Market Lab Report
by Dr. Chris Kacher
Jobs Report
The labor market has already flipped hard: the 2-to-1 jobs-to-unemployed gap from 2022 is gone, we’re basically at one-to-one now. Initial claims spiked to 231k (highest in two months), hiring plans cratered to the lowest January level since records started in 2009, and companies are openly embracing cost-cutting while slamming the brakes on new hires. That combo—slashing headcount at the margins and refusing to add bodies—used to scream recession. This time it’s mostly AI-driven efficiency taking over, not collapsing demand. AI is juicing GDP because companies are squeezing way more output out of fewer people thanks to agentic tools and automation.
Nevertheless, the jobs report came in strong with 130,000 jobs crushing the estimated 55,000 and unemployment even ticked lower to 4.3% under the estimated 4.4%. But it means the Fed will be less likely to lower rates sooner than later. Indeed, the CME FedWatch Futures now show the next rate cut in July instead of June (as of this writing). But QE comes in many forms as we've discussed so does not depend on just rate cuts.
GDP growth
As for AI-induced productivity, the U.S. economy delivered one of the most significant upside surprises in recent memory. Real GDP growth in Q3 2025 beat consensus estimates by 1.5 percentage points, the largest positive beat in the past ten years.
What makes this standout is not just the headline number, but what drove it: nearly all of the late-2025 acceleration came from productivity gains rather than an increase in labor hours or employment.
Output rose sharply while unit labor costs remained contained. Corporate margins expanded faster than inflationary pressures built up. This is the opposite of an overheated economy; it is an economy becoming structurally more efficient.
When growth comes from doing more with fewer workers, the effects ripple through financial markets in powerful ways:
- Revenues rise without proportional cost increases
- Operating leverage widens
- Earnings ceilings expand
- Valuation multiples do not need to compress to justify higher prices
This dynamic helps explain why market leadership has rotated away from narrow, long-duration growth stocks toward cyclicals, value, and small-caps — sectors that historically outperform when genuine economic acceleration takes hold without inflation overheating.
Credit markets are telling the same story. Faster nominal GDP growth improves debt dynamics even as absolute debt levels rise. Companies are growing into their balance sheets. Default risks remain contained. Credit spreads are tighter than many expected given the macro backdrop.
The AI Spending Catalyst
Massive capital expenditure by hyperscalers is a major force behind this resilience. In the view of veteran economist Ed Yardeni, current levels of AI-related spending by the largest cloud providers are “appropriate and sustainable” rather than excessive. So far, these outlays appear “very stimulative to overall business activity,” creating a virtuous cycle: demand for GPUs, servers, networking gear, data-center power, and cooling infrastructure feeds back into broader economic output and corporate earnings.
What This Means for the Nasdaq
The recent bounce in the Nasdaq Composite reflects these underlying strengths though the bounce has been so far on weaker volume so buyer beware. In the near term, the Nasdaq remains choppy. The persistent concern is that the massive AI capex (hundreds of billions from hyperscalers) is not yet translating into proportional revenue or ROI fast enough. Key points fueling the worry:
- ROI uncertainty — Investors keep asking “when does all this spending turn into real earnings growth?” Guidance from big tech has been mixed: capex plans remain huge (Amazon reportedly $50B+ in 2026), but monetization timelines keep getting pushed out.
- Circularity fears — Some see a “circular spending” dynamic where AI companies buy AI tools to sell AI services, raising questions about sustainable demand.
- Valuation compression — Even after the pullback, many AI-related stocks still trade at elevated multiples, so any disappointment triggers outsized selling.
Important Caveats: Acceleration and Bottlenecks Matter
Underscoring the fears, the sustainability of this dynamic depends on two critical conditions:
- AI adoption must continue to accelerate
The massive AI spending currently underway is a major tailwind. But for the productivity gains to persist and compound, enterprises and governments must rapidly deploy these technologies across workflows. If adoption slows — whether due to integration challenges, skill shortages, regulatory hurdles, or ROI concerns — the supply-side efficiency boost could moderate.
- Bottlenecks must be avoided
The current pace of AI infrastructure buildout is unprecedented, but it is also straining several key constraints:- Power availability and grid capacity
- High-end GPU supply and advanced chip production
- Cooling and data-center construction timelines
- Skilled labor for deployment and maintenance
Any significant delay or shortage in these areas could cap the upside. If bottlenecks emerge and persist, the productivity acceleration — and the margin expansion it supports — could decelerate faster than markets currently expect.
The Q3 2025 GDP beat is powerful evidence of a productivity renaissance quietly raising the economy’s potential growth rate. This environment supports higher equity valuations, tighter credit conditions, and continued rotation toward economically sensitive sectors — all without triggering the classic inflationary spiral that would force aggressive monetary tightening. Nevertheless, productivity-led growth keeps inflation in check, supports margin expansion, and raises the sustainable level of earnings growth. When combined with controlled inflation and accommodative financial conditions, this environment tends to lift equity multiples — especially for companies that can leverage AI to improve efficiency.
The recent strength in the Nasdaq Composite, data-center stocks (IREN, APLD, CIFR), and uranium-related plays (URAA) reflects these underlying drivers. Yet the path forward is not guaranteed. For the bullish case to fully play out, AI adoption must keep accelerating and critical bottlenecks must be resolved or circumvented.
If those conditions hold, the productivity-led growth story could have considerable further to run. If they falter, the market’s recent bounce may prove more fragile. The next few quarters of AI deployment progress and infrastructure buildout data will be decisive.