Uncertainty Lingers Despite Powerful AI Demand

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

With the federal government back in business after the longest shutdown in U.S. history, government-backed economic data is beginning to resume its usual flow. Still, the big questions that have been hanging over the economy remain: Just how weak is the labor market, and how will it ultimately be affected by recent interest rate cuts? To what degree are tariffs contributing to rising inflation, and will inflation eventually decline closer to the Federal Reserve’s 2 percent target? Will the Fed cut interest rates for a third straight time when committee members meet next month, and what impact will its decision have on jobs and inflation?

One economic question is becoming increasingly important: What is the state of the consumer as the economy becomes more bifurcated along income lines? In recent commentaries, we’ve noted that higher-income households have accounted for a disproportionate share of consumer spending. More-affluent consumers tend to be less sensitive to high interest rates than lower-income consumers do, and they have benefited far more from the wealth effect produced by strong gains in the stock market. With consumer spending—which makes up roughly 70 percent of U.S. economic activity—more concentrated among higher-income households, and much of their spending supported by equity gains, any stock-market pullback could have negative implications for the U.S. economy.

In a related development, investors have become increasingly worried about the sustainability of the equity markets’ advance in recent weeks given historically heightened valuations and its heavy dependence on artificial intelligence, particularly the relatively few AI stocks that have driven much of the stock market’s gains over the past couple of years. These worries came to a head last Wednesday when Nvidia announced strong earnings, signaling that demand for chips essential to AI projects remains strong. The announcement caused a brief surge in global tech stocks on Thursday, but the rally didn’t last. Gains evaporated as the day wore on and turned to losses by the time markets closed.

Many observers thought a positive Nvidia earnings report would effectively send investors an all-clear sign, suggesting ongoing growth in the AI economy justified strength in related stocks. Yet the larger economic and market questions remain. We believe volatility is likely to persist over the coming months until the answers become clearer.

Speculative corners of the market enjoyed large runups during much of this year amid investor exuberance about the AI boom. While equity markets have generally advanced over the past few months, these speculative assets have begun to show some signs of stress. Consider cryptocurrencies. Crypto bulls have offered a variety of investment rationales, including its use as a potential inflation hedge or a store of value. Over the past year, however, crypto has behaved most like leveraged technology stocks. For example, Bitcoin and Ethereum, the two largest cryptocurrencies, gained 62 percent and 227 percent, respectively, in the months following the April 2 “Liberation Day” tariffs announcement. Since early October, they plunged 33 percent and 43 percent, respectively, amid aggressive selling from leveraged crypto wallets.

Speculative excesses in other parts of the market also have corrected recently. Goldman Sachs monitors a basket of unprofitable tech stocks as a proxy for investor risk-taking. This basket soared 129 percent between April 2 and October 15 and then began a downward slide that has picked up speed. As of Friday, November 21, this index traded 21 percent below its mid-October peak. For perspective, it is worth noting that this basket of currently unprofitable tech stocks soared during the liquidity-saturated post-COVID economy; then it crashed, and it remains more than 55 percent off its 2021 highs even after its strong 2025 advance.

We believe these pullbacks indicate that investors increasingly are questioning the staying power of the AI-driven advance amid increasing public chatter about the possibility of a bubble. The reality is that no one knows for certain whether the market is in a bubble, just as no one knows the near-term answers to today’s economic questions. What we do know is how to invest for uncertainty: Own a diversified portfolio of investments across various asset classes, focused on the long term and driven by a financial plan designed to meet one’s goals through ever-changing economic and market conditions. Speculation and concentration in any segment of the market may provide large upside potential, but they also introduce large downside risks. By contrast, diversification is designed to help investors navigate all the near-term vagaries and stay on track for long-term success. For a diversified investor, today’s unknowable questions will become merely future water-cooler conversations, not events that changed their financial future.

The early 2000s provide an instructive example. Like today, investors then questioned whether the tech-driven bull market was sustainable, with passionate opinions on both sides. We learned the answer only in hindsight. For investors who remained diversified, rather than allowing their portfolios to become concentrated and heavily tilted toward speculative asset classes, the answer didn’t matter all that much. Assets other than large U.S. growth stocks—including international shares and Small Caps—held up relatively well during the first years of the 21st century.

Investors who regularly rebalanced back to their diversified, long-term asset allocation targets were better positioned to ride out the bear market and stay on track toward their goals. No one knows what the future will bring—but maintaining diversification helps investors prepare for any scenario.

Wall Street wrap

Overall economic data suggested that growth remained resilient. That said, the data showed increasing bifurcation among consumers, a labor market that remained narrow and weakening and continued inflation pressures.

Mixed September jobs report shows rising unemployment: The Bureau of Labor Statistics (BLS) released its September jobs report last week after a long delay caused by the government shutdown. The report showed 119,000 new jobs added in September, more than economists expected. However, the number of jobs added in July was revised down from 79,000 to 72,000, and August’s numbers were revised from 22,000 jobs added to 4,000 jobs lost. Since the labor market began weakening in May, the economy added an average of only 39,000 jobs per month.

