The U.S. economy continues to defy expectations of a slowdown, with second-quarter GDP tracking near 3%. That figure may yet be revised upward, since the most recent trade data showed exports outpacing imports — a favorable shift in the export-import differential that flatters the headline growth number. But the trade balance is a secondary story. The center of gravity for the economy, and especially for the second half of the year, remains the American consumer.
Two Faces of the Consumer
Consumer health right now wears two faces, one encouraging and one cautionary. On the positive side, the labor market has proven genuinely resilient. Over the past three months, the economy added close to 600,000 jobs while the unemployment rate held relatively steady. Crucially, this hiring strength has not been accompanied by a meaningful surge in wage pressure or wage inflation — a combination that is ultimately constructive for the broader inflation backdrop.
The flip side is that the consumer is increasingly under strain. Real wage growth has slipped into negative territory and, with new inflation data imminent, looks set to be negative for a second consecutive month. Even if this does not push the personal consumption component of GDP into outright contraction or turn it into a drag on second-half growth, it incrementally chips away at households' spending power. The more important point is what it reveals: a fragility, or at least a rising risk of fragility, around consumption that did not exist as visibly before. For now, that vulnerability is largely overshadowed by a still-healthy environment for business investment and capital spending — an environment driven, above all, by the boom in AI-related capital expenditure.
Reading the Labor Market Honestly
It is tempting to declare the labor market unambiguously strong, and a narrative has taken hold that hiring now decisively exceeds firing. But conviction should not rest on a single month or even a count of consecutive months; it should rest on the totality of the data. The headline nonfarm payrolls figure — the establishment survey statistic released each month — has indeed been strong, and that is the number underpinning the optimistic framing. Yet a broader look complicates the picture. The hiring rate drawn from job-openings data and the household survey both tell a softer story. Household employment has been notably weaker over the past year, opening a divergence between the establishment and household measures.
This divergence is not, on its own, an omen of recession. It simply signals that while the labor market has stabilized, it is neither reaccelerating fully nor entering a hiring boom. Reinforcing that read, small-business hiring intentions from the latest NFIB survey for May fell even further, reaching their lowest level since 2020.
Counterintuitively, this restrained environment may be exactly what the economy needs. A full-fledged hiring boom would tighten the labor market and risk generating fresh inflationary pressure — an undesirable outcome precisely when inflation already looks fairly broad-based. A stable-but-not-booming labor market is, in this context, a fine place to be.
The Semiconductor Surge
One striking data point captures the moment's dynamics: U.S. imports of semiconductors have surged to an almost speculative degree. Export growth from China running around 35% was heavily concentrated in chips. The figure says much about where global demand and the AI investment cycle are flowing, and it underscores how thoroughly semiconductors have come to dominate the economic narrative.
A Rotation Built on Fundamentals
Beneath the headline obsession with big technology and chips, a quieter and more interesting rotation has been unfolding. Small-cap value, as represented by the Russell 2000 value index, has been outperforming the Nasdaq. What makes this episode different from past head-fakes is its foundation.
The change can be traced back to the earnings season at the end of 2025, when the earnings profiles and forward earnings estimates for small caps began to turn higher. In prior years, every flicker of small-cap outperformance proved fleeting and not to be believed, precisely because it was not backed by fundamentals. This time there is genuine fundamental underpinning, and that is likely the key reason the outperformance has had more staying power as it moves down the capitalization spectrum.
There is a second way to frame it. Amid all the stress and volatility seen year-to-date, the natural instinct is to fixate on big tech and semiconductors as the top performers off the rebound from the spring low. But not all investors think only in terms of a single market bottom; the longer-term-minded ones — and ideally most investors fall into this camp — measure performance over the full year. Viewed that way, real pockets of outperformance emerge well outside the megacap leaders.
Beyond the Concentration Risk
This rotation matters because so much of the market's earnings growth, and therefore its concentration risk, has been bound up in a narrow set of names. The encouraging implication is that there is a viable trade outside of AI — or, just as plausibly, that many of these smaller companies are themselves adjacent ways to play the very same AI theme. Either way, breadth beneath the surface is a healthier condition than leadership confined to a handful of giants.
The overall picture, then, is one of an economy that is resilient but not invulnerable: a labor market that has stabilized without overheating, a consumer enjoying job security while quietly losing ground on real wages, an investment cycle powered by AI, and a market whose leadership may finally be broadening on the strength of genuine fundamentals rather than hope.