Jobs are up, but hiring is slowing - here’s what’s really going on

Welcome to Stocks in Translation, Yahoo Finance's video podcast that cuts through the market mayhem, the noisy numbers, and the hyperbole to give you the information you need to make the right trade for your portfolio. I'm Jared Blickery, your host, and with me is my co-host, Yahoo Finance senior reporter Brooke DePalma, who's here to connect the dots and to be that bridge between Wall Street and Main Street. Today, we're honing in on the job market, but also keeping a focus on markets as well. Our phrase of the day, jobless expansion. We dig into the uncomfortable reality of the collapse in job growth while the economy keeps humming along. Critically, is this the new norm for 2026? And for today's market show and tell, we're going to look under the hood at market breadth, specifically how many S&P 500 stocks are actually trading above their 200-day moving average and why this is important to the current bull market. And this episode is brought to you by the number 20.1. That's the so-called forward PE ratio for the energy sector, which is at a five-year high. We compare it to the tech sector, which is falling like a stone. But this is saying about sector rotation. And to help us make sense of it all, we are joined once again by Kevin Gordon, who's head of macro research and strategy at the Schwab Center for Financial Research, and one of the best in the business at turning big macro signals into practical market frameworks. He's also a lifelong musician playing seven instruments and a serious home chef. But before we really dig into the jobs numbers here, just tell us what you think of this rally of the economy as we, I guess we're about, you know, one third of the way through February. Yeah. It feels like we're still in January. It feels like a lot of different things. A lot of things have happened so far. I've been making that joke lately, but it does feel like we're in January. No, I mean, I think the flavor of the rally over the past several months, well advertised at this point, but, you know, really moving away, as you mentioned, from that tech leadership or the tech adjacent leadership and going into other parts of the market. I think it's been really interesting and an interesting thought experiment for a lot of investors who have been used to so much of that mega cap dominance over the past several years where now you are still seeing healthy breadth, but it's not necessarily materializing and manifesting in strong index level gains. And that's just, I call it just the math, the math of the index of a cap-weighted index like the S&P 500. You know, if you can sort of dish it out in terms of the growth in those sectors over time and how much they account for the S&P, you have to be able to take it when they're not participating as much and when you have tech as the worst performing sector over the past month. So I think it's still a relatively healthy backdrop. It's just very different than what we've been used to in terms of seeing a lot of these really strong cap-weighted index level gains. Yeah, we also did get some new jobs data out, which time now for our phrase of the day, and that is jobless expansion. And it sounds like a contradiction, but it's pretty simple. The economy can keep growing even as job growth cools way down. And today's job data is a perfect example of why this is confusing. On one hand, the three-month average of payroll gains just ticked up to about 73,000 in January, a one-year high, as Kevin points out on the X platform. Now, on the other hand, the big annual benchmark update is saying, careful, 2025 payroll gains were revised down to about 181,000 when they were over 7 million in 2021. To the main point, job growth is positive, but down big. Meanwhile, growth is strong here. So Kevin, what does a jobless expansion mean for both workers and investors? So well, I think the first thing I would say is that this is not terribly unique relative to history in the sense that we have seen it before. The last time that we saw it was in the early 2000s. Yeah, the big housing, jobless recovery. Exactly. Early 2000s, though, are we spooked by that, guys? Well, no, I mean, it's interesting because I say it's a unique kind of data point because you had the recession in 2001, but the unemployment rate kept rising, actually, well into 2003. And when you look at payroll growth and the expansion that started at the end of 2001, it was pretty weak. I mean, you really just had only GDP expansion without this movement in the labor market. So in some ways, it's apples to apples. In some ways, it's not because you could look at that period and say, well, we were exiting recession right now. It's hard to argue that we're exiting recession with the caveat that the 2001 recession was actually pretty mild. So in GDP drawdown terms, it really wasn't that bad. So I think that, you know, it's unique to see relative to history. Of course, you know, we don't want to be in a jobless expansion. But I think given where we are right now, aging demographics, a lot of downward pressure on labor force growth because of, you know, almost no net new migration. We'll see what the, you know, what the updated numbers are officially for 25. But when you combine all of that, it just means that your so-called break-even payroll rate is much lower. So the amount of jobs that you need to create, that our economy needs to create each month without having to see the unemployment rate move materially is just much lower. We sort of learned that, you