Capital Is Feasting On Labor
Commentary Highlights:
Geopolitical Purgatory & Energy Shift: The Iran conflict and indefinite closure of the Strait of Hormuz have kept oil near $100/bbl, a situation that has exposed global energy vulnerabilities while simultaneously accelerating a long-term shift toward domestic resource strength and renewable energy adaptation.
Rally Continues With Narrow Participation: Major indices reached record highs last week despite exceptionally thin breadth, as semiconductors and the broader technology sector drive two-thirds of market gains while elevated interest rates continue to pressure the bond and housing sectors.
The Capital-Labor Divorce: The U.S. economy has reached a historic extreme with corporate profits capturing a record 14% of GDI while the labor share has dropped to its lowest level since 1947—a 2-standard-deviation imbalance driven by AI's role as a purely capital-augmenting technology.
Full Commentary:
It was an uneventful weekend on the news front, with no progress made (or lost) on the Iran conflict, and President Trump rejected Iran’s response to his one-page memorandum as unworkable. As it stands, both sides believe they have a strong hand to play, with the implication being that the Strait of Hormuz will remain shuttered indefinitely, thereby holding the global economy in a state of purgatory. As a result, oil prices continue to hover around the $100/bbl level, not an onerous level for sure, but high enough to act as a pinch on consumers' pocketbooks.
What is truly remarkable about the action in the markets is how suddenly investors have become so unconcerned about the renewal of these tit-for-tat attacks between the IRGC and the U.S. The conflict shows no signs of ending, but let’s face facts: President Trump's reluctance to restart major military operations has likely encouraged the Iranians to hold out for better terms. I’m not saying President Trump should ‘bomb them into oblivion’ or pull up stakes and move on – those tactical and strategic calls are above my pay grade. What is increasingly obvious is that the situation at hand is highly complex to unwind, irrespective of how or why we (the U.S.) got into this predicament. And then we have on our hands the story broken by the Washington Post of a CIA assessment which has found that Iran’s pain point from the U.S. blockade of Iranian ports is still four months away – if true, investors need to consider what implications this could have on markets and the economy.
I found the following X post from Chief Market Strategist of Wellington-Altus, James Thorne, to be thought-provoking (not consistent with what you see from the major news outlets), and one I tend to find myself in more agreement with than disagreement:
My interest in sharing this post is less about Trump and more about U.S. strength. Yes, I think a necessary and thoughtful debate can be had about U.S. strength deteriorating in the years and decades ahead, but as of now, that’s not the case. I also think one could conclude that Iran is projecting more strength than most assumed going into this. But the biggest difference, as is clearly pointed out in the above post, is that Iran used its most powerful deterrent (outside of nuclear weapon capabilities) in closing the Strait of Hormuz, and this is a big long-term loss for them. Why? Because you can only play this card once. Moving forward, the world will adapt and work to eliminate the leverage this chokepoint has over supply chain vulnerabilities/dependencies. The weekend edition of the New York Times ran with the following story: How Energy Prices Are Driving Demand for Solar Panels and Heat Pumps which detailed how the world is adapting in real-time: surging demand for electric vehicles, heat pumps, and solar panels – a trend that is very likely to continue (along with government-led financial incentives).
As for markets, they’re clearly focused on other things beyond the conflict in the Gulf. Last week the Nasdaq climbed +4.5% to a fresh high, notching its best six-week performance since 2009. An exchange-traded fund that tracks the Magnificent Seven Tech stocks (MAGS) closed at a new high, its first since October. As for the S&P 500, it notched its 15th record close of the year after rising by +0.8% Friday. It gained +2.3% for the week (6th straight week of gains) with the benchmark index now up +8% in 2026.
The breadth behind the rally in stocks hasn’t been as broad as you’d like to see, with almost half of the run-up in the S&P 500 coming from the semiconductor space. The appreciation in this space has been breathtaking, where the group now accounts for a record-high 18% of the S&P 500 – by way of comparison, that share was 8% at the 2000 Tech bubble peak, 4% in October 2022, and 11% a year ago. The entire technology sector (semiconductors is a sub-sector within Tech) has accounted for two-thirds of the equity market rally. Another data point illustrating the lack of breadth is that Tech and Communication Services are the only two sectors to have made new all-time highs. Not to mention that, from the late March lows, the equal-weighted version of the S&P 500 benchmark, which effectively turns down the volume on those giant stocks, is up half as much.
However, anyone harping on this point is missing the forest for the trees. Market concentration and Tech leadership have been a figment of the U.S. stock market for going on a decade now. This is less of a shock to those who have taken the time and done the work to understand why and how we are where we are (passive flows, profit margins, regulatory capture, earnings). So, rather than fight it or fear it, I’ve learned to accept it and understand how to incorporate it into our strategy and investment process. That said, this rally is getting a bit extended, with sentiment and positioning catching up to the rally in price. The latest NAAIM Exposure Index reading is back up to 96.67, just shy of its high over the last twelve months and up considerably from the 60.24 it got down to in mid-March.
