For Wall Street, the worst-case scenario is in the rearview mirror. Investors now believe lower interest rates are imminent, tariffs are survivable, and consumers can keep spending as long as unemployment doesn't spike.

Why it matters: Investors are betting on an economic expansion, which could lead to market gains that are much broader than just Big Tech.

What they're saying: "Liberation Day happened, and everybody froze…then, incrementally starting on April 8th, with…the series of (tariff) deals, then the One Big Beautiful Bill, you've unfrozen, and the economy is reaccelerating," Steve Chiavarone, deputy chief investment officer of equities at Federated Hermes, tells Axios.

Between the lines: The idea that the market rally is just getting going is based on a belief that the economic data is on an upswing and that interest rate cuts will fuel additional growth.

• Sharp downward revisions to recent job market data took the spotlight by pointing to weakness, but Chiavarone says that even with those revisions, the labor market is still growing.
• Other economic data points, he notes, indicate a recovery, including an uptick in ADP private payrolls, a downturn in initial jobless claims, and a recovery in earnings growth.

Zoom in: Investor bets already support the idea of an economic recovery, with cyclical corners of the market catching bids last week.

• Citi's cyclical versus defensive index rallied 130 basis points last week.
• Cyclical corners of the market also rallied, with materials up 1.8%, transport up 2.8% and regional banks up 2.6% on the week.
• The equal-weighted S&P 500, which treats both large and small members the same, outperformed the broader market by over 2%.

Zoom out: Rate-sensitive names that are cyclically tied will be the winners within this macro backdrop, Chiavarone says.

• Dividend payers and small-cap companies could turn out to be the beneficiaries of a lower cost of capital spurred by interest rate cuts.
• On a sector basis transports, materials, semiconductors, biotech, industrial equipment not related to tech capex and consumer names that are a little more speculative could benefit from any economic expansion to come.

Yes, but: "Powell can kill this later this week," Chiavarone says, referring to Federal Reserve chair Jerome Powell's planned remarks at the central bank conference in Jackson Hole this Friday. And any uptick in unemployment could debunk the idea that the economy is set to expand.

The bottom line: Interest rate cuts could come just as the worst headwinds have been removed or priced in for corporate America.

The full adoption of artificial intelligence could save corporate America $920 billion annually, new Morgan Stanley data finds, cost savings that could come from employing a lot fewer people.

Why it matters: As investors worry about soaring valuations, the research backs up the bulls: AI could boost productivity and supercharge earnings growth, leading to profits that could justify current multiples.

By the numbers: The $920 billion in annual savings from AI adoption, net of estimated implementation costs, is only the beginning, according to the data.

• That represents over 40% of the annual compensation expenses within the S&P 500. Long term, this could result in $13 trillion to $16 trillion in market value creation for index companies.

Between the lines: That 40% number refers to cost savings associated with paying people, which could signal future job losses.

• "In some cases, adopting AI will result in headcount reductions," Stephen Byrd, the global head of thematic research and sustainability research at Morgan Stanley, tells Axios. "In other cases, employees will be freed up to focus on higher value-added work that can generate incremental revenue and/or reduced company expenses."
• The research notes this could manifest through corporates not replacing workers lost to attrition, rather than major sweeps of layoffs.

Zoom out: The new data comes as investors wonder whether AI spending will lead to cost savings, with four of the top tech firms set to spend $364 billion on AI for 2025 alone.

Zoom in: The cost savings are not linear, and Morgan Stanley estimates different upsides for various sectors in the market.

• AI could generate savings worth more than 100% of expected 2026 pretax profits in consumer staples distribution or retail, real estate management, and development and transportation.
• Technology hardware and equipment and semiconductors are not among the sectors expected to save as much.

Be smart: If AI delivers nearly $1 trillion in annual savings for companies, profits could see a major lift, giving the lofty valuations of today some real earnings support.

It's not just an AI squeeze. New graduates are having an especially tough time landing a job right now, with the share of unemployed Americans who are new to the workforce at a 37-year high.

Why it matters: The data reflects how reluctant companies have been to hire amid ongoing economic uncertainty over tariffs and policy.

By the numbers: More than 13% of unemployed Americans in July were "new labor force entrants," or those looking for jobs with no prior work experience, including new high school and college graduates.

• It's the highest number since 1988, as the Baby Boomer generation was flooding the job market, per the Federal Reserve Bank of Richmond.

The big picture: Folks with jobs are hanging on to them, as unemployment sits at a relatively low 4.2%. But those without work are having a hard time, facing one of the toughest labor markets in years.

• The jobless rate for college graduates age 22 to 27 has been hovering at a rate last seen in the 2010s (excluding 2020 data).

Zoom in: Another sign of how hard it has become to get a job? The share of unemployed workers without a job for 27 weeks or longer is up sharply, the Richmond Fed report says.

• Such long-term unemployed people now make up more than 25% of all unemployed workers, which is the highest level since February 2022.

The bottom line: This frozen hiring market is a "double-whammy" for Gen Z, says John O'Trakoun, an economist at the Richmond Fed who did the research.

• Many job hunters entered college at the height of pandemic lockdowns and started their university years on Zoom in their childhood bedrooms.
• The sluggish labor market is yet another hurdle for them to clear.