know, in this most recent slate of jobs data for January, we had a really significant beat to the upside for payroll growth and the unemployment rate moved down to 4.3 percent. When economists forecasted, I believe, 4.4 percent. Yeah, exactly. So I think that, you know, from the point of view of the worker, the average worker, it is a worrisome sign, especially if you're one of those individuals who doesn't have a job. But at the same time, in terms of the overall stock of payrolls, because there's an important stock versus flow discussion that you need to have when you talk about payrolls, the overall stock is still at an all-time high. So when you talk about, you know, month to month, how many people are employed, how many people are making money, able to put that money into the economy, it's still at an all-time high. So that growth engine for the consumer is still going. It's just that that flow is now, you know, considerably weaker. Maybe it's turning higher a little bit, evidenced by January jobs data. But that, I think, is the really important distinction to make, is that because of the nature of demographics and where immigration is right now, you're just having a slower sort of speed limit or a slower rate that you can go at in terms of job creation. Yeah, stock versus flow. I hadn't heard that applied to the job market, but you broke that down very well. So what should people expect into the end of the year, do you think, 2026? It's been, I think, to summarize, low hire, low fire. Does that persist for people looking for jobs? You know, where do they look and what are the investment opportunities? Well, you know, it seems like health care is doing all the hiring. Yeah, well, that's the thing. I mean, the bulk of it, and that's another interesting way to think about the job backdrop, is if you look at the net percentage of industries that are hiring now, it has, you know, firmly crossed into positive territory. It's been there for a while. It's at 55 percent. That's the so-called employment diffusion index. So just the share of industries on a net basis that are hiring. So that is stronger. But when you look at the composition of it, it's health and education services that are that are dominating that, and especially for 2025. That was the sector, basically, that was adding all of payrolls. If you took that out, you kind of had nothing essentially, you know, on a year to year basis. I think that admittedly, you know, I had a feeling coming into 26 and what we were the data that we were looking at that you were probably going to see some sort of stabilization in unemployment by the middle of the year and maybe an eventual rolling over because a lot of the capex data that we've seen in the business spending data and just the strength of that historically does lead to stronger employment data. So I think it's maybe being pulled forward a little bit. So we didn't expect it to happen as soon as it's happening now. If you didn't see, in fact, see the peak in the unemployment rate being in November, that is a pretty material, I think, move and shift for the economy. But what that means for hiring, I'm not sure. I'm not so sure it's going to be as robust as it has been in prior expansions. I just think back to the labor force point. There's just not as much for us to draw from. And I think a lot of companies have still been spooked by, you know, number one, what happened with tariffs last year is still adjusting to that. But number two, being able to figure out if they can continue to grow their businesses without having to hire a lot. And you've heard certain anecdotes about this and in the media and the news over the past, you know, several months. But to the extent now that AI becomes a little bit of a bigger player in that not having to hire as many people, especially at the entry level, I think that's going to be a really big focus for this year. So to me, I think about a lot in stabilization terms, whether it is this firm reacceleration, I think it's a little bit of a different story, especially when you compare it to prior cycles and the fact that we didn't go through a traditional recession, you know, in the past year. Got a lot to figure out here. Let's talk markets. And because it is now time for market show and tell. And today we're looking past the headline index number and into market breadth, which is a way to judge how widespread a market move is by counting how many stocks are participating. We've covered this before. And there are lots of ways to do this, because here's the main thing. The S&P 500 can look like it's going nowhere, even when a lot of stocks are quietly getting healthier. Some might be getting not healthier. So we're going to look at market breadth through this lens. How many S&P 500 stocks are trading above their 200 day moving average? The 200 day is just a long term average of prices that shows the current trend. And when more stocks get above it, that's a sign that the rally is spreading out, not just riding on a few big names, as we've seen in the past. So, Kevin, when you look at this breadth measure, what does it tell you right now about how healthy this market really is, even if the index is feeling a bit choppy? Yeah. So overall, still relatively healthy. If you looked at the whole universe of stocks in the NYSE universe, which is, you know, I call it the market, you know, then that's that's right at two thirds as of yesterday's close. So you're at a pretty healthy territory and sort of atmosphere. But even over the past several months, that percentage has