% of employment and have seen the largest decline since March 2020, with 66,000 jobs lost.
The BLS diffusion index is below 50, indicating more industries shedding jobs than net hiring.
AI Impact and Future Outlook
AI will displace a large number of jobs in the next few years, faster than we can repurpose them, leading to an underemployment and unemployment crisis.
The benefits of AI will concentrate in the hands of a smaller portion of society, increasing inequality and quality of life disparities.
The US electrical grid needs to be rebuilt to power AI dominance, with China adding a US worth of production electrical capacity every 18 months.
Economic Policy and Societal Implications
The Fed could start aggressively cutting rates in May 2026 with a dovish chairman, potentially having a powerful impact on the economy over the next three years.
The UBI (Universal Basic Income) concept is economically flawed as it will lead to inflation and purchasing power loss, creating a dependent class on a grander scale.
To prepare for the future, parents need to help their kids think about how to work with AI to maximize their ability to advance and contribute value, minimizing the risk of being replaced by AI.