By Haddon Libby
Equity markets of late have been surging to new all-time highs, capping off a remarkable year of gains. This push upward has prompted a chorus of cautionary calls from prominent financial leaders. Figures such as David Solomon, CEO of Goldman Sachs; Federal Reserve Chairman Jerome Powell; Ray Dalio, founder of Bridgewater Associates; Torsten Slok, Chief Economist at Apollo Global; David Einhorn, founder of Greenlight Capital; and David Rosenberg of Rosenberg Research have all voiced concerns. Their warnings center on AI-related stocks, where valuations appear inflated beyond sustainable levels. While these experts acknowledge the transformative potential of the Fourth Industrial Revolution—often dubbed 4AI—to generate immense wealth, they caution that retail investors are succumbing to excessive euphoria. This optimism extends beyond AI to nuclear energy plays and volatile meme stocks like OpenDoor, Kohl’s, and GameStop, where hype outpaces fundamentals.
The backdrop to this market fervor is a stark economic reality: 2025 has witnessed the highest levels of layoffs since the COVID-19 pandemic, with over one million Americans losing their jobs. To put this in perspective, the last comparable surge occurred during the 2008-2009 Great Recession, when five million people were laid off. This year’s cuts have been widespread but concentrated in specific sectors. Government employees account for more than 300,000 of the losses, while the technology industry has shed 150,000 positions. Other hard-hit areas include retail, manufacturing, warehouses, non-profits, financial services, energy, and media. Notably, over half of these layoffs have targeted higher earners—those making $100,000 or more annually. This demographic shift underscores a broader transformation in the workforce.
At the heart of these job reductions is the rapid adoption of AI-assisted tools. By enabling workers and managers to accomplish more in less time, AI has dramatically boosted efficiency across industries. This productivity surge is a key driver behind the resilience of equity markets, even amid rising unemployment. Companies are leveraging AI to streamline operations, cut costs, and maintain profitability, which in turn supports higher stock prices. Investors, buoyed by these efficiency gains, continue to pour capital into tech-heavy sectors, fueling the market’s upward trajectory.
This AI-driven spending masks deeper vulnerabilities in the U.S. economy. Investments in AI infrastructure and data centers have propped up growth figures, but when these expenditures are excluded, the economy is expanding at less than 1% annually. This sluggish underlying performance persists despite aggressive fiscal stimulus: the U.S. government is running deficits equivalent to 6% of GDP. Such deficit spending is not unique to America; major economies like China and Germany are employing similar strategies to bolster their growth amid global headwinds. This reliance on borrowing highlights a fragile recovery, where artificial boosts from tech investments and public debt obscure weakening employment trends that are dragging down overall GDP.
The Federal Reserve’s recent rate cut offers another lens into this uneven landscape. The policy adjustment primarily influenced the short end of the interest rate curve, leaving longer-term rates relatively stable. As a result, 30-year mortgage rates hover between 6.25% and 6.5%, a modest decline from their October 2022 peak of 7%. While this provides some relief, housing affordability remains a pressing issue. Currently, only about one-third of Americans can afford a median-priced home valued at $430,000. This figure represents half the homeownership accessibility of 50 years ago, when economic conditions allowed broader participation in the real estate market. Rising rates, combined with elevated home prices, have locked out many potential buyers, exacerbating wealth inequality.
Looking ahead, the interplay between AI innovation, market speculation, and economic fragility poses significant risks. While 4AI promises unprecedented productivity and wealth creation, the current wave of layoffs and deficit-dependent growth signals caution. Investors and policymakers must navigate this terrain carefully to avoid a repeat of past bubbles. As equity markets press onward, the warnings from financial sages serve as a timely reminder: euphoria can be fleeting in the face of structural challenges.
Haddon Libby is the Founder and Chief Investment Officer at Winslow Drake Investment Management. For more information on our investment management services, please visit www.WinslowDrake.com.
