Published December 19, 2025
Below we continue with the middle of Schwab’s 2026 Outlook document. This piece examines labor market trends.
Labor: A headwind and a tailwind
Speaking of labor deterioration, let’s move onto the hot (uhm, cold?) topic that is the labor market. Courtesy of the government shutdown, we are publishing this outlook without updated official payroll data for October or November. Payrolls for those months will come out on December 16th (note: there will be no unemployment rate published for October). In the meantime, investors have had to rely on private sector sources like ADP, which show an increasingly soft hiring backdrop.
Through November, ADP payroll data show an average loss of nearly 5,000 private sector jobs over the past three months. If we back up multiple years, we can see that all the stress has been concentrated in small businesses. As shown in the chart below, over the past couple of years, small businesses with 20-49 employees have seen net job losses; firms with more than 500 employees have continued to hire aggressively. For the former cohort, weakness started to accelerate this summer, presumably when businesses started to feel more of a pinch from tariffs.
The small get smaller
Source: Charles Schwab, ADP Research, Bloomberg, as of 11/30/2025.
Data indexed to 100 (base value=12/31/2023). An index number is a figure reflecting price or quantity compared with a base value. The base value always has an index number of 100.
Despite that grim statistic for small companies, weakness down the company-size spectrum hasn’t been potent enough to drag down the economy or reflect mass layoffs. As you can see in the chart below, initial jobless claims have remained low and in a tight range this year. The more notable pickup has been in continuing jobless claims (individuals who continue to file for unemployment insurance and cannot find new jobs). The divergence between both series emphasizes a low re-hiring rate in the workforce.
We think these statistics will remain among the most important for gauging the health of the labor market moving forward. As of now, initial claims are following their normal seasonal patterns (that recent decline you see is due to the Thanksgiving holiday). Should they start to move higher, we will turn increasingly pessimistic on the labor market. As of now, though, they indicate little layoff activity for the broader economy. We expect that to persist.
Layoff activity still low
Source: Charles Schwab, Bloomberg.
Initial claims as of 11/28/2025. Continuing claims as of 11/21/2025. Y-axis on left chart is truncated for visual purposes.
When we talk about the labor market also being a tailwind for the economy, we want to emphasize the importance of the stock vs. the flow of labor. The flow is reported each month in the jobs report—e.g., 50,000 payrolls created. The stock is a summation of several months (or years) of flows of labor. Given the stock is at an all-time high of nearly 160 million payrolls, paychecks go out and spending continues. Even if American consumers are doing it reluctantly, they spend money when they’re employed.
To be sure, the unemployment rate has continued to inch higher, but it remains incredibly low given how few payrolls the economy has been creating each month. That is almost entirely due to the fact that immigration has slowed to a near halt. This is something we think investors need to get used to heading into 2026, especially if deportations continue and there is very little (if any) net migration into the country. Downward pressure on labor force growth lowers the potential growth of the economy—but so far, the lack of growth from the labor force has been made up for by a pickup in productivity growth.
That said, we expect the unemployment rate to continue to rise into 2026—albeit not at a recessionary-like pace—as we continue to see rolling recessions in certain industries (like manufacturing). That should keep the unemployment rate’s rise modest. Plus, as shown below, consumers continue to say labor market conditions are weakening. Here is where we need lots of corroborating evidence, though. A survey like the University of Michigan’s will tell you that we’re deep in a layoff cycle, yet one from the Conference Board will tell you we’re not quite there yet. The net of both, however, is that things are likely going to get a bit more difficult for the labor market before they get better (presumably by the middle of next year).
Grim labor prospects per consumers
Source: Charles Schwab, Bloomberg, The Conference Board, University of Michigan. Unemployment rate as of 9/30/2025.
University of Michigan as of 12/5/2025. Consumer confidence labor market differential (as of 11/30/2025) represents percentage of respondents who say jobs “are plentiful” minus percentage of respondents who say jobs “are hard to get.”
Who’ driving?
One driver of that turn in the labor market might be the positive growth effects from the One Big Beautiful Bill Act (OBBBA), which provides considerable stimulus to both consumers and businesses. Estimates vary as to the exact boost to GDP, but analysis from the Joint Committee on Taxation, Congressional Budget Office, and Tax Policy Center show nearly a 0.7-percentage-point boost in 2026 (followed by another considerable lift in 2027), as you can see in the left chart below.
That comes at a cost, though. The right chart shows the expected trajectory of the federal debt as a percentage of GDP with and without the OBBBA. The bill results in a much steeper climb in our country’s debt over the next decade. If there’s one thing we are almost certain will continue in 2026, it’s profligate spending by both political parties. The federal debt remains the biggest loser in a polarized environment.
Fiscal stimulus, but with a cost
Source: Joint Committee on Taxation, Congressional Budget Office, Tax Policy Center macroeconomic models, as of 7/27/2025.
OBBBA = One Big Beautiful Bill Act. Please see TaxVox: The 2025 Budget Reconciliation Act Will Increase Debt While Modestly Boosting The Economy for details. Estimates compare debt held by the public under the law currently in place as of 1/1/2025 to a policy adopts all tax and spending provisions of the 2025 Budget Reconciliation Act, as enacted, including the macroeconomic effects and interest costs of the legislation. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.
That said, we continue to expect the private sector to do the heavy lifting in 2026. As has been the case over the past few years, private business investment has been a significant driver of economic growth. Most recently and perhaps unsurprisingly, spending on data centers and computers has soared the most. Given we still think there is more runway for the AI buildout, an assist from the OBBBA, and lagged benefits from this year’s Fed rate cuts, business investment will likely remain firm.