actually been grinding higher a little slowly, but it's been grinding higher, even as you've had a lot of this carnage in certain sectors like tech. And that's depressed, you know, the index level gains. But even for something like the S&P 500, you've been kind of hovering right around closer to 70 percent on average lately. And I think what's been a little bit more remarkable has been the catch up in that statistic for the Russell 2000, you know, small caps. Let's talk about small caps. Yeah. I mean, they've been so weak for so long in this in this bull market that is that we've been in since 2022, you know, sort of had these historic years in a negative sense for small cap participation or lack thereof in 2023 and then 2024. So we've been waiting for so long for them to really get up and going. And I think that for many reasons, strong fundamental reasons, they really have started to turn higher now and they've really started to catch up. And one of the and one of the metrics that confirms that is is that breadth statistic that you mentioned. And just really quickly on software stocks, will we see a rebound here? Well, the easy answer. Do you have a fear of them being obsolete? The short answer is I don't know and nobody does. I think that I think for a sector like tech, because that's where software lives, you know, within, you know, a lot of the questions have been around how much of this is, you know, an earnings driven move versus how much of it is just multiple compression. So far, it's just been the compression and valuation and multiples. And I think a lot of sort of de-risking, whether it was tied to any leverage or not, within that space in particular. But I think just a lot of de-risking and sort of that knee-jerk reaction when you have everything around, you know, the AI narrative that was sort of pushing a lot of those moves. Remind me of DeepSeek last year, you know, it was catalyst and stuff happened. Yeah. And I think, you know, it's sort of that one area when you look at significant gains relative to the S&P over several years, it was that area that was quite extended. It was that industry that was quite extended. So to the extent that investors wanted to take profits in a certain area, you know, deploy it elsewhere, whether it was energy or materials which had been leading, I think that makes a lot of sense. So to me, you know, if I was specifically looking at that industry, which we don't get down to that granular of a level, but I would look at the earnings profile of the industry and a lot of the companies if it hasn't changed materially, which for tech as a sector, it has not changed materially this year. So I think that's still a relatively fundamental underpinning. But it gets to the fact that when you're talking about sector leadership, especially in an earnings sense, it's the differentials and the growth rates that matters more than anything else. And I think that's been the bigger story actually since last earnings season, not this current one. The turn for a lot of this outperformance in terms of equal weighted S&P or small caps, it was around the end of Q3 going into Q4 when we had earnings season for the third quarter, when you started to see a lot of these estimates really move higher for the rest of the market. And so I think that has been, again, to the whole point about differentials and rate of change mattering more for earnings for a lot of these sectors. I think that's been to the benefit of them. Right. We do need to take a short break. But coming up, we're talking energy versus tech and a symphonic runway battle that's music to investors' ears. Stay tuned. This episode is brought to you by the number 20.1. That's the energy sector's forward P.E. near five year high. And quick translation, forward P.E. is just the price investors are paying today for what analysts think a company or a whole sector will earn over the next year. Now, here's the comp. Here's the comparison. Tech is around 24.3. But here's the twist. That number for tech is down over the last five years and way off that 2025 peak near 32. So this isn't just tech is pricey. It's that energy's price tag has risen and the market is rewriting what it's willing to pay for different kinds of growth. And that gets to another concept we talk about here, sector rotation. We've been talking about it. So put it all together for us, Kevin. What's the big takeaway for investors here? When they hear those two numbers, what should they be thinking? Yeah, well, first of all, I think it's always tough to compare, you know, two sectors that are very different, like tech and energy in terms of valuation. So I would say never just take the forward P.E. and say tech is at this energy is at this. Therefore, come to the conclusion, even rate of change. Exactly. I think that you need to look at it relative to history, certainly, but also look at the components of that ratio. So for energy, as an example, you know, the price has really been doing all the all the lifting in addition to the fact that the EPS component, the E, has been moving just a little bit lower. So there hasn't been a pickup. So you kind of have it working in the bad direction for both of them, where prices have been surging, but earnings haven't been following. So it's just sort of this bigger bet. A way of thinking about that is multiple expansion that investors have on that sector. So it's a little bit riskier if you want to think about it that way. For tech, I think the upside is that the earnings component has been relatively unchanged and unbothered, even