AI is an extremely disruptive technology. It has already turned on its masters: The software stocks have been pounded by fears that AI will make coders redundant (chart). Now it is turning on the financial industry.
The most direct hit today comes from news that Altruist, a wealth management startup, has launched new AI-enabled tax planning features. This has sparked a "sell first, ask questions later" reaction among investors who fear that legacy firms will struggle to compete with AI-automated services. Charles Schwab, LPL Financials, and Morgan Stanley got clipped. Nevertheless, we are sticking with our overweight recommendation for Financials, especially the money-center banks, regional banks, and investment banks. We also think that the selloff in software stocks is overdone.
In economic news yesterday, January's ADP private payroll employment rose just 22,000. Today, December's retail sales growth was reported at 0.0% m/m, with the control group down 0.1% (chart). As a result, real GDP growth for Q4-2025 was revised down from 4.2% to 3.7%, led by a drop in real consumer spending from 3.1% to 2.4%, according to the Atlanta Fed's GDPNow.
As we've occasionally said in the past: Any data that doesn't support our forecast is either bad data or it will be revised to show we were right after all! Consider the following:
(1) Retail sales. The Redbook Retail Sales Index has been rising around 6.0% y/y since late 2023 (chart). It certainly doesn't confirm the weak December reading of 2.1% y/y for retail sales excluding food services.
On a not seasonally adjusted basis, retail sales excluding food services rose 3.8% y/y to a record high in December (chart). December is a tough month to seasonally adjust because of the holiday shopping season.
(2) ADP private payrolls. January's ADP report reflects a scheduled annual revision of the data series, which has been reweighted to match the Quarterly Census of Employment and Wages (QCEW) benchmark data through March 2025. As a result, it has been revised down by 2.3 million workers (chart)! Tomorrow's official employment report from the Bureau of Labor Statistics (BLS) will likely also show a significant downward revision.
The revised ADP data show monthly changes that bear almost no relationship to the preliminary data (chart). In other words, the preliminary data are basically useless!
(3) Delinquencies. We don't have any issues with the delinquency data collected by the Federal Reserve Bank of New York (chart). The Q4-2025 survey shows that delinquencies of 90+ days for credit cards, student loans, and auto loans are rising. Leading the way higher have been rising delinquencies among young adult borrowers.
(4) Other labor market indicators. January's NFIB survey of small business owners showed that job openings remain in a downtrend but are still above the average reading since the mid-1980s (chart). Hiring intentions also remain above their average over that period. We think the labor market is in better shape than the unreliable ADP and BLS reports suggest.
Today's Employment Cost Index in private industry for Q4-2025 shows that inflationary pressures in the labor market are moderating (chart). The ECI inflation rate on a y/y basis is rising just a bit faster than is the CPI.
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