Beyond the stock market, we have the bond market continuing to come under pressure from sticky inflation, elevated oil prices, and a less accommodative monetary policy, even with the new Fed Chair, Kevin Warsh, expected to be confirmed at the end of the week. As the Fed continues to sound hawkish, the interest rate that really matters for borrowers is the yield on the 10-year T-note, not the Fed funds rate. The recent selloff in the bond market has pushed the 10-year yield above 4.40%, sending mortgage rates up again and dealing a blow to this year’s spring home-buying season. After a brief dip in the 30-year fixed mortgage rate in February, daily trackers now show the average rate climbing above 6.5%. The lack of any interest rate relief is making it difficult for buyers who have been sidelined by high prices to get into the housing market. So much for the housing boom the consensus was crowing about coming into the year with the price of the homebuilder sector, down 26% from its nearby highs, telling you all you need to know.
Moving on to the economy, I want to elaborate on an imbalance that continues to metastasize in the division of labor's share and capital's share of economic profits. The implications of this disconnect are both profound and unprecedented. We’ve all heard the phrase, ‘the stock market is not the economy, and vice versa’. This is true, but we are at a historic extreme. Let me explain. As of the most recent Q1 2026 estimates, U.S. Corporate Profits After-tax reached an annualized rate of approximately $3.79 trillion. Relative to Gross Domestic Income (GDI) which is currently tracking at roughly $27.1 trillion, corporate profits as a share of GDI are at an all-time high of 14%, compared to an average of 10.4% from 1950 – 2020.
So, what is happening here is a huge and secular shift in the relative income shares in the economy away from labor and towards capital. The profits share of GDI has never been as high as it is today, and that ratio is 40% higher than the long-run norm. Not once in the past seventy years has the level of personal income relative to corporate profits been as low as is the case currently. In the first quarter of 2026, the Labor Share of GDI dropped to 54.1%, which the BLS has confirmed is the lowest recorded value since the series began in 1947. In the 1960s, for every $1 in corporate profit, there was approximately $12 in personal income. Today, that ratio has plummeted to roughly $6.30. These are extremes, as both of these ratios are near 2 standard-deviation events.
The two charts below from Rosenberg Research explain how Wall Street and Main Street have become divorced. Investors are rightfully paying up for that first chart, which has moved in a parabolic fashion these past few years, but unfortunately, it’s coming at the expense of the average worker. The only question is this… sustainability, and what it means for social stability and the always tenuous relationship between democracy and capitalism. We are effectively running a 'capitalist-only' economy on a 'democratic' operating system. While Wall Street celebrates this parabolic move, we must recognize that this 14% is a derivative of the other 86%. That 86%—the wages, salaries, and personal incomes of the American workforce – is the foundational engine of consumption. When the ratio between these two reaches a 70-year low, we aren't just looking at a successful market; we are looking at an asymmetric extraction that historically precedes a structural reset.
I happen to be a capitalist, but I must admit that this makes me uncomfortable. The primary catalyst for this current imbalance is the unprecedented concentration of AI CAPEX by those companies at the upper echelon of the corporate hierarchy. We are witnessing a K-shaped investment cycle where a handful of Hyperscalers are spending hundreds of billions to build a ‘Digital Moat,’ and while the rest of the business world benefits in the near-term from an investment boom that trickles into their industries, over the long-term they will likely struggle with stagnant growth.
AI is unique in economic history because it is a purely capital-augmenting technology. Unlike the industrial revolutions of the past, which required massive labor forces to operate new machinery, AI seeks to optimize the 14% (profits) by fundamentally reducing the need for the 86% (labor). This explains the parabolic profit margins we see today: companies are increasing their operating leverage by replacing human payroll with silicon processing power. If the 86% share of the economy continues to shrink relative to the 14% share, we face a ‘Consumption Ceiling.’ Labor is not just a cost to be minimized; it is the source of the demand that justifies corporate existence.
The current divorce between Wall Street and Main Street is not just an economic curiosity; it is a social stability risk. When personal income relative to corporate profits is at its lowest level in seven decades, the patience and understanding of the average citizen begins to diverge from the success of the stock market. This tension is the breeding ground for populism and a direct threat to the symbiotic relationship between a free-market economy and a stable democracy.
If these trends continue to persist on their current trajectories (labor share down and capital share up), the latter will eventually have nothing left to capitalize. Capitalism is the greatest engine for human progress ever devised, but an engine that consumes its own fuel source is destined to stall.
Enough on that, let’s end with a couple ideas we’re digging into that look like interesting setups to us. First is Chinese Tech companies, with HSTECH moving up into its massive negative trend line after putting in a series of higher lows over recent weeks. At the same time, the 21-day moving average has crossed above the 50-day for the first time in months. In addition to the technical picture becoming more constructive, the fundamental story is boosted by revenue and net profit growth set to accelerate robustly over the next several quarters.
The Kraneshares CSI China Internet ETF (KWEB) or Invesco China Technology (CQQQ) are some of the cleanest ways to play a potential China tech catch-up trade. A large double bottom could now be taking shape, where a decisive break above the negative trend line could flip this from trapped price action into a squeeze higher.
Another area is the Healthcare sector, which seems to have been abandoned by investors. Healthcare now represents 8.2% of the S&P 500 vs. Info Tech at 37% – multidecade extremes for both. With an aging global population, breakthroughs in medical science enabled by AI, and the potential for huge efficiency gains, this is an area worth kicking the tires on for some mean reversion.
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