Fiscal Policy and AI

By Ketu Desai

Fiscal policy and AI remain drivers of the market, which will go as they go. The Trump administration has clearly pivoted from cutting the deficit through DOGE and raising revenue through tariffs to growing our way out of it. The President said, “For all cost cutting Republicans, of which I am one, remember, you still have to get reelected. Don’t go too crazy! We will make it all up, times 10, with growth, more than ever before.”

This shift from contractionary to expansionary policy will support both the economy and market. The centerpiece is the “Big Beautiful Bill”. The latest Monthly Treasury Statement showed that spending was 185% of receipts and the current fiscal year deficit is up 13.5%. The CBO says the Bill will add another $3.3 trillion to the deficit. Interest expenses now account for almost 20% of total tax revenue, with current odds that the Fed will be on hold for the summer. If they don’t cut in July, the Jackson Hole meeting in August will likely set up a cut for September. Prior to that, the market will likely start to price in a number of cuts for 2026.

The administration will also appoint a new Fed Chair in 2026, who is highly likely to cut rates aggressively to help address interest expenses. An expansionary fiscal policy with rate cuts is as market friendly as it gets.

While policy is stimulating, the labor market is weakening. Initial jobless claims and continuing claims are not yet at alarming levels, but they are reaching a point to attention. Part of the reason is due to natural economic forces, and part due to AI. Both Amazon and Microsoft announced that they will lay off thousands of people due to AI. Klarna’s CEO said, “We saw firsthand the benefits of adopting practical AI. Our AI assistant now performs the work of 700 employees, reducing average resolution time from 11 minutes to just 2, while maintaining the same customer satisfaction scores as human agents.” Klarna has also reduced its workforce by 40%.

Goldman’s CEO said that “The initial registration prospectus for an IPO – might have taken a six-person team two weeks to complete, but it can now be 95% done by AI in minutes.” This will no doubt have an impact on entry-level banking and legal jobs. Already, the new grad unemployment rate is nearly 2% higher than the overall rate.

AI is now able to match or beat humans at many tasks including answering PhD level science questions or coding better than a 99^th percentile competitor. Software development jobs are down 50% since the start of 2023. Just in the past year, AI coded co-pilots have generated more than $1.5bn in revenue. AI generates 30% of Microsoft’s code. Salesforce said that AI is doing 30-50% of the company’s workload. Google’s Veo 3 created an ad for Kalshi that aired during the 2025 NBA Finals, which was completely AI-generated and only cost $2,000. Meta is already preparing an offer that will completely automate ad creation.

It is not hard to see how this will cause significant disruption across advertising, marketing, and entertainment industries. We have seen similar cases across nearly all industries. From a market’s perspective, it means companies will be more productive, and margins and multiples will expand.

One of the key provisions in the Big Beautiful Bill is 100% immediate expense of CapEx. This will help accelerate the AI infrastructure buildout. The 2026 cap-ex expectations from the four hyper-scalers have nearly doubled, from $207bn to nearly $400bn. This does not include sovereign AI and new hyper-scalers such as CoreWeave or OpenAI.

Data center investments added one percentage point to GDP last quarter. The AI boom hasn’t led to all of tech rallying, as it has been a stock pickers market with both winners and losers. Take Mag 7 for instance,  where we are seeing dispersion, with stocks such as Meta up 25%, and Apple down 20% for the year. The AI infrastructure buildout has led to new market leadership in AI power, semis, and software names. The incoming 2027 AI server rack designs will require 50x the power of the server racks that power the internet today, according to Goldman Sachs. This has benefited AI power names such as GE Vernova, Constellation Energy, and Vistra.

The proliferation of AI agents has benefited Palantir, ServiceNow, and Snowflake. Microsoft said on its latest earnings call, “We processed over 100 trillion token this quarter, up 5x year-over-year, including a record 50 trillion tokens last month alone.” This explosion in token processing has significantly increased the demand for computers, benefiting AI related semiconductors. AI is drastically changing not only the economy, but also the markets, which has led to a new class of stock market winners.

Looking forward, the market will focus on the latest in geopolitics, fiscal policy, economic data, a Fed meeting, and second quarter earnings.

Ketu Desai is the Principal of i-squared Wealth Management Inc. (www.isquaredwealth.com), an investment management firm based in New Jersey. ketu@isquaredwealth.com