though you've gone through this multiple compression. And you talk about, you know, over the past five years, the tech forward P.E. having been down a little bit. Look at that in the context of the outperformance of the tech sector, just in price percentage performance terms, it's been pretty remarkable. So it's kind of that, you know, I guess, reassuring aspect of markets in the sense that you can have a richly valued sector like tech and you can have its P.E. remain almost unchanged over a handful of years, but you can still see pretty significant gains. So I think that's been the benefit of seeing the fact that especially, you know, I get a ton of questions from clients around valuations when they get really stretched. Isn't this, you know, a turning point, Armageddon? Are we about to fall off the cliff? And I always say, number one, valuation is a horrible short-term market timing tool, especially if you're looking, you know, a year out. But number two, you can be in these environments of really stretched valuations for a long time. And you can also have earnings eventually start to catch up, do the heavy lifting, and then that alleviates some of the pressure on multiples. That's how you can have the past five years that we did for tech. And then the final thing I'd point out, too, is that tech has become a larger part of the S&P 500. So to the extent it sort of justifies, you know, a higher multiple and a higher average and a range that we've been used to relative to history, I do think that you have to think about the market, you know, in those terms. How do you see earnings growth proceeding through the rest of the year? Do you see that still trending up and maybe differentiate small caps versus large caps? Yes, I do see it trending higher. I do think, though, that for small caps in particular, again, that rate of change is going to matter a lot because one of the things that has, I think, justified a lot of the rally and the turn in small cap performance relative to large caps over the past several months is the fact that you look at the forward earnings profile for something like the Russell 2000 relative to the S&P 500. It has decisively turned. It's been choppy. It's not going to be linear. And we would caution against thinking that it's going to be a linear move. But that does start to matter in terms of small caps finally seeing, you know, better beat rates, finally starting to see better rates of change for revenue growth and for profits growth. I think that some stability and interest in the interest rate picture over the past year really has, you know, accrued to the benefit to their benefit, but also the fact that you're probably going to get some of the beneficial marginal, you know, albeit marginal, but beneficial impacts of Fed rate cuts. You do have more similar policy on the fiscal side this year. So there is a lot more working in favor, you know, down the cap spectrum. But again, I wouldn't think of it as this sort of either or. I think small caps and large caps have a place in every portfolio. It just matters how much what your risk tolerance is. And with that being said, for the everyday investor who might be hearing this and they hear a lot about sector rotation and they're looking at their portfolio, wondering, is now the time to maybe think about including elsewhere or maybe diversifying a bit more? What would you say? International? I would say, yes, exactly. Certainly outside the U.S. I mean, we've been in this camp for for several years. At the beginning, it was hard to make the argument because international stocks were just not doing well relative to the U.S. But relative now. But relative. But now, yeah, it has started to improve. And I think that, you know, twenty five, twenty twenty five was a very, I think, clear year in terms of how much dollar, you know, underperformance really aids and accrues to the benefit of stocks outside of the U.S. I do think that'll still be a component of of the rally that you see outside the U.S. this year. And so far it has because the dollar has just has sort of failed to get up and going. But I think in conjunction with that, you do have to pay attention to some of these these impulses around the world that, you know, you're starting to see some PMIs tick higher manufacturing activities slowly improving in Europe. When you think of a region specifically like Europe just being more cyclically dominant in terms of their stock market indexes, then that that sort of mathematically, again, you talk about the math of an index that leads to their outperformance. So it's interesting. And it speaks to, I think, how much there's tech dominance here, even if we see our cyclicals rallying here, which has very much been the case. Materials, energy, industrials. Then you see the same thing happening in Europe, but it's going to be a bigger benefit to them in a relative sense because those are bigger portions of their indexes. So I think that has to be taken into account, especially when you're talking about X U.S. versus U.S. outperformance. And you know what I would say to an investor who has, you know, had a portfolio for several years and sort of just set it and forget it at the beginning, you're probably way outside your band for the U.S. and way under, you know, way outside to the downside for your X U.S. So it's not to say that you just have to automatically get those, you know, right back into into what balance was and what the target was. But think about how you can use this volatility to your advantage in terms of how much things got