Employment Strength Is a Headwind, Not a Tailwind
Where we are now, what history shows, and which stocks fit each employment regime.
Employment growth has slowed to 0.37% year-over-year as of December 2025, down from 1.28% a year ago. We've crossed from "Moderate" into "Slow" territory. Here's what 32 years of data tell us about what comes next, and how to position.
Current Status
Nonfarm payrolls stand at 159.5 million, growing at just 0.37% year-over-year. The trend is clear:
| Date | Employment (M) | YoY Growth | Annualized 3M | Regime |
|---|---|---|---|---|
| Dec 2025 | 159.53 | 0.37% | -0.17% | Slow |
| Sep 2025 | 159.59 | 0.81% | 0.39% | Slow |
| Jun 2025 | 159.44 | 0.97% | 0.41% | Slow |
| Mar 2025 | 159.28 | 1.12% | 0.84% | Moderate |
| Dec 2024 | 158.94 | 1.28% | 1.59% | Moderate |
The 3-month annualized rate has turned negative (-0.17%), suggesting further deceleration ahead. We're not in contraction yet, but the direction is clear.
The Six Employment Regimes
I divided 32 years of employment data into six regimes based on year-over-year growth, then measured SPY performance in each. The results challenge conventional thinking.
| Employment Regime | Months | Avg Return | Volatility | Win Rate | Worst | Best |
|---|---|---|---|---|---|---|
| Deep Contraction (<-2%) | 27 | +2.88% | 6.60% | 77.8% | -10.9% | +18.0% |
| Contraction (-2% to 0%) | 42 | -1.55% | 5.13% | 45.2% | -16.6% | +7.3% |
| Slow (0% to 1%) | 32 | +0.39% | 4.55% | 59.4% | -16.1% | +10.9% |
| Moderate (1% to 2%) | 172 | +0.89% | 3.40% | 65.1% | -10.1% | +14.2% |
| Strong (2% to 3%) | 88 | +1.02% | 3.96% | 64.8% | -13.7% | +11.3% |
| Very Strong (>3%) | 34 | +0.64% | 4.73% | 61.8% | -9.5% | +8.1% |
Key findings:
- Deep Contraction is best: +2.88%/mo with 77.8% win rate. The Fed is cutting aggressively, and markets price recovery.
- Mild Contraction is worst: -1.55%/mo with only 45.2% win rate. Uncertainty peaks—is this a pause or the start of something worse?
- Moderate (1-2%) is Goldilocks: +0.89%/mo with the lowest volatility (3.40%). Stable growth without overheating.
- Very Strong (>3%) underperforms: Just +0.64%/mo. Hot labor markets keep the Fed tight and multiples compressed.
Sector Performance by Regime
Different sectors respond differently to employment conditions. Here's how each sector SPDR performed across regimes since 1999.
| Sector | Deep Contract. | Contraction | Slow | Moderate | Strong | Very Strong |
|---|---|---|---|---|---|---|
| XLF Financials | +4.23% | -2.00% | -0.63% | +0.95% | +0.60% | +0.46% |
| XLY Discretionary | +3.95% | -0.70% | -1.47% | +1.05% | +0.37% | -0.44% |
| XLB Materials | +3.78% | -0.81% | -1.26% | +0.87% | -0.61% | +0.56% |
| XLE Energy | +3.53% | -1.37% | -0.54% | +0.70% | -0.20% | +2.42% |
| XLI Industrials | +3.45% | -1.33% | +0.29% | +1.12% | +0.94% | +0.26% |
| XLK Technology | +3.29% | -1.93% | -1.06% | +0.92% | +1.91% | +0.34% |
| XLV Healthcare | +2.48% | -0.72% | +0.49% | +0.72% | +0.48% | +0.76% |
| XLP Staples | +1.55% | -0.91% | -0.02% | +0.84% | -0.22% | +0.58% |
| XLU Utilities | +0.95% | -1.05% | -1.52% | +1.40% | -0.24% | +0.41% |
Sector insights:
- Financials lead in Deep Contraction: +4.23%/mo. Fed cutting = curve steepening = bank profits.
- Healthcare is most stable: Positive in 5 of 6 regimes. Best defensive sector.
- Energy likes extremes: +3.53% in Deep Contraction, +2.42% in Very Strong. Worst in the middle.
- Tech peaks with Strong employment: +1.91%/mo. Not too hot, not too cold.
