Weak Jobs Data Seen as Potential Catalyst to Push Stocks Higher

by Natalia Kniazhevich of Bloomberg News, 2/11/26

As Wall Street awaits a potentially consequential US employment report, some investors are counting on bad news for the economy turning into good news for stocks.

With the job market in the midst of what some economists have dubbed a “low-hire, low-fire” environment, expectations for January’s employment data are low: In addition to anemic job creation, economists are bracing for revisions in Wednesday’s report that could indicate an even sharper slowdown in hiring than previously thought.

The job market has preoccupied traders in recent months, even as the S&P 500 Index climbed to fresh records. Investors increasingly punished companies announcing job cuts last year, even if the layoffs were driven by motives such as efficiency gains or restructuring, data from Goldman Sachs Group Inc. show. Companies that have had their shares fall following layoff announcements in past weeks include Amazon.com Inc., Home Depot Inc. and Pinterest Inc. Futures on the S&P 500 traded steady at 7:38 a.m. in New York.

But a darkening employment picture could be a positive for the broader stock market if historical comparisons hold up, according to Jim Paulsen, who authors the “Paulsen Perspectives” newsletter. That’s because investors have tended to see weak job data as a sign that the Federal Reserve will support the economy by lowering interest rates — an outcome many on Wall Street expect this year.

“Once policy juice arrives, whether or not the economy eventually suffers a recession, the stock market begins looking toward a renewed economic recovery and investors started bidding stock prices higher,” Paulsen wrote.

Paulsen’s data show there have been 14 instances since 1948 — including the present day — when annual seasonally adjusted payroll growth slowed to the current level of roughly 0.37% or below during an economic expansion. Eleven of those cases proved to be good times to buy stocks, with the S&P 500 rising an average of around 13% on an annualized basis as job growth ranged between 0% and 1%.

One possible caveat is that the S&P 500 is currently hovering near records, while many past instances of a labor market slowdown came after stocks had already sold off on economic worries, according to Paulsen.

Problems “can also emerge if the US economy disappoints and companies can’t maintain their profit margins,” said Brian Nick, head of portfolio strategy at Newedge Wealth. “That could turn investors to a risk-off mood at the same time when companies will be cutting jobs.”

Some of that caution may have already crept in despite the broader market’s strong showing, Goldman’s report showed.

Shares of companies announcing recent layoffs traded an average of 2% below where the bank’s technical models expected them to be following the news, according to the report, which was published late last year. Firms citing restructuring as a reason for the cuts were hit even harder, with their stock price underperforming by an average of 7%.

The moves are a deviation from a historical trend, according to Goldman Sachs economist Elsie Peng. In the past, layoffs driven by motives such as efficiency gains have typically lifted share prices, while cuts tied to deteriorating fundamentals led to underperformance, the banks data show.

To Peng, the shift suggests that investors interpret the cuts as a response to financial strain, even when companies cite more innocent reasons.

“Despite the benign justifications offered, the equity market has perceived recent layoff announcements as a negative signal about these companies’ prospects,” she wrote.

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Bloomberg News provided this article. For more articles like this please visit bloomberg.com.

Weak Jobs Data Seen as Potential Catalyst to Push Stocks Higher

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