out of whack, you know, to use a technical term and then getting back a little bit into into balance. Hard pivot. I don't have a segue for this one, but we've got a market stake on a classic Hollywood gab show staple. We call it Who Wore It Better. And today we've got a musical twist, the nimble violinist versus the steady pianist. On the left catwalk, our violinist struts out like a hair trigger market move. The look is light and precise, a slim tailored jacket with fine string like stitching and a bow tie that actually looks like a violin bow. Finance translation. This is part of the market that can swing hard on small shifts in interest rates or fed expectations, tiny changes, big reactions. Think duration. On the right catwalk, the pianist steps out like a long haul theme. The look is bigger and grounded, structured, double breasted suit with subtle black and white key cuffs and heavy shoes that can, quote, sustain. Finance translation. This is where profits and cash flow do most of the talking. Less jumpy, more staying power. So, Kevin, the question for you is which musician is better suited to the current market environment, the nimble violinist or the steady pianist? This is tough because the violin is my first instrument. So I'm always personal waiting. But no, I'm inclined to take the piano approach because I think, you know, especially when you think about how much instability we still are dealing with in a geopolitical sense, to some extent, you know, domestic political sense and how much policy is still causing some sort of short term knee jerk reactions in markets. I think you still want to go for what is steady, especially from a cash flow standpoint. And that has come more into the microscope these days, especially for the megacaps, you know, going to the bond market, you know, conducting just huge issuance when it comes to. Thirty two billion, why not? Absolutely. So I think that has, you know, that has come more into focus and why I think that there's going to be a little bit more emphasis on things like, you know, stable profit margins, making sure that companies have been guarding against that correctly, I think has mostly been the case last, you know, last year is a perfect example. Just the low hiring picture, basically almost the no hiring picture at this point. I think companies took steps to that's that sort of evidence that companies took steps to reduce the largest cost they have, which is labor. So they have been guarding against profit margins in that way. So to now see it more driven by, you know, revenue growth as opposed to just cost cutting. I think that kind of stability is really going to be important for this year. Quickly, when you look at twenty twenty five, the geopolitical uncertainty that really hit the markets, then how are you thinking about that moving into twenty twenty six? Seems like tariffs hopefully got behind that. Well, you know, my my general framework for all of that instability has been, you know, differentiating between what is the front page risk and what is the bottom line risk. And I think, you know, Liberation Day last year was kind of a great example of both of those happening at once where, you know, big tariffs, huge reciprocal tariffs that we've really never seen before. Massive front page risk. I mean, it was in the front pages for how long at the at the initial timing of that massive bottom line risk as well, because the market was pricing in this huge hit to earnings, how companies were going to be able to deal with this given the scale and the scope and the size of those tariffs. Eventually, we had seen, obviously, a lot of that walked back series of 90 day delays and mitigation tactics. So it became more of a front page risk story. But I extend that to even things like Greenland or Venezuela. You know, so far this year, yes, a lot of kind of unease and consternation around what is the headline here. But when you think about how the market views it in a dispassionate way, the market really just cares about what is this going to do to earnings? And if there's no impact earnings to the downside, largely it's going to shrug it off. And that's what we've sort of seen year to date, notwithstanding a lot of the carnage in some areas like software. But when you look at the broader market, when you look at those broader breadth statistics that we've seen, none of that has yet indicated that there's something to worry about materially. So if that were to change, then we would obviously reassess. But the market has not been pricing that in and telling us that. Really appreciate the way you broke that down. So it's time to review a couple of things here. Going back to the phrase of the day, the jobless expansion seems to be kind of the way things are going to be this year. Twenty twenty six. I like the fact that we didn't use the word the K word. I don't think we use that at all. So I'm not going to use it here. But just kind of thinking about this dual track, let's call it that that jobs have been on. We also see that that in the consumer and the market itself. And that gets to market rotation and how we're seeing some sectors do quite well. And they're asserting themselves in different ways versus others like tech, which are kind of winding, which have wound down. And speaking of winding down, that's it for things here at Stocks in Translation. Be sure to check out all the other episodes of our video podcast on the Yahoo Finance site and mobile app or also on all your favorite podcast platforms. We'll see you next time on Stocks in Translation.