Friday was a challenging day for stocks. The S&P 500 fell 2.6%, which ended the index’s extraordinary nine-week winning streak. We have not had a 10-week streak since 1985, and the clock is now reset on having another one. The main driver for Friday’s sell-off? A “good news is bad news” response to a strong jobs report (more on that below), which makes it even less likely that we’ll see any additional rate cuts in 2026. The other element? High sensitivity to downside catalysts following the historic run off the March 30 low.
Let’s put this in context. As of Friday, the S&P 500, on a total return basis, is still up 8.4% for the year (after less than half a year) and 25.9% over the last 52 weeks. That includes Friday’s 2.6% decline. The S&P Technology Select Sector Index, at the heart of Friday’s sell-off, fell 6.7% , but it’s still up 25.4% for the year and 53.7% over the past 52 weeks.
Did Friday represent a sea change that now changes everything? We don’t think so. Good news that the market treats as bad news can still be good news in the bigger picture, and that’s how we think markets will absorb the strong jobs report longer term. This is just one data point, and an estimate at that. If the Fed lets the economy run hot, which we think is likely, this was more an opportunity to take some profit than a major shift threatening the economy.
The Streak Is Over, and That’s OK
Yes, the S&P 500’s nine-week win streak is over. And maybe you would expect forward returns after such a strong run to give back a little. But historically, that’s just not what we’ve seen. After a nine-week or longer streak ends, the S&P 500 is higher a year later 80% of the time, with an average gain of 9.8%. That’s only about average for all periods, but it’s important to remember that “average” historically is solidly bullish.
This is also the strongest nine-week return we’ve ever seen to start a streak of nine weeks or longer. Streaks with stronger returns have tended to mean a better follow-up in the next 52 weeks, with the S&P 500 averaging more than 20% in the 52 weeks following the prior top three nine-week win streak returns (2023, 1961, 1985).
The Labor Market Looks Fine, Thank You Very Much
So much for the “AI is killing jobs” narrative, let alone “the Fed should keep rates low to protect the labor market.” We’ve been in the camp since the start of the year that the labor market looks better than a lot of economists, market bears, and even the good folks at the Fed think. We even suggested that the labor market may see some re-acceleration. Well, the data are bearing that out right now.
The May payroll report blew past expectations, with the economy adding 172,000 jobs, well above economists’ consensus expectation of just 88,000. Moreover, payroll growth for March and April was revised up by a total of 93,000. That’s a reminder that the initial estimate can vary widely, and why it’s useful to focus on the three-month average. The three-month average of payroll gains is currently 188,000, the highest since March 2024. For perspective, the three-month average was minus-39,000 at the end of 2025, and across all of last year, payroll growth averaged a measly 10,000 per month (116,000 jobs created over the full year). What else would you call that other than re-acceleration?
As noted above, payroll growth can and has been revised a lot in recent years, and that’s why it’s useful to corroborate what’s happening with other data points. The unemployment rate comes from a different survey than payroll growth. The former is a survey of households, while the latter is a survey of businesses. Well, the unemployment rate was unchanged and sitting near historical lows at 4.3%. This shouldn’t be a huge surprise, given that payroll growth is clearly outrunning population growth (especially with immigration pulling back). There’s no question that the labor market was weakening last year, with the unemployment rate rising from 4% to 4.5% between January and November, but we’ve clearly turned the corner now.
Better yet, the prime age (25-54) employment-population ratio rose to 80.8%, just shy of this cycle’s peak of 80.9% and higher than at any point between May 2001 and March 2023. In other words, more people in their prime working age years are employed today than at any point during the last two expansion cycles (relative to the age group’s population).
