In today’s world, we are under a constant barrage of information and it can feel overwhelming. In 1986, if you added all the information blasted at the average person in a day it was the equivalent of 40 print newspapers. By 2007, that number had risen to the equivalent of 174 newspapers per day across all media types. I’d be scared to see what that number is today.
The point is though, the increased volume of information that is being blasted at us gives us the sensation that the world is speeding up. In reality, as we continue to consume more information through social media, this information is carefully curated by algorithms that collect our data from every click we make. Our data feed is then curated to our specific personality. It’s not that the phone is actually listening to you, it’s that the algorithm begins to know you so well it feels like it is. The algorithm wants you to take action, because action means more clicks and more engagement.
This means the platforms can charge higher dollars for advertisers.
Attention + Engagement = Profit
I mean, it’s pretty incredible the amount of tempting offers I receive for courses, products and tips to try to improve my golf swing. Spoiler – none of them has helped yet.
The reason you don’t pay a subscription fee to use FaceBook, Instagram, YouTube, SnapChat, TikTok or most other popular social media platforms is because you and your data are the product. There’s a reason Amazon sells Alexa for less than the cost to produce it.They are willing to lose money on the device and hardware to run the platforms, because the data is so valuable to them.
Even worse, a lot of information curated by the social media algorithms has a negative bias to it. Negativity by nature causes a stronger emotional response. In investing, this is the response to loss aversion, or the idea that we experience about twice as much pain from investment losses as gains. The social media platform has both a stronger incentive to show you negative information and their users in general have a stronger incentive to create negative content because this is favorable to the algorithms. It’s a feedback loop.
This is one reason why over the last few years I’ve tried to personally go back to reading paper books most days to start my morning. I also try to limit the scope of where I’m consuming my financial media to newsletters, podcasts and blogs from people I actually consider to be experts in the financial industry.
As financial planners, Brennan and I do a majority of continuing education and learning through the Kitces.com platform. Michael Kitces is the cofounder of XYPN, the platform we use to help support and run our business. He is consistently regarded across financial publications as the number one voice in the financial planning industry. He has developed a community of experts in numerous financial planning areas, taxes, investments, insurance etc., that consistently produce great content for his platform.
A lot of the time we spend outside of client meetings is spent continuing to learn and develop our knowledge in different planning topics, as we believe this is the number one way we can add value in the long term.
While we don’t want to take lightly the flood of headlines in the news recently that will potentially impact the economy, we believe it’s always best to pause and analyze before making any quick reactions.
Here’s what we’re seeing on the state of the economy – the positives, negatives and potential long term risks:
Positives: Longer Term Tailwinds Remain
1. Strong Corporate Earnings – Despite concerns about economic slowdown, corporate America continues to perform well. Many companies have successfully managed higher costs, maintained healthy profit margins, and adapted to shifting consumer demand. Earnings season has largely met or exceeded expectations, supporting stock valuations and investor sentiment. As we’ve pointed out before, many of the largest companies finance long term debt at extremely low rates, giving them additional flexibility as interest rates have risen. This is similar on a personal level, as individuals who have no mortgage or a low rate mortgage, have been better able to respond to inflation. US companies in general have a long-term track record of continuing to adapt to different economic and political environments.
2. Liquidity Remains High – There’s nearly $7 trillion sitting in money market funds, which represents a significant amount of dry powder (cash) that could be deployed into the market if conditions improve. This level of liquidity provides a cushion for financial markets and could fuel future investment, supporting asset prices. In a previous post we also pointed out that the number of publicly traded companies continues to shrink. This adds up to a lot of dollars being allocated to few public investment opportunities, which could continue to support higher US stock valuations over the long term.
3. Low Unemployment – The job market remains strong, with unemployment levels near historic lows. While some industries are experiencing layoffs, overall employment remains robust, supporting household incomes and consumer spending. A strong labor market is a crucial buffer against economic downturns.
4. AI and Capital Spending – News broke out of China at the end of January that the DeepSeek AI model had potentially been trained on only $6 million of spending. This sparked an immediate sell off in big technology companies tied to AI. Nvidia suffered a $600 billion loss in market cap in one day, the single biggest loss for a stock by dollar amount in history. However, as people rapidly digested the news, the initial knee jerk reaction died down. Many investment analysts who track the technology sector are actually predicting this will be a net positive in the long run by allowing companies to more efficiently unlock new applications for AI. In the short term, the question investors were asking is, “If a model could be trained that efficiently, for that cheaply, why would big technology companies need to continue investing billions of dollars in capital expenditures into AI?”
In the following week or two, several of the big technology companies announced their quarterly earnings and none of them immediately reduced their plans for capital spending based on the DeepSeek news. On Nvidia’s earnings call yesterday, CEO Jensen Huang, said he believes next-gen models like DeepSeek will need 100 times more computing power.
