Why AI, Government Spending, and the S&P 500 Are Sending Warning Signals

Hi, this is Stefan Whitwell, and this is July's Chart of the Month.

The American workforce

I'm going to start you out with a quick look at the American workforce. The workforce is incredibly important. If people are out of work, it means the economy is in trouble. But even when times are good, things change, so it's good to have a sense of where our labor force is employed. So if you check this chart out, it describes different sectors in our labor force by the amount of labor, measured in dollars, dedicated to each area of the economy. I want you to notice two big takeaways, and you can find others by looking at it on your own time. First is that services account for a much greater portion of labor than goods. Services account for about nine and a half trillion dollars in the economy; goods, just under three trillion. So over three times bigger. By goods, I mean construction, manufacturing, mining, things like that. The other thing I want you to notice is what a significant portion of our labor force is dedicated to government jobs. The work that people do for the government is very important, and the role that our government plays is very important. But many people argue that it's gotten too big, and part of that argument is born out of these numbers. If you look at it, over two trillion dollars' worth of the labor economy goes to federal and state government workers every year. That is a huge, huge size of labor dedicated to just governance.

The rate of growth of earnings in the S&P 500

Okay, let's move to the next chart. This chart is a long-term look at the rate of growth of earnings in the S&P 500. So this is looking at the 500 largest market-cap companies in the US stock market, and it covers roughly from 1934 to, let's call it, 2025, so about 90 years. And as you can see, the average annual growth rate in earnings is about six and a half percent. So, not a very exciting chart. But what's important to notice here is that six and a half percent is the baseline for earnings growth. Some years more, some years less. But a lot of people, especially recently, have begun to grow big expectations about how much they should be making in the market. And how much you make in the market depends on how much prices go up, and the amount of prices go up is very directly related to how much earnings are going up, maybe not in the short run. In the short run, there's a lot of emotion and hype and meme stocks and all that kind of junk. But in the long run, the valuation of the market is very related to earnings growth. So remember that the baseline of everything, the whole point of owning a company, is what it makes for you. It's based on earnings. So if the stock market's overall earnings are growing by six and a half percent a year on average, then that's about what you should expect to get from the stock market over the long term. And I mentioned that because earlier this year Goldman Sachs came out with a report projecting that the next 10 years' annual rate of return in the stock market will be closer to three percent, not six and a half, not 10, 15, or 20. And a lot of people, when you ask them, "What are your expectations around what you should be making in the market?", they've kind of been spoiled by some of the good years we've had, and their expectations are probably too high. So the problem with that is that if your expectations are too high, you're going to start taking more and more risk to try to meet your expectations. So the purpose of this slide is: reset your expectations, understand what baseline is, so that you can be more conscious about the level of risk that you're taking and what is a reasonable amount of earnings growth or market appreciation that you might expect from the S&P 500 over a longer period of time.

The combined power of data centers

The last thing that I wanted to share with you, that I thought was really interesting, was a chart that shows the combined power of data centers. This is an estimate of the power usage of data centers by the year 2030, comparing that to electricity demand in major countries in 2023. That's measured in thousands of terawatt-hours, which doesn't really mean anything to me, I know it's a very, very big amount of electricity. But here's what's crazy. If you look at the amount of electricity demand of China versus the US, it certainly jumps out at me that China is over twice that of the US. It gives you a sense for just how big China is as an economy. The other thing that's really interesting about this is just noticing that the expected data center demand for electricity in 2030 is more than the amount of electricity demand in 2023 by any one of the following countries: Russia, Japan, Brazil, Korea, even Canada. So that gives you a sense of just how much electricity is being used, energy demand is going up as a result of AI and other emerging technologies. So I thought you'd enjoy these three charts. I hope you have a great rest of your July, and I'll see you back in August.