Sometimes investing feels like detective work. You follow trails of breadcrumbs, piecing together scattered clues from data, headlines, and sentiment to uncover what’s really driving the markets. In my last market update, I noted it was too early to tell how tariffs and trade frictions would affect the economy. A few months later, we have better clues. The data now shows competing narratives about where growth, inflation, and the markets may go from here.
When tariffs were first announced, economists worried about stagflation (a mashup of stagnation and inflation) where slowing momentum meets rising prices.
On the positive side, second-quarter real GDP was revised up to a 3.8% annualized pace. Consumer spending and business investment were both supportive, easing fears that tariffs would immediately hit the consumer. Wages continue to grow at a low single-digit rate, maintaining a virtuous cycle of spending.
At the same time, the job market is showing fatigue. For the first time since 2021, job seekers now outnumber job openings. Behavioral indicators tell a similar story: Google searches for “second job” have roughly doubled over five years, suggesting growing stress about keeping up with expenses. Growth remains positive, but these early cracks hint at the “stag” side of stagflation.
A key question this year has been whether tariffs would push prices higher. Headline inflation has hovered near 3%, above the Fed’s 2% target. That one-point gap may not sound large, but it has major market implications. Services inflation has been stubborn, while goods inflation, after cooling last year, is regaining strength as pre-tariff import prices filter through and food costs continue to rise.
Earlier this year, many companies absorbed part of the tariff hit in their margins, delaying price hikes. That won’t last forever. If margins continue to compress, firms may raise prices in the quarters ahead. Pair a cooling labor market with renewed price pressure, and the consumer tailwind that’s been a foundation of economic resiliency could fade.
These forces have put the Fed in an especially difficult position, especially with asset prices at all-time highs. In simple terms, the Fed raises rates to fight inflation and cuts them to support a slowing economy and labor market. These conflicting signals didn’t stop the Fed from cutting rates in September, and markets expect more cuts to follow.
Cutting rates too fast risks reigniting inflation just as it was cooling. Waiting too long risks a harder landing for jobs and growth. Many central banks have already entered one of the fastest global easing cycles since the Global Financial Crisis in 2008, narrowing the Fed’s room to maneuver. The 1970s taught us that easing too early can create a second inflation wave, and 2021 reminded us that “temporary” shocks often linger.
One of the biggest macro stories this year has been the dollar’s sharp fall, down more than 10% year-to-date (the steepest slide since 1986). The drop reflects a mix of Fed rate cuts, the dynamics between growth and inflation, rising deficits, and ongoing trade and geopolitical uncertainty.
A weaker dollar has historically supported equities, commodities, and other real assets, and that’s exactly what we’ve seen. The S&P 500 is up about 13% through Q3, while international markets have soared roughly 27%, marking the widest outperformance versus U.S. equities since 2009.
The “real” economy that produces and moves physical goods has cooled. Manufacturing, transportation, and parts of construction are in recession-like territory. These sectors, sensitive to tariffs and new immigration policy, have historically been early indicators of recessions.
Meanwhile, AI-related investment has exploded. Since ChatGPT’s launch in 2022, U.S. data center construction is up nearly 400%, and power infrastructure spending has surged in tandem. J.P. Morgan estimates the five largest hyperscalers (Amazon, Apple, Microsoft, Google, and Meta) will spend a combined $1.2 trillion from 2025 through 2027 on AI infrastructure. Nearly 40% of last quarter’s real GDP growth came from capital expenditures tied to AI, which an unusually large share from a single theme.
There’s a risk that the meteoric rise in AI spending is masking weakness elsewhere in the economy. Technologically, AI is undeniably transformative, but from a business model standpoint, the pace of investment is hard to sustain without a clearer path to profitability. For example, ChatGPT parent OpenAI continues to post multi-billion-dollar losses as it experiments with monetization, and multiple corporate surveys show that despite rising adoption, many corporate AI pilots are already being abandoned. If the AI engine downshifts, this growth impulse could fade quickly.
The AI boom has concentrated both economic growth and market performance. The six largest U.S. companies (Nvidia, Microsoft, Apple, Amazon, Meta, and Alphabet) now total roughly $20 trillion in market value, larger than China’s GDP (the world’s second largest economy). The top ten names in the S&P 500 represent about 41% of the index as of late September. Since late 2022, AI-linked stocks have driven most of the S&P 500’s returns, earnings growth, and capital spending growth. When so much of the market rests on one theme, even a small stumble in the narrative can trigger large market swings, especially at all-time high valuations.
One way to gain exposure to the AI trend could be commodities. The AI buildout is driving record construction and energy use that flows directly into commodity demand. After more than a decade of underinvestment, supply remains tight just as other structural forces, from the energy transition and electrification to reshoring of manufacturing and global fragmentation, add additional demand. Commodities hedge against inflation and rising geopolitical tensions and remain a structural and strategic cornerstone of real economic growth.
With all the attention on AI, you might assume a basket of these tech stocks are this year’s top performers. In reality, commodities have quietly led the way. Strength in gold, uranium, global defense, and rare-earth metals shows this isn’t just an AI story, but a broader shift toward real assets tied to energy security and strategic geopolitical resilience.
What’s most notable about this rally is that gold, traditionally seen as a safe haven, is rising alongside stocks and other risk assets. That dynamic suggests a deeper shift underway in how markets value the dollar versus hard assets. In 2022, The Wall Street Journal boldly declared “Gold Loses Status as a Haven.” Two years later, it’s having one of its best runs since 1975, yet 40% of asset managers still hold no gold, and average allocations remain below 3%. Central banks continue to be steady buyers, shifting reserves away from Treasuries, a reversal of decades-long policy. Morgan Stanley’s Chief Investment Officer recently suggested that the traditional 60/40 portfolio be replaced by a 60/20/20 mix, adding a permanent gold allocation to guard against inflation, geopolitical stress, and rising fiscal deficits. In an environment defined by AI-driven spending, sticky inflation, and shifting global powers, hard assets are reclaiming their place as the ultimate store of value.