5. Home Equity – Although higher mortgage rates have hurt the number of home sales, prices remain high due to limited supply of inventory. Those who own homes, are collectively sitting on over $17 trillion of untapped home equity. This could be another potential tailwind for consumer spending, if consumers decided to start tapping into home equity to keep up higher prices. There are already some signs this is happening.
Negatives: Some Signs of Strain Emerging
1. Layoffs on the Rise – While unemployment remains low, layoffs in certain sectors have picked up. This could be an early indicator of economic slowing, as companies look to cut costs in response to weakening demand or margin pressures.
2. Government Dysfunction – Political turmoil in Washington is adding uncertainty to financial markets. Whether it’s policy gridlock, debt ceiling debates, or regulatory uncertainty, government chaos often leads to volatility and complicates business decision-making.
3. Weaker Consumer Sentiment – Some recent economic data suggests that consumer confidence is starting to wane, which could translate into lower discretionary spending. With inflation still elevated, consumers are becoming more cautious, potentially leading to slower economic growth.
4. Housing Market Stuck in Limbo – Higher interest rates and prices continue to weigh on the overall housing market, keeping affordability low and limiting transactions. Many homeowners are reluctant to sell due to the low mortgage rates they secured in prior years, further constraining supply and keeping housing activity subdued.
5. Tariff Risk and Inflation – If proposed tariffs are implemented, they could add to inflationary pressures at a time when the economy is still dealing with higher prices. Tariffs generally lead to higher costs for businesses and consumers, potentially prolonging the battle against inflation and forcing the Federal Reserve to keep rates elevated for longer.
6. Concentration risk – The sell off in many technology stocks from the DeepSeek news did highlight an important point. The size of the Magnificent 7 (all large technology stocks) is adding concentration risk to the S&P 500 index. The concentration of these companies within the index has continued to grow over time, making a strategy embraced by some investors of just owning the S&P 500 more risky. Even though the S&P 500 has enjoyed a strong run of outperformance over the last 10-15 years, there have been other points in history where other asset classes like value stocks, small cap stocks, international stocks or real estate have all outperformed for stretches of time. Because of the growing concentration risk in the S&P 500, and the historical benefits of diversification, we continue to believe owning a diversified portfolio of different asset classes is the best way to reduce concentration risk and maximize long term investment success. We look at investment success as helping you achieve the returns necessary in the long term to reach the goals set out in your financial plan, not attempting to outperform a benchmark over a short term period.
The Longer Term Risk: The Continuously Growing Elephant in the Room
While short-term economic conditions matter, I believe the biggest long-term threat to the U.S. economy is the growing national debt, now at $36 trillion. If left unchecked, the cost of servicing this debt will start cutting into GDP growth, as a greater share of government spending will have to be directed toward interest payments rather than productive investments in infrastructure, education, and innovation.
At some point, policymakers will need to address this challenge through some combination of spending cuts, tax increases, or structural reforms. The longer action is delayed, the more difficult the solution becomes. We’ve seen US credit rating downgraded in the past without a substantial impact, but if confidence in the U.S. government’s ability to manage its debt erodes further, we could see a spike in borrowing costs and increased market volatility. However, it’s hard to put a timeline on when this could have an impact. It could be 1, 5 years, 50 years, or never if the right changes are made. There are people who decided not to invest at all the last 15 years since the financial crisis because of the ballooning deficit, and all that has happened is their cash has been decimated by inflation.
Nobody wants a wishy washy answer though. At the current pace the debt is increasing, the Congressional Budget Office projects interest payments would become the largest federal budget line item sometime in the 2040s. This is my best guess right now on when this would really begin to crowd out spending on other items, significantly impacting the economy. It’s worth pointing out though, that the CBO projected interest payments wouldn’t exceed defense spending until 2028 and this ended up happening in 2024. The timeline on this could accelerate if rates continue to stay higher for longer.
Personally, I believe the only way we make progress here is by educating people that the longer term risks of not tackling the debt outweigh the unpopular changes that would need to be made in the short term to curb spending and raise revenue to actually make progress. This is hard because human psychology has a natural tendency to prioritize short term threats and rewards over long term progress. Delayed gratification is not popular, even though there is research that shows it is what actually makes us more happy in the long run.
Final Thoughts
Despite some emerging challenges, the economy remains resilient for now, supported by strong earnings, ample liquidity, and a healthy labor market. However, signs of consumer weakness, a sluggish housing market, and growing policy uncertainty warrant caution. Long-term, addressing the national debt will be critical to sustaining economic growth and market stability. Conversely, I believe advances in AI and technology will continue to add to productivity, even if we experience a slower growth environment. Profits can improve for businesses through margin expansion from productivity even if overall sales growth is slower. In the short term, we’re not planning to make any large adjustments given the current market environment, but we’re constantly monitoring how economic data and current events unfold.
