Jobs, Leverage and the AI Financing Gap

The labour market went nowhere for three months. Leverage did the heavy lifting instead. That's the tension sitting underneath a week in which risk assets posted some of their most euphoric readings in years, on an economy that is not obviously earning it.

Jobs and the Fed

July payrolls fell by 23,000 against expectations for an 80,000 gain, with the prior two months revised down by a sizeable 103,000. Strip out healthcare and social assistance, and private payroll gains have averaged close to zero over the past three months. The unemployment rate still dropped to 4.1%, but only because 264,000 people left the workforce, not because more people found work.

So the goalposts have moved, and it's becoming difficult to know whether this poor data in payrolls is actually a reflection of a weak US economy or just the changing nature of the economy.

Market structure

Euphoria returned to risk assets, and so did the leverage that usually ends it. Bank of America's Bull & Bear indicator jumped to its highest level since 2021, on broadening equity gains and tighter credit spreads. US high yield bond funds took in $4bn in a single week, the most in two years, while a 3x leveraged semiconductor ETF pulled in $2bn in two days. Hedge fund prime broker balances and retail margin loans are both sitting close to record shares of US GDP.

AI capex

Bond markets are pricing AI risk that equity markets are still choosing to ignore. Alphabet sold another $25bn of bonds last week, taking 2026 issuance to $114bn, and had to offer a real premium to get its longest maturities away. SpaceX capex jumped 80% quarter on quarter to $18bn, comfortably outpacing revenue growth, and the stock fell despite beating on the top line. Microsoft disclosed for the first time that OpenAI generated $24bn of its revenue last year, a reminder of how concentrated the AI trade has become.

You've got a lot of credit risk being factored in here by bond markets. They are definitely not buying the AI boom the same way that equity investors are.

The takeaway for portfolios

None of these three threads are new stories on their own: a soft labour market, a leverage-fed rally, and a bond market wary of AI credit. Together, they explain why that week's gains were harder to trust than the index level suggested. We would rather own the mispricings this kind of divergence creates than chase the melt-up itself.