Five for Friday

AI, Productivity, Sector Winners, Tariff Legality, and Lehman Brothers

1. AI

While this week saw plenty of headlines—tariff legality, job revisions, inflation data—the biggest story was Oracle. The software company’s shares rallied more than 35% on Wednesday after reporting a huge surge in order backlogs for cloud infrastructure, driven almost entirely by AI demand. Stocks of that size (Oracle is one of the world’s 15 biggest firms) essentially never see moves like that. My takeaway is that even with the massive hype around AI, both the magnitude of investment and the profit-generation of the companies involved are still regularly surprising to the upside. Entering the Q2 reporting season, Magnificent 7 companies were expected to see earnings growth of 14%; they instead reported growth of 27%! Those results are in spite of the information sector actually shedding jobs over the last year, resulting in expanding profit margins and strong cash flow growth that can be plowed right back into the business. This virtuous cycle will end one day, but the results we saw this summer make it hard to imagine that the end is near.  

2. Productivity

Of course, the vast promise of AI is not that it will enrich the owners of Big Tech stocks, but that it will enable a more productive economy across the board—allowing workers to do more with less, automating away low value-add tasks, and growing profit for companies without hiking their expenses. It’s still early days, but there are optimistic signs. Labor productivity data (worker output per hour) for the second quarter was revised higher last week to one of the best non-recession levels in 20 years. This is promising because even as AI is being adopted at a faster rate than the personal computer or internet were, most workers do not yet regularly use the new technology. As Strategas Chief Economist Don Rissmiller recently noted, this is also the best likely route for solving America’s national debt issue.  

3. Breadth

Despite the focus on the Big Tech stocks driving AI proliferation, this bull market has been very broad. For instance, over the two years ending Aug. 2025, the two best-performing sectors (on an equally weighted basis) were actually Financials and Utilities. The relative strength of Utilities despite the expected headwinds (being a high dividend sector in a high interest-rate world and being a “defensive” sector in a bull market) is particularly interesting. In many ways, the performance speaks to the insatiable power needs of data centers and artificial intelligence, and to the role of classic utilities in fueling them. This is a trend showing no sign of letting up.  

4. Tariffs

The Supreme Court agreed to review President Trump’s tariffs levied via the International Emergency Economic Powers Act, and will hear arguments in early November. This process is sure to be noisy and highly watched, and there may well be important takeaways from the decision. But, as our partners at Strategas recently noted, the administration has other ways to reimplement any tariffs ruled illegal (e.g., section 232 – see pg. 3) and will pursue those paths if the Supreme Court rules against its use of emergency powers. We could be in for a stretch of loud deliberation and politicking, only for the effective tariff rate to end up in much the same spot it is today. Allocate your attention accordingly.  

5. On this day

17 years ago (also a Friday), senior representatives of major financial institutions met at the Federal Reserve Bank of New York to discuss rapidly devolving market conditions and bailout options for Lehman Brothers. Though a private rescue deal looked likely at times over that weekend, on Monday Sept. 15, 2008, Lehman Brothers finalized what is still by far the largest Chapter 11 bankruptcy filing in U.S. history. The S&P 500 would go on to drop 55% over the next six months (that I’m sure felt like six years), but today—amazingly—is up about 625% since the 2008 bankruptcy.

Disclosures

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Market and economic statistics, unless otherwise cited, are from data provider FactSet.

This report does not provide recipients with information or advice that is sufficient on which to base an investment decision.  This report does not take into account the specific investment objectives, financial situation, or need of any particular client and may not be suitable for all types of investors. Recipients should not consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report.

For investment advice specific to your situation, or for additional information, please contact your Baird Financial Advisor and/or your tax or legal advisor.

Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.

Copyright 2025 Robert W. Baird & Co. Incorporated.

Other Disclosures

UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W. Baird Limited holds an ISD passport.

This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the Financial Services and Markets Act 2000 (financial promotion) order 2001 being persons who are investment professionals and may not be distributed to private clients.  Issued in the United Kingdom by Robert W. Baird Limited, which has an office at Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB, and is a company authorized and regulated by the Financial Conduct Authority.  For the purposes of the Financial Conduct Authority requirements, this investment research report is classified as objective. 

Robert W. Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license.  RWBL is regulated by the Financial Conduct Authority ("FCA") under UK laws and those laws may differ from Australian laws.  This document has been prepared in accordance with FCA requirements and not Australian laws.