Once again, job growth was driven by the non-cyclical sector of health and educational services, which added 59,000 jobs. Since May, this sector—which represents just 17 percent of the overall U.S. labor market—has added 61,000 jobs per month, making it responsible for more than 100 percent of all job gains.

The BLS’s other jobs report, the household survey, showed the unemployment rate ticking higher, from 4.3 percent to 4.4 percent. The survey also showed 470,000 workers joining the labor market but just 251,000 finding jobs. The household survey also found longer-term weakness, with a total of 324,000 jobs lost over the five months through September.

S&P Global data shows growth alongside cost concerns: Preliminary data from the latest S&P Global Purchasing Managers Index (PMI) showed the pace of overall growth accelerating as of November. The latest report, which tracks both the manufacturing and services sectors, gives a Composite Output Index reading of 54.8, up from October’s reading of 54.6. Levels above 50 signal expansion.

“The flash PMI data point[s] to a relatively buoyant U.S. economy in November, signaling annualized GDP growth of about 2.5 percent so far in the fourth quarter,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. “Furthermore, although jobs continued to be created in November, the rate of hiring continues to be constrained by worries over costs, in turn linked to tariffs. Both input costs and selling prices rose at increased rates in November, which will be of concern to the inflation hawks.”

Improvement in services was driven by the largest increase in new orders since last December. However, manufacturers saw slower new orders and a historically high buildup of unsold stock, driven by companies’ efforts to buy materials ahead of potential tariff-related price increases and/or supply shortages. “This accumulation of unsold inventory hints at slower factory production expansion in the coming months unless demand revives, which could in turn feed through to lower growth in many service industries,” Williamson said.

Input cost inflation for November accelerated at the fastest rate in three years, due in part to a combination of tariffs and higher wages. Service-sector costs, which are not directly tied to tariffs, rose at the fastest rate since January 2023, indicating sticky inflation. Meanwhile, competitive pressures kept the rise in selling prices below recent peaks.

While employment rose for the eleventh time in the past 12 months, the rate of job creation dipped near 12-month lows. Job creation in the services sector in particular showed only modest growth, due principally to cost concerns.

Consumer sentiment figures revised downward: The final results of the University of Michigan’s consumer sentiment survey were released last week. The survey shows sentiment regarding current economic conditions at 51.1, down from a preliminary estimate of 52.3 and the lowest reading since data began to be collected in 1978.

Long-term inflation expectations fell from 3.6 percent in the preliminary results to 3.4 percent in the final results. Although this figure is low compared to most other readings since April, it matches the highest readings between 1994 and the COVID pandemic.

The report also draws attention to an economy bifurcated along wealth lines. A majority of consumers without stock holdings drew attention to high prices dragging on their personal finances, while only about a third of consumers with the largest tercile of stock holdings did so. The report notes that the gap reflects differences in how much pain high and rising prices impose on various types of households.

“The wealthiest consumers appear equipped to continue spending, while the financial positions of non-stockholders are deteriorating,” said Survey of Consumers Director Joanne Hsu. “These trends indicate that aggregate economic statistics can obscure vulnerabilities within certain parts of the population.”

In an indication of the relationship between the stock market and the economy, the report noted that sentiment among consumers with the largest stock holdings dropped about two points from October, likely because of stock market declines in the final two weeks of the survey period.

The week ahead

Tuesday: The Census Bureau will release September retail sales data on Tuesday. Consumers spent more than expected in August, driven by high-income households. We’ll be watching to see if this trend continues.

The BLS will release the Producer Price Index report Tuesday as well. We will be watching for clues about the path of inflation.

Wednesday: The Conference Board will release the Consumer Confidence report for November in the morning. Last month’s report showed consumer confidence falling slightly despite stronger views of current business and labor market conditions. We’ll continue to keep an eye on the labor market differential, which measures the difference between the number of respondents who believe jobs are easy to find and those who report challenges in finding work. In October, the percentage of consumers who said jobs were plentiful rose slightly but remained relatively low, while the percentage of consumers who said jobs were hard to get ticked upward.

The Department of Labor’s jobs report also will come out Wednesday. The last published report covered the week ended Nov. 15. While it included a relatively benign reading of 220,000 initial jobless claims, with a four-week average of 224,250, it showed continuing claims increasing to 1.974 million, the highest this year. Together, these readings reflect an environment with low firings but also low hiring.

The Federal Reserve will release its Beige Book, which compiles anecdotal information about current economic conditions in each Federal Reserve district. The last issue, put out Oct. 15, painted a picture of an economy with slow to stagnant growth, stable employment and modestly higher wages and prices. It also showed the growing gap between higher- and lower-income households, along with increasing uncertainty about tariffs and the impact of the government shutdown.

Reader note: the Weekly Market Commentary will be taking a brief hiatus next week due to the Thanksgiving holiday. We look forward to recapping the latest developments on Monday, December 8.

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