In recent weeks, the market has experienced a distinct recalibration, moving away from the unbridled optimism that characterized much of the year. The primary driver of this shift has been a significant downturn in AI-related stocks. Heavyweights in the sector have faced sharp declines, with some leaders in the semiconductor space shedding more than 20% of their value. This volatility has not occurred in a vacuum; it is being exacerbated by a darkening macroeconomic cloud, including a rise in the unemployment rate.
The Employment Mirage: Where Did the Jobs Go?
The cooling of the labor market has become a central concern for the Federal Reserve and investors alike. The unemployment rate has climbed to 4.6%—the highest level in over four years—driven by a notable loss of jobs across several sectors. Most striking is the contraction in the public sector; government jobs are down by approximately 270,000 since January 2025. This “labor market cooling” marks a transition from a period of worker scarcity to one where corporate caution is taking root, as organizations grapple with high borrowing costs and uncertain demand.
This downturn is falling with particular weight on the younger generation, who are finding the traditional “entry-level” door increasingly slammed shut. The unemployment rate for workers aged 16 to 24 has surged to 10.6%, more than double the national average, as recent graduates face a “low hiring” environment where even basic roles often require years of experience. For many in Gen Z, the typical path from education to a stable career has been disrupted by a broad corporate hiring freeze and a growing trend of “underemployment,” where graduates are forced into part-time or low-skilled roles just to stay afloat.
The Fed’s Tightrope: Why Cheap Money Isn’t Coming Back
Investors are also adjusting to a new reality regarding interest rates. Earlier in the year, many expected a series of aggressive rate cuts from the Federal Reserve to stimulate the economy. However, the Fed is now likely to cut rates less than previously anticipated. This is because inflation remains “sticky”—meaning it is staying above the 2% target. The Fed is walking a tightrope: they want to support the job market, but they cannot lower rates too quickly if it risks a new surge in the cost of living.
From Hype to Harvest: The End of the “Blank Check” Era
Within the technology sector, the sell-off in AI stocks represents a pivot from the “installation phase” to a more skeptical “evaluation phase.” The narrative has shifted from “at what cost can we build this?” to “when will we see the return?” Investors have become increasingly jittery regarding the massive capital expenditures required for data centers. Recent reports of stalled negotiations and delays in building out infrastructure have served as a reality check, suggesting that the path to a fully AI-integrated economy may be longer and more expensive than previously thought.
The market is also beginning to look more closely at “neocloud” providers. To put it simply, while traditional cloud giants like Microsoft or Google offer a massive library of different digital services, a “neocloud” is a newer, specialized provider that focuses almost exclusively on renting out the powerful chips (GPUs) needed to train AI. While these companies grew rapidly during the initial boom, they are now facing a tougher environment. High costs to maintain their hardware and narrowing profit margins have led to a re-evaluation of their worth, as investors realize these specialized services may face intense competition.
Survival of the Fittest: Finding the “Gold” in the Shakeout
It is important to view this recent weakness as a natural and expected part of the investment cycle. History shows that every major technological innovation—be it the steam engine, the automobile, or the internet—disrupts the natural order of current processes and initially triggers a period of “irrational exuberance.” This is invariably followed by a “shakeout” or correction where speculative money is purged, and the technology begins to move from being a novelty to becoming an essential part of our daily lives. We believe we are currently navigating this turning point.
The rise in unemployment and the softening of the labor market add a layer of complexity, as they may signal a broader economic slowdown that could temper the pace of corporate AI investment. However, labor market weakness can also act as a catalyst for AI adoption. When it becomes harder to find or afford labor, companies often seek productivity gains and automated efficiencies to protect their profits. This creates a “K-shaped” environment where high-quality firms thrive while speculative players struggle to survive.
Our strategy is to look through the immediate “noise” of daily price swings and labor reports. The current volatility is not a signal of the failure of AI, but rather a maturation of the market’s understanding of its risks. The “froth” is being removed, and while the process is painful for those who took on too much risk, it creates an attractive entry point for patient investors focused on the long term.
Our outlook remains grounded in the belief that AI remains a foundational shift in the global economy. However, the days of “rising tides lifting all boats” in the sector have ended. Success in this phase of the cycle requires a disciplined focus on finding durable business models. We are prioritizing companies with proven profitability and significant “moats”—unique advantages that protect their profit margins from competitive threats. By focusing on these fundamentals, we remain well-positioned to navigate this cycle and capture the sustainable value that this technological revolution will ultimately provide.
Birthdays:
Singers Billie Eilish (24) and Christina Aguilera (45) have birthdays today, while actor Brad Pitt turns 62 and director Steven Spielberg turns 79.
Christopher Gildea 610-260-2235