AI’s investment grip
Source: Charles Schwab, Bloomberg, as of 6/30/2025. For illustrative purposes only.
Business investment’s dominance won’t necessarily come at the expense of consumer spending; we expect the latter to remain positive. However, if the labor market continues to soften at the margin, inflation stays sticky, and affordability doesn’t improve, consumption might look less robust in 2026 compared to 2025. That especially rings true if companies’ increased investment doesn’t lead to a surge in hiring—which is possible if the desire is to invest more in technological, as opposed to human, capital.
We think that will keep the economy in a “vibepression:” a consumer sentiment depression alongside continued growth in GDP. As shown below, there has been a persistent deterioration in consumer sentiment despite inflation-adjusted GDP reaching new highs each year since the pandemic. After the pandemic, the souring of vibes was initially driven by the inflation spike in 2022 and 2023, but has since been driven by tariffs and AI-related labor anxiety. Given our expectations for sticky inflation, low hiring, and modest firing, we think the “vibepression” will persist. Unfortunately, this is a K-shaped chart that is increasingly moving towards the shape of an I.
The Great “Vibepression”
Source: Charles Schwab, Bloomberg. GDP as of 6/30/2025.
Consumer sentiment average represents average of University of Michigan’s Consumer Sentiment Index (as of 12/5/2025) and Conference Board’s Consumer Confidence Index (as of 11/30/2025).
Tying macro to market
One of the more striking sentiment bifurcations at present is the clash between the dour expectations for unemployment per the University of Michigan’s (UMich) Consumer Sentiment survey and the unusually upbeat outlook for stock prices per The Conference Board Consumer Confidence survey, shown below. UMich respondents tend to be more sensitive to job security, wages, and day-to-day economic stress—capturing “kitchen table” anxieties that have kept recession fears elevated. In contrast, The Conference Board’s stock price expectations reflect a more market-aware (and often higher-income) cohort that has been buoyed by rising equity prices, abundant liquidity, and the resilience of corporate profits. The result is a split personality in confidence—textbook K.
Unprecedented divide
Source: Charles Schwab, Bloomberg, The Conference Board (as of 11/30/2025), University of Michigan (as of 12/5/2025).
For illustrative purposes only.
Cycle studies can be a helpful guide to a stock market outlook, although never a gospel. Unless you’ve been living under a rock, you know we’re heading into a midterm election year in 2026. Shown below is NDR’s four-year presidential cycle performance pattern. Notable is the fact that this year’s performance, after undershooting the historical trend significantly into “Liberation Day” turmoil, has been significantly overshooting the trend since then. That doesn’t necessarily mean reversion-to-the-norm is about to kick in, but in keeping with historical trends, we do expect significant market gains to be more difficult to come by in 2026.
Midterm years’ dull historical performance
Source: Charles Schwab, Bloomberg, ©Copyright 2025 Ned Davis Research, Inc.
Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at http://www.ndr.com/copyright.html, as of 12/5/2025. Four-year presidential cycle based on average S&P 500 daily price data for each day of the cycle from 1/3/1928-12/31/2024. Data indexed to 100. An index number is a figure reflecting price or quantity compared with a base value. The base value always has an index number of 100. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance does not guarantee future results.
S&P 500 presidential cycle performance (1928-2024)
Source: Charles Schwab, Bloomberg, ©Copyright 2025 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at http://www.ndr.com/copyright.html, as of 12/5/2025. Four-year presidential cycle based on average S&P 500 daily price data for each day of the cycle from 1/3/1928-12/31/2024. Data indexed to 100. An index number is a figure reflecting price or quantity compared with a base value. The base value always has an index number of 100. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance does not guarantee future results.
Market Update
Concerns about AI-related stocks pressured indexes Monday with the Nasdaq slipping -0.6%. Shares of AI chip supplier Broadcom continued falling despite huge earnings released the prior Friday. Investors have been expressing concern off and on throughout the quarter about AI-related firms issuing debt to pay for extraordinarily high capital expenditures. A mixed jobs report Tuesday led to little change on Wall Street though a rise in the unemployment rate to its highest level since July 2021 sent Treasury yields lower. The oil sector encountered significant selling as oil prices dipped. The AI bubble concerns surged again Wednesday when an investor in Oracle’s massive AI data center buildout stepped back from one of the projects. The Nasdaq suffered a nearly -2% plunge on widespread selling in the AI and industrial sectors. Homebuilder Lennar posted disappointing results as home buyers remain sidelined by relatively high interest rates. A massive earnings beat by semiconductor maker Micron after the bell brought buyers back into the market Thursday with the Nasdaq rebounding +1.8%. A reasonably positive inflation report further encouraged buyers in the session. Another strong rebound Friday with buyers continuing to perhaps spot bargains in AI-related shares after heavy selling in recent days. As for interest rates, the yield curve has notably steepened in recent weeks with the Fed-driven short-term rates coming down while longer-term rates have been pushing modestly upward.
A back-and-forth week of trading left the S&P 500 (SPY) unchanged at +0.12%. The Nasdaq 100 (QQQ) experienced some wide swings during the week but also closed slightly positive at +0.56%. Small cap stocks (IWM) was more impacted by the weakness in energy shares ending the week down -0.87%.
Warm wishes and until next week.