Not only does AI have a "closed loop," but the US stock market does too: companies lay off employees to boost stock prices, rising stock markets stimulate consumption, and strong consumption supports performance.
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It’s not just AI that has a “closed loop”—the US economy is also running within a non-typical “closed loop”: Companies boost stock prices through layoffs and cost-cutting, surging stock markets then stimulate consumption via the wealth effect, and strong consumption in turn supports corporate performance and economic resilience.
Macroeconomic blogger and economist David Woo describes this phenomenon as a Soros-style “reflexive” closed loop. According to previous reporting by Wallstreetcn, he warns that this loop—made up of corporate layoffs, rising stock prices, and consumption support—is fueling a bubble, and that if the AI-led stock market frenzy fades or consumer confidence collapses, its fragile balance could be shattered.
J.P. Morgan’s latest research on the 4th provides data backing for this phenomenon. Analysts Joseph Lupton and Maia G Crook indicate in their report that the current market is showing a “strange decoupling”—widespread deterioration in the labor market is happening simultaneously with robust growth in household wealth. This decoupling is seen across developed markets but is especially pronounced in the US.
J.P. Morgan believes that the “wealth effect” from rising stock prices is acting as a bridge to temporarily close the gap left by slowing growth in labor income. However, the analysts also stress that this asset-price-driven resilience in consumption will be hard to sustain over the long run. They warn that once the wealth effect fades, the stock market could swiftly shift from being the economy’s “buffer” to becoming an “amplifier” of downside pressure.
Rare Decoupling: Wealth Growth Offsets Wage Weakness
J.P. Morgan’s report details the significant gap between the weak labor market and the booming consumer market. Data shows that employment growth in developed markets has slowed significantly, with job growth in the G4 group (US, Eurozone, UK, Japan) nearing stagnation in Q3 2025, dropping to an annualized rate of 0.3%. At the same time, real labor income growth is also struggling.
However, the surge in household balance sheets is offsetting the weak labor income. The report points out that fueled by a booming stock market, household wealth in developed markets surged by more than 10% annualized over the last two quarters ending Q3 2025. The US stands out, with its households’ wealth annualized growth reaching 14.8% over the past two quarters.
J.P. Morgan’s analysis states that this “wealth effect” is the key driver of consumption. When household wealth increases, even if income doesn’t, households tend to spend more. The bank estimates that in the US, for every extra $1 increase in wealth, families tend to spend about 3.5 cents more. It’s this effect that bridges the current gap between weak labor income and strong consumer spending.
Consumption Engine Running Out of Fuel: Warnings in Saving and Sentiment
While the wealth effect is still temporarily supporting consumption, multiple indicators show that US consumers’ “fuel” is running dry. First, the saving rate has fallen to unsustainably low levels. J.P. Morgan’s chart shows that America’s personal savings rate has dropped about a percentage point since the first half of 2024 and is far below pre-pandemic levels. This means consumers are burning through savings to maintain spending—a pattern that cannot last.
Second, consumer confidence and expectations are signaling pessimism. According to a New York Fed survey, US households’ median expectation for future nominal income growth has dropped below 2.5%. University of Michigan survey results are even gloomier: as many as 68% of families surveyed believe next year’s income growth won’t keep up with inflation—the most pessimistic figure since 1975.
J.P. Morgan indicates that although consumer sentiment indicators have recently diverged from actual spending data, their persistent weakness cannot be ignored.
Fragile Balance: When Stocks Shift from Buffer to Amplifier
The logic now in play in US markets seems counterintuitive. David Woo believes that US stocks have formed a Soros-style “reflexive” closed loop—companies protect profits by laying off workers and thus push stock prices higher, rising stock prices then stimulate the wealthier class to spend and boost corporate earnings. This self-reinforcing loop is fueling a bubble, and once the AI bubble bursts or consumer confidence collapses, the US economy will fall into a severe recession.
J.P. Morgan expresses similar views, stating that current US economic resilience is heavily dependent on the stock market’s continued boom. In its outlook, J.P. Morgan adopts a cautious tone, saying “Given already high valuation metrics, it’s hard to see another year of prosperity for the stock market.” Future economic growth will have to rely more on a recovery in real income growth.
The bank’s baseline scenario is for a gradual recovery in the labor market, validating current consumption patterns. Yet the report concedes that risks of “persistent labor market weakness” are rising.
The key risk is that this virtuous cycle could reverse at any time. The analysts issue a direct warning:
“If companies start layoffs as the wealth effect subsides, the stock market could become an amplifier of downside pressure, just as it now serves as a buffer for upward pressure.”
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