The prime-age employment-population ratio is useful because it gets around the fact that we have an aging population (so more people leave the labor force every day) and definitions around who is actually counted as “unemployed” (an unemployed worker who is “actively” looking for a job is counted as unemployed, but not someone who has given up after months of searching). The fact that the prime-age employment-population ratio is as high as it is goes against the prevailing narrative that “AI is taking away jobs.” That’s not even the case for young people, whose job prospects would be more impaired by AI. Yet, for 20-24-year-olds, the unemployment rate has fallen from 9.2% last November to 7.2% in May, even as the AI wave has grown.
Better Employment Breadth
Things are even looking better under the hood. Over the past few years, employment gains within the healthcare sector have dominated job growth, while more cyclical areas of the economy have lagged. This was especially the case in 2025, but that’s changed recently.
Over the past three months, payrolls have grown by 565,000. Healthcare payroll growth remains dominant, accounting for 35% of total payroll growth (198,000 jobs). But several cyclical areas are also showing up well, including leisure and hospitality (+144,000), transportation and warehousing (+65,000), professional and business services (+56,000), construction (+41,000), and even manufacturing (+22,000). The rebound in manufacturing is welcome, especially since manufacturing payrolls fell by 88,000 between February 2025 and February 2026.
One prominent area where job growth is lagging is the tech industry. Payrolls across the telecommunications and data processing services industry have fallen by about 40,000 over the last year and have been flat recently. However, rather than AI replacing workers, it’s more likely a result of companies laying off workers to free up capital budgets for AI-related infrastructure.
The Fed Is Fiddling While Inflation Burns
The labor market looks strong right now, and inflation is heating up. As we’ve been pointing out for several months , this is not just an energy problem because the Strait of Hormuz remains shut. The fact that the Strait remains shut is certainly a problem, and it’s going to feed into non-energy inflation as well, via higher food prices and transportation costs.
But we’re also seeing elevated inflation due to AI-related bottlenecks, tariffs, and even core services (ex housing) inflation. The Personal Consumption Expenditures Price Index (PCE) for core services is up 3.6% from last year and running at a 3% annualized pace over the last three months (through April). For perspective, the pace was just 2.2% in 2018-19. The fact that services inflation is running hot has been a sign that the labor market is in better shape than headline numbers suggested up until a few months ago. There wouldn’t be upward price pressure on services if wage growth was weak and people were losing their jobs.
The fact that inflation is running hot and rising, while the Fed keeps interest rates unchanged, means policy is getting loose. Normally, a backdrop of a relatively healthy labor market and elevated (and rising) inflation would have the Fed thinking about rate hikes. Instead, it looks like the Fed, especially under incoming Chair Kevin Warsh, will look past elevated inflation, treating it as transitory.
For now, easier monetary policy is good news for the stock market. However, the problem grows behind the scenes. At some point, whether it’s a year from now or two or three years from now, the Fed will realize that inflation has run too high for too long and will have to be even more aggressive to get inflation back to target. Policy rates should probably be about 0.5% to 1.0% higher than they are now. To be clear, the inflation problem can hardly be laid at the Fed’s feet. The fiscal deficit is running around 6% of GDP, well above anything we’ve seen this deep into an economic expansion. Usually, as expansions wear on, the deficit gets smaller, but the opposite is happening now. With Congress and the presidential administration asleep at the wheel, the job lands at the Fed to pull things back. But it doesn’t look like a Warsh-led Fed is ready to tackle it—instead, it wants to move the inflation goalposts (including removing “outliers”) to keep policy easy and run things hot.
There’s clearly a cost, in the form of higher inflation and higher bond yields (which add to the federal government’s interest burden). Higher inflation means real (inflation-adjusted) wage growth is falling. Higher bond yields translate to higher borrowing costs across the economy, including higher mortgage rates, and that’s shutting out an entire cohort of millennials from the housing market. Keep in mind that housing has historically been the primary vehicle for building wealth for middle-income households, but the entryway is now blocked.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly traded companies from most sectors in the global economy, the major exception being financial services.
The views stated in this letter are not necessarily the opinion of Cetera Wealth Services LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
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