Insights

Tech turns defensive as labor weakens

Investors are rotating into US large-cap tech as jobless claims rise. AI adoption is accelerating across major firms, and the IT sector remains resilient, driven by strong earnings, structural tailwinds, and growing demand for innovation.

July 11, 2025 5 min read

Dane Smith

Head of North American Investment Strategy & Research

Chris Carpentier, CFA, FRM

Senior Investment Strategist

The above chart illustrates the positive relationship between jobless claims and the relative outperformance of the Information Technology sector. As labor market data softens, investor flows appear to favor quality growth exposure, particularly US large-cap tech, viewing it as a defensive haven with structural tailwinds. This behavior underscores the market’s preference for earnings durability and innovation exposure in uncertain macro environments.

Weekly Highlights

Weekly Jobless Claims 235.5K

4-week avg, as of July 04, 2025

S&P500 IT Sector YTD +9.82%

as of July 10, 2025

Estimate of AI Capex $300B+

2025

IT as a defensive growth allocation

In the current environment, the Information Technology sector is increasingly behaving less like a cyclical and more like a quality defensive asset. Despite elevated valuations, investors continue to favor high-margin companies exposed to secular growth drivers including AI, Semiconductors, cloud, and automation. A recent FactSet report indicated that 94% of companies in the InfoTech sector cited AI during their Q1 earnings call, highlighting the ever-growing adoption and strategic focus on AI.

AI is no longer a speculative theme, new data/commentary would suggest we’re in the early stages of a productivity revolution. Microsoft and Google executives recently disclosed that 25–35% of their code is now AI-generated and rapidly accelerating project timelines (according to Microsoft CCO Judson Althoff, Google CEO Sundar Pichai). Additionally, Amazon also stated they had successfully deployed their “one millionth robot” which is “powered by a new generative AI foundation model”.

Platforms like Cursor and Microsoft Co-Pilot are rapidly rising in popularity and attempting to reshape how nonmanual computer-centric work gets done — from software development to customer service. Yahoo Finance reported that Microsoft had racked up over $500 Million in AI savings whilst announcing a plan to lay off nearly 4% of its workforce. It appears this is just the beginning for inference demand. Company reliance on AI remains in its infancy and will only continue to grow.

The excitement around AI has gone far deeper than verbal commentary, the audacious early-year projection of $300 billion in AI-related cap-ex spend remains in tact for 2025 despite the overwhelming market turbulence of the last few months.

Shifting gears, the June jobs report showed a 147,000 payroll gain, though a closer look shows private sector hiring slowed to just 74,000. Unemployment ticked down to 4.1%, but largely due to a drop in labor force participation. As mentioned here: July rate cut unlikely, we believe labor market erosion is now intensifying.

In this context, staying in quality assets (particularly US tech) offers both resilience and upside. The sector’s structural tailwinds, earnings power, and global leadership make it a compelling anchor in portfolios navigating late-cycle dynamics.

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