The U.S. economy showed positive signs as second-quarter growth was revised upwards to 3.8% annualised. This positive trajectory seems to have continued into the third quarter, with consumer spending on track for a 2.8% annualised growth rate.

Artificial Intelligence Investment Boom

Questions arise about the economy’s ongoing strength despite weaknesses in employment and consumer confidence. One factor explored is the boom in artificial intelligence investment and spending, particularly in construction spending on data centres, software, computers, peripherals, and research and development.

These sectors, directly tied to AI, have grown relative to the overall economy and contributed 15.7% to economic expansion while only making up 6.1% of GDP. The numbers represent their direct impact, ignoring indirect effects like increased consumption due to rising company shares linked to AI.

The concentration of AI-related growth in a few large companies helps to explain the disparity between overall economic strength and weak business confidence indices. Non-AI sector struggles are overshadowed by developments in AI-exposed sectors.

The strong headline growth figures, with the second quarter of 2025 revised up to 3.8%, are creating a confusing picture when contrasted with weaker employment data. This suggests our trading strategies should focus on the clear split between the booming artificial intelligence sector and the rest of the economy. The Atlanta Fed’s GDPNow model is currently tracking third-quarter growth at an even stronger 4.1%, reinforcing this divergence.

Investment Strategies and Market Volatility

We should consider overweighting exposure to the specific technology sectors driving this expansion, as they contribute 15.7% of economic growth while only being 6.1% of GDP. Using call options on semiconductor and cloud infrastructure ETFs could allow us to capture further upside from this concentrated momentum. Year-to-date performance in 2025 already shows this split, with AI-focused tech funds up over 40% while broader small-cap indices are flat.

At the same time, this boom is masking weakness elsewhere, which is why business confidence remains subdued outside of big tech. This presents an opportunity for relative value trades or outright hedges. We could look at buying put options on consumer discretionary or regional banking ETFs, which are more sensitive to the sluggishness seen in recent employment reports, like the disappointing 95,000 jobs added last month.

The resilient GDP numbers will likely force the Federal Reserve to maintain its restrictive stance for longer, delaying any potential rate cuts into 2026. This means interest rate derivative trades that bet on rates staying high, such as selling Eurodollar futures or paying fixed on swaps, remain viable. We recall the Fed’s statement last month where they held rates steady but stressed a data-dependent approach, giving them cover to stay hawkish.

This type of narrow, tech-led growth is something we have seen before, especially in the late 1990s before the dot-com bubble burst. The growing disconnect between strong GDP and weakening underlying indicators could lead to a spike in market volatility. Therefore, holding VIX call options or other long-volatility positions could be a prudent hedge against a sudden correction if the market begins to focus on the weakness in non-AI sectors.

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