iCapital Market Pulse: AI’s Creative Destruction Feels Artificially Exaggerated

Key Takeaways:

• Despite headlines, current data shows little evidence that AI is materially displacing labor, with key indicators either improving or in line with pre‑COVID levels.
• AI could boost productivity and thereby raise neutral‑rate expectations, shaping how markets view the Fed’s terminal rate this cycle.
• Periods of “creative destruction” should benefit venture capital and hedge funds, where increased dispersion and key beneficiaries can drive outsized returns.

Investors are laser-focused on AI’s potential to disrupt labor markets, especially given the recent move by Block to slash 40% of its workforce—citing technological productivity.¹ AI will certainly affect parts of the job market, but we don’t subscribe to the more pessimistic scenarios—particularly given the limited evidence that technological cycles lead to permanent increases in the unemployment rate.

It’s early to assess the extent of AI-driven job displacement. Currently, there is little evidence that AI has contributed to the series of workforce reductions over the past 12 months, despite the headlines. While the rapid pace of technological change will likely impact certain industry groups in the near- and long-term, we believe AI could ultimately spur demand for new types of jobs over the coming years.

AI’s influence extends beyond the labor market, as it also carries important implications for Federal Reserve (Fed) policy and market expectations for the terminal rate this cycle—particularly in light of Fed Chair nominee Kevin Warsh.

In this period of heightened disruption—or ‘creative destruction’—we see several asset classes that should be well‑positioned. Venture capital appears particularly attractive at this stage, given the vast amount of investment behind AI and the underlying math—where only one or two successful investments can change outcomes. This environment should also favor hedge funds, which can generate returns on both the long and short side. It should also support structured investments—especially income notes—which given the uptick in volatility, should offer a competitive yield relative to the equity return profile we expect in 2026.

Is AI going to replace your job?

It’s the question many people are now asking themselves—especially after the Citrini report and Block’s announcement that it will lay off 40% of its workforce.²  While the topic has become prominent—Bloomberg News headlines on AI job cuts are running well above their five-year average (see Exhibit 1) —it’s hardly a new phenomenon. Elon Musk, Dario Amodei, and Sam Altman have long warned about AI’s potential to displace labor, with Anthropic CEO Dario Amodei recently noting that “AI could wipe out half of entry-level jobs.”³But is the Block news really a preview of what’s to come? We don’t think so. While productivity gains from AI likely played some role, we see this largely as a correction to the overhiring that occurred pre COVID—something Jack Dorsey himself acknowledged in a recent X post. Even after a 40% reduction in force, Block’s headcount still sits above its pre-COVID average.⁴ And this isn’t the first time Dorsey oversaw a rapid expansion in headcount, during his tenure at Twitter (now X), headcount nearly doubled before being reduced by roughly 80% under Elon Musk.⁵

While we recognize that AI will likely disrupt certain sectors and has unique characteristics—particularly its potential to approach human-level intelligence—when looking back at other technological cycles, we have not seen a permanent uptick in the unemployment rate. Based on recent studies, even assuming that AI could displace 11 million jobs (6% of the current labor force), this is projected to lead to a 0.3-0.4 percentage point (pp) increase in the unemployment rate, which would be expected to reverse over the following quarters.⁶

There is also little evidence that AI is displacing jobs

There is little evidence that AI is currently displacing labor, as a few key labor indicators have either improved, or look broadly similar to their pre‑COVID levels.

Job Cuts: Despite the recent news, there is very little evidence that AI has led to a meaningful uptick in layoffs. According to Challenger job cut announcements, AI has only accounted for 3% of cumulative job cut announcements since 2023 (see Exhibit 2).⁷ It is also worth noting that these are only announcements, therefore realized layoffs are likely lower.

Job Openings: Despite concerns that AI will replace roles such as software engineers, banking and finance professionals, and product managers, job openings in these sectors have generally increased since early 2025 (see Exhibit 3).⁸ This trend stands out as overall job openings have declined over the same period.New Entrants: One area where people believe AI is disrupting the labor market is via new entrants—discussed here. While there have certainly been anecdotes of this, when looking at the labor force participation rate for 16-24-year-olds, it is still in line with its pre-COVID average (See Exhibit 4)⁹, indicating that the labor trends for this cohort are largely unchanged from pre-pandemic levels.Taken together, the data shows very little evidence that AI is displacing labor. While headlines often focus on potential headwinds for workers, it’s equally important to consider how AI can potentially create new roles. In fact, a recent study found that roughly 60% of today’s workers are employed in occupations that did not exist in 1940¹⁰ —underscoring how difficult it is to fully imagine how labor markets may evolve with this new technology.

How will AI impact terminal rate expectations? 

There is also a debate over what AI could mean for the Fed’s terminal rate. While slower job growth or displacement in certain sectors could call for a lower policy rate, Fed officials have emphasized that rate cuts would do little to offset AI-related labor disruptions. Recent Fed speeches have underscored this point, noting that monetary policy is not well-suited to address structural shifts in the labor market.

• Waller: “ Monetary policy addresses cyclical fluctuations in the economy, but if AI constitutes a structural shift in the demand for labor, monetary policy will not be an effective tool.”¹¹
• Cook: “In a productivity boom such as this, a rise in unemployment may not indicate increased slack. As such, our normal demand-side monetary policy may not be able to ameliorate an AI-caused unemployment spell without also increasing inflationary pressure.”¹²

As highlighted in Lisa Cook’s recent comments, there is another side to the AI debate as it relates to the Fed’s terminal rate. If AI ultimately delivers higher productivity—currently running roughly 1.1 pp above its pre-COVID average¹³ –it could push expectations of the neutral rate higher. This dynamic is likely one reason why markets are pricing in less than one rate cut for 2027 (see Exhibit 5).¹⁴As stated in our 2026 Market Outlook, we continue to believe that rates should remain rangebound in 2026. While there is the potential for this range to possibly widen, especially in the second half of the year, if terminal rate expectations rise, this could put a floor under the 10-year Treasury yield—barring any significant change to the economy.

Investment implications: Venture capital and hedge funds well‑positioned, with an emphasis on income

In an environment defined by “creative destruction,” we think this backdrop is constructive for venture capital. While periods of technological transition tend to widen dispersion, the math for these strategies doesn’t require broad‑based success. Historically, only about 6% of venture deals generated a 10x return, yet those winners accounted for roughly 60% of total industry returns¹⁵ –illustrating how a small number of winners can generate outsized returns. This is likely enhanced if you invest in smaller funds, where early-stage investors tend to have larger ownership stakes compared to later series rounds.

With dispersion increasing, we continue to view this environment as constructive for hedge funds. The large price swings across individual names this year are creating opportunities to generate alpha on both the long and short side. While AI‑related disruption will likely pressure certain business models, it could also support others. Hedge funds are well‑positioned to navigate these cross‑currents and can offer greater portfolio diversification relative to your traditional equity allocation, where expected volatility is higher.

Another way to access public markets is through structured investments tied to top sectors or single name views. Over the past two years, the VIX has averaged 16.93, which compares to the average 18.24 so far this year.¹⁶ Given our expectation for mid-to high single digit returns in U.S. equities, this uptick in volatility should make terms on income notes more attractive, and offer yields that can compete with—or even exceed—our expected equity market returns. With volatility likely to persist, especially as drawdown risks increase during a midterm election year, we think structured notes can provide a compelling way to express your equity exposure this year.