The U.S. economy is showing encouraging signs. Second-quarter growth was adjusted upwards to 3.8% on an annual basis, and this positive trend seems to be continuing into the third quarter, where consumer spending is expected to grow at 2.8% annually.

Investment Boom in Artificial Intelligence

Despite some weaknesses in employment and consumer confidence, questions about the economy’s strength persist. One key factor is the surge in investment and spending on artificial intelligence (AI), especially in areas such as data centers, software, computers, peripherals, and research and development. These AI-related sectors have grown faster than the overall economy, contributing 15.7% to economic growth, even though they make up only 6.1% of GDP. This figure reflects their direct impact and does not include indirect effects, like increased consumption due to rising company shares tied to AI. The growth in AI is primarily concentrated in a few large companies, which helps explain the gap between overall economic strength and low business confidence. Struggles in non-AI sectors are being overshadowed by the success in AI-focused areas. The impressive growth figures, particularly the revised second-quarter 2025 figure of 3.8%, create a confusing picture when set against weaker employment data. This suggests that our trading strategies should reflect the clear divide between the booming AI sector and the rest of the economy. The Atlanta Fed’s GDPNow model currently expects third-quarter growth at an even stronger 4.1%, reinforcing this trend.

Investment Strategies Amid Market Volatility

We might consider increasing our investments in specific technology sectors driving this growth since they contribute significantly to the economy. Using call options on semiconductor and cloud infrastructure ETFs could help us benefit from this concentrated momentum. Year-to-date performance in 2025 indicates this split, with AI-focused tech funds rising over 40% while broader small-cap indices remain flat. However, this boom hides weaknesses in other areas, which explains why business confidence is low beyond big tech. This creates opportunities for relative value trades or outright hedges. We could consider buying put options on consumer discretionary or regional banking ETFs, which are more affected by recent disappointing employment reports—like the 95,000 jobs added last month. The strong GDP figures are likely to compel the Federal Reserve to maintain its tight monetary policy for a longer period, possibly delaying any rate cuts until 2026. Therefore, interest rate derivative trades that anticipate high rates remain valid. The Fed’s recent decision to hold rates steady, coupled with their data-driven approach, gives them room to stay firm. This type of growth, heavily concentrated in technology, is reminiscent of the late 1990s before the dot-com bubble burst. The disconnect between strong GDP and weakening indicators could increase market volatility. Thus, holding VIX call options or other long-volatility positions may serve as a smart hedge against a potential market correction if attention shifts to weaknesses outside the AI sector. Create your live VT Markets account and start trading now.

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