What Happens at Key Thresholds
When employment crosses below 1% (Moderate → Slow), here's what followed historically:
| Crossing Date | Emp Growth | 3M Forward | 6M Forward | 12M Forward | Context |
|---|---|---|---|---|---|
| Mar 2001 | 0.87% | +5.4% | -9.9% | -0.6% | Dot-com bust |
| Aug 2007 | 0.97% | +1.2% | -8.4% | -11.0% | Pre-GFC |
| May 2011 | 0.81% | -8.9% | -6.4% | -0.5% | Euro crisis fears |
| Mar 2020 | 0.40% | +20.2% | +31.0% | +56.2% | COVID + massive policy |
When employment turns negative (crosses 0%), the outcomes are more severe:
| Crossing Date | 3M Forward | 6M Forward | 12M Forward | Context |
|---|---|---|---|---|
| Jul 2001 | -12.5% | -6.1% | -23.9% | Recession |
| May 2008 | -7.8% | -35.1% | -32.3% | Financial crisis |
| Apr 2020 | +12.9% | +13.4% | +46.0% | COVID + unprecedented stimulus |
Stock Ideas by Regime
Given the current Slow regime with risk of further deceleration, here are stocks screened for quality that fit different scenarios.
For Current "Slow" Regime: Healthcare (Defensive)
Healthcare showed +0.49%/mo in Slow regime—positive while most sectors were negative.
| Ticker | Company | Mkt Cap | P/E | ROE | Margin | Div Yield | 3M Ret |
|---|---|---|---|---|---|---|---|
| JNJ | Johnson & Johnson | $527B | 21.1 | 32.7% | 27.3% | 2.35% | +12.9% |
| MRK | Merck | $272B | 14.3 | 39.0% | 29.6% | 3.01% | +29.1% |
| ABT | Abbott Labs | $212B | 15.2 | 28.2% | 31.9% | 1.97% | -5.8% |
| AMGN | Amgen | $178B | 25.4 | 96.2% | 19.5% | 2.88% | +10.8% |
| GILD | Gilead Sciences | $155B | 19.1 | 40.7% | 27.9% | 2.53% | +1.1% |
| PFE | Pfizer | $146B | 14.8 | 10.9% | 15.6% | 6.71% | +5.9% |
For Continued Slowdown: Consumer Staples
Staples held flat (-0.02%/mo) in Slow regime while cyclicals fell.
| Ticker | Company | Mkt Cap | P/E | ROE | Margin | Div Yield | 3M Ret |
|---|---|---|---|---|---|---|---|
| PG | Procter & Gamble | $338B | 21.0 | 32.1% | 19.7% | 2.89% | -2.2% |
| KO | Coca-Cola | $303B | 23.3 | 47.0% | 27.3% | 2.90% | +4.8% |
| PEP | PepsiCo | $200B | 27.7 | 38.9% | 7.8% | 3.84% | -3.9% |
| CL | Colgate-Palmolive | $68B | 23.5 | 545% | 14.5% | 2.44% | +8.0% |
| TGT | Target | $51B | 13.4 | 24.9% | 3.6% | 4.06% | +20.4% |
If Employment Turns Negative: Financials
Deep Contraction produces +4.23%/mo for Financials. Fed cutting = bank profits.
| Ticker | Company | Mkt Cap | P/E | P/B | ROE | Div Yield | 3M Ret |
|---|---|---|---|---|---|---|---|
| JPM | JPMorgan Chase | $851B | 15.3 | 2.41 | 16.0% | 1.86% | +1.7% |
| BAC | Bank of America | $387B | 12.7 | 1.29 | 10.2% | 2.04% | +1.6% |
| GS | Goldman Sachs | $291B | 17.5 | 2.41 | 13.8% | 1.46% | +25.7% |
| MS | Morgan Stanley | $301B | 18.4 | 2.70 | 15.1% | 2.04% | +15.4% |
| PNC | PNC Financial | $88B | 12.7 | 1.45 | 11.9% | 2.96% | +23.2% |
| USB | U.S. Bancorp | $85B | 11.8 | 1.34 | 11.8% | 3.75% | +19.0% |
Quality Industrials: Work Across Regimes
Industrials showed +1.12%/mo in Moderate and +3.45%/mo in Deep Contraction. Solid either way.
| Ticker | Company | Mkt Cap | P/E | ROE | Margin | Div Yield | 3M Ret |
|---|---|---|---|---|---|---|---|
| HON | Honeywell | $139B | 22.7 | 35.6% | 15.1% | 2.00% | +12.5% |
| UNP | Union Pacific | $136B | 19.3 | 42.4% | 28.7% | 2.37% | -1.9% |
| UPS | United Parcel Service | $91B | 16.5 | 34.4% | 6.2% | 6.14% | +23.3% |
| FDX | FedEx | $73B | 17.3 | 15.7% | 4.8% | 1.86% | +26.6% |
| CMI | Cummins | $80B | 29.9 | 23.7% | 7.9% | 1.32% | +37.4% |
Summary
Employment growth at 0.37% YoY places us in the "Slow" regime. History shows this isn't the worst zone—that's mild Contraction (-2% to 0%). But with 3-month annualized growth turning negative, the risk of further deterioration is real.
- Current regