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Welcome back to the Rundown for another weekend deep dive. Today we are taking a look at the emergence of a K shaped economy thanks to AI. On one side you have companies with direct exposure to AI that are thriving. I'm talking about the hyperscalers, the GPU dealers, the companies building and powering these data centers. But the other side isn't doing so well. Young workers and white collar jobs are being threatened and that's impacting restaurants, retailers and more. So in today's episode, we're taking a closer look at the winners and losers of the K shaped economy and try to figure out if this is a phase or a permanent reality of the AI economy moving forward. We got a great show for you today. Let's dive in. All right, let's kick this off with the top arm of the K curve, the winners of this current economy, and no surprise here, it's dominated by big tech companies that are pushing the AI revolution. And even within this group, it can be divided up into two sides. You have the spenders and and you have the sellers. Let's start with the spenders first. These are the hyperscalers, the big tech giants that have cloud businesses. And they've committed to spend hundreds of billions of dollars to build out AI infrastructure in hopes that all this investment will lead to more revenues in the future. We got an earnings report from all the major players this week and all of them posted strong growth in their business and no signs of slowing down. On AI spent. Google crossed $100 billion in quarterly sales for the first time ever, driven by a 35% growth in their cloud division, which saw a big boost thanks to their cloud customers using their AI tools. Google also announced that they were raising their capex spending to $92 billion this year. Then you had Amazon. They also posted strong numbers. With AWS seeing its largest growth in three years, again thanks to AI demand. Amazon also expects to spend $125 billion in AI CapEx this year to build more AI data centers to to fill the AI demand. And then there's Microsoft. Their Azure cloud business grew 40%, the fastest out of all of them. And they plan to spend around $80 billion in fiscal 2025. We also heard from Meta and they committed to spend over $70 billion on AI capex. The thing is, these big tech companies can afford to spend all this money on AI because they have very profitable existing businesses. In fact, profit margins for Max7 companies, which includes Apple, Microsoft, Amazon, Meta, Nvidia, Google and Tesla, those margins continue to expand while margins for the rest of the S&P 493 as a whole are declining. So, I mean, that makes it nearly impossible for other companies to compete with these big tech giants and invest the amount of money needed to be competitive in AI. Collectively, big tech is spending 60% of their operating cash flow to build this AI infrastructure. So that means that these big tech giants will end up capturing all the upside from AI if the demand for AI ends up materializing. Now, I should mention OpenAI here. They've been one of the few winners outside of the hyperscalers. I mean, they pretty much kicked off the AI hype cycle with the launch of ChatGPT back in 2022. Today, ChatGPT has over 800 million weekly active users, which is crazy. Now, OpenAI's business is still relatively small compared to the big tech giants. They're only projected to do around $13 billion a year in revenue, but they expect to hit $100 billion in revenue by 2028. And just like the hyperscalers that I talked about, OpenAI is planning to spend hundreds, actually over a trillion dollars, on AI infrastructure to meet the AI demand. Now look, as of right now, investors have been okay with all this AI capex spending. OpenAI is still a private company, but they were Last valued at $500 billion, and they plan to IPO at over a trillion dollar valuation within the next couple of years. But we'll have to see how long investors are okay with all this AI CapEx spending, especially if this spending doesn't result in meaningful returns soon. I think companies like Google, Microsoft and Amazon are probably okay because they have cloud businesses and they're seeing more growth in their cloud business because of AI. But a company like Meta saw their stock suffer its worst day in three years this past week, not because they missed earnings, but because they said they were going to spend even more money on AI. As of right now, Meta hasn't shown a meaningful return on all this AI spending. I mean, they don't have a cloud business like the others. So I think investors might be starting to get a little bit nervous that all this AI spending might not lead to anything now. And that brings me to the biggest winner of the AI economy. The sellers. Now, all the money that these hyperscalers are spending to build AI infrastructure is going to companies making the chips and providing the power to run the data centers. At the very top sits Nvidia, which just hit a $5 trillion market cap this week. They are the undisputed backbone of the AI economy. They make the best AI chips, they have the CUDA software layer on top, which has essentially become their moat. But beyond Nvidia, there are other winners too. AMD's chips have become the second option to Nvidia, with AMD forecasting $4 billion in AI chip sales this year alone, with more to come in the near future. There's also tsmc, which is the only company that can manufacture these high end AI chips for Nvidia and amd. There's asml, which makes the super specialized and complex lithography equipment needed to manufacture the chips. And then you have companies like Micron, which makes these special memory chips which are needed for AI. And then there's the power companies that provide the insane amount of power needed to actually run these AI data centers. All these companies and industries that I just mentioned have seen their stock price skyrocket over the last few years thanks to AI. So if you're an investor or an employee of one of these companies, you've likely been a winner in the K shaped AI economy that we live in today. In fact, according to JP Morgan, AI related stocks have accounted for 75% of S&P 500 returns and 80% of earnings growth since Chat GPT launched back in November of 2022. And I think it's that stat right there that is a perfect example of of how the AI economy has resulted in a handful of winners and a ton of losers. Now let's take a look at the lower arm of the K economy. This is the side of the economy that is falling behind and I think we need to start with the labor market. There are real fears that AI is going to take everyone's job in the near future. In fact, I think some people think that it's already happening, especially for young people. The early data around it is pretty concerning. Entry level hiring in tech is down 25% year over year and over 50% lower than 2019. According to Signal Fire. Wage growth has flattened for young workers. It's the worst since the early 2000 and tens. And the unemployment rate for people under the age of 25 has climbed to 10%, which is more than double the national average. There was a viral chart making the rounds online this week showing that The S&P 500 has gone up more than 70% since Chat GPT launched back in November of 2022. But at the same time, job openings are down more than 30%. And then to add to the doom and gloom, there are weekly headlines of companies laying off thousands of workers. UPS, the delivery company said they've cut 48,000 workers so far in the name of cost savings and automation. Amazon announced that they've cut 14,000 corporate employees, with more cuts expected soon. Microsoft has laid off 15,000 workers. I mean, there is real fear right now this might just be the start of AI taking over people's jobs and leading to mass layoffs. But I do want to caution that headlines might not be as bad as they sound, at least according to Harvard economist Jason Furman, who served as the chair of the Council of Economic Advisors under President Obama. I actually got a chance to talk to Jason Furman for this weekend's interview episode, which drops tomorrow. But I want to give you guys a sneak peek of what he had to say in response to Amazon's job cut this week.
