Labor Market

Looking through month-to-month volatility, job growth’s underlying trend is stable and consistent with a flat-to-slightly higher unemployment rate.

Fears of widespread job losses due to AI are overstated. For investors, the key is that white-collar anxiety is accelerating a red-hot blue-collar economy via lower yields. Upgrade Private Real Estate to overweight.

The neutral rate in the US is being propped up by a variety of forces that are at risk of reversing. These include the AI capex boom, large budget deficits, and the extraordinarily high level of household wealth. As such, interest rates are likely to surprise to the downside over the next few years.

The annual benchmark payrolls revisions revealed that the labor market has been weaker for longer than initially reported. The probability that a crack in consumption is just around the corner is much reduced and we have therefore dialed back our recession expectations. Though our asset allocation recommendations remain neutral across the board, we are more optimistic than we were at the beginning of the year.

Core inflation will get close to the Fed’s 2% target by the end of this year.

If humanoid robots were to become substitutable for workers, the AI age could lead to rapid growth in the size of the effective global labor force. The result could be a larger version of the “China shock,” which followed China’s entry into the global economy.

The Warsh Fed will run the US economy hot. This is bad for T-bonds and the dollar, but good for stocks. Plus, a new tactical trade is overweight Consumer Discretionary (RXI) versus Industrials (EXI).

The labor market tightened in January, significantly lowering the odds of a H1 2026 rate cut. Rate cuts driven by lower inflation are still likely in H2 2026.

Our Portfolio Allocation Summary for February 2026.

In Section II, Jonathan examines whether the AI “scaling laws” are likely to hold. They will over the near term, but cracks are already beginning to form in the narrative of ever-improving AI.