The economic system has two engines: AI and the wealthy

Sometimes a Fed official drops a line so good that you have to take a moment to appreciate it. Here is Richmond Fed President Thomas Barkin:

The economy has two engines: AI and the rich

That’s the kind of clarity and succinctness that really pulls it all together.

It speaks to the two investment themes that have been working as well. Everything AI-related has been in a boom since OpenAI released ChatGPT 3 to the world. The rich have been doing well for awhile but last year’s Big Beautiful Bill from Trump further cut taxes and that’s been compounded by huge equity gains that have further driven spending.

Delta Airlines further underscored that this week.

“We are looking at our seat growth in the coming year. … Effectively,
none of our growth in seats will be in the main cabin; virtually all
will be in the premium sector,” Delta CEO Ed Bastian told reporters after this week’s earnings release. The company is now making more money in premium than economy as main cabin revenue fell last year by 7% while it expanded by 9% in premium.

In the middle, customers are getting squeezed. Target was a market darling for years as it built up a fanbase of middle class consumers who wanted an upgraded experience from Walmart and dollar stores. But in the post-pandemic period, it’s been a disasterous stock to own as families are forced to trade back down.

Obviously part of that is company execution but the same theme has undermined Starbucks, which saw its $7 lattes go from ‘affordable luxury’ to any easy way for stretched consumers to save.

I think this investment theme isn’t going to go away, so continue to look to AI trade to start. There are signs it’s filtering down to companies that use AI from just the ones that make them. Financials have a huge opportunity to cut costs and improve lending with data and the market is beginning to reflect that while also staying somewhat cautious about the potential for job losses from AI (and loan losses).

There are other areas as well that will continue to benefit from these themes but the real question is whether it will continue. How long it can continue. And whether it will broaden out.