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I would just caution people, there were all these layoff stories. I can't remember when, maybe it was a year and a half ago, didn't show up in the aggregate job data just because Amazon has a flashy headline. There's a lot, a lot of other parts of the economy that are not Amazon. And if anything, the surprising thing in the US labor market right now is how few layoffs there are, not how many.
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So yeah, the decision by Amazon sounds alarming on the surface, but at least for now, Jason thinks that it shouldn't be a cause for panic. The overall labor market isn't collapsing, at least not yet. The BLS reported that unemployment is at 4.3% as of August, and the Chicago Fed now forecasts unemployment to be around 4.35% for October. But it's hard not to feel a little bit anxious though, especially with all these studies coming out about AI. According to the World Economic Forum, they expect roughly 60% of jobs in advanced economies will be affected by AI and about 39% of current worker skills will be outdated by 2030. That's in five years. Then there was a Goldman Sachs report that estimated that AI could impact up to 300 million full time jobs globally. So when you see reports like that along with layoffs, and it's hard not to feel a bit pessimistic. In fact, there are even more numbers pointing to consumers being nervous about the economy and cutting back on spending. This growing divide between the winners and the rest of the economy isn't just an abstract labor market problem. It's actually showing up in earnings reports of other companies. We are currently living in a K shaped consumer economy where wealthier Americans who have benefited from a rising stock market and rising home value are spending more money than Ever before. In fact, the top 10% of earners in the US account for nearly half of all consumer spending now, which is an all time high number. But if you look at lower and middle income consumers, they are getting hit hard by rising costs and they're starting to pull back spending. In fact, companies are talking about this in their earnings reports. For example, Coca Cola. In their earnings report, the CEO said that growth for the company is being fueled by the pricier higher income products like Topo Chico and FairLife protein. Shakespeare, McDonald's CEO called a two tier economy saying that traffic from the lower income consumers is down double digits because people are either skipping meals or just eating at home. And then you have Chipotle. They reported disappointed earnings recently and they blamed it on the economy, specifically from lower spending from lower to middle income consumers. It also probably doesn't help that Chipotle has been raising prices over the last few years and making their portions smaller. At some point consumers are going to push back. But beyond just food and drinks, this story is playing out across multiple industries. If you look at the auto industry, that market is being driven by wealthier households buying bigger and more expensive cars, while auto loan defaults for people with low credit scores is climbing. When you look at the airline industry, Delta Airlines literally said that revenues from their premium and high cost seats is expected to surpass the entire coach cabin by next year. And then when you look at hotels, Hilton said their luxury brands are performing except exceedingly well while revenues from their affordable brands like the Hampton Inn is dropping. So this is happening across the entire economy. The top 10% of earners are spending like crazy while everyone else is pulling back. So the question is whether this is a short term thing or is this what an AI powered economy will look like going forward. Will the AI companies and their investors be the only ones that get rich while the rest of us get left behind being replaced by robots? So what's my take here? Well, longtime listeners know that I tend to take an optimistic approach when it comes to most things, including AI. My hope is that with time I will create new kinds of jobs that we can't even imagine right now, just like the Internet did. In fact, I'm a perfect example of that because a podcast didn't exist 20 years ago. I probably would still be an engineer today if not for the Internet. So I'm hoping the same thing happens with AI, that we have even more jobs and even more economic opportunity than we have today. It doesn't seem like that right now the transition periods are always pretty scary with some early winners and losers, but with time, I'm hoping the gap between the top and bottom K start closing. Well. All right guys, that's it for today's weekend Deep Dive. If you enjoyed today's episode and have like five extra seconds, consider giving us a five star rating on Apple, Spotify, YouTube, wherever you listen to your podcasts. And if you're listening on Spotify or YouTube, let me know in the comments what you thought about today's episode episode and what you think about the K shaped economy. And if you think that conditions will get better or worse over time. Also, let me know what topics you want us to cover in future Deep Dive episodes. Thank you guys so much for listening, watching and commenting. Shout out to Mike and Connor for all the work behind the scenes and we'll see you guys back here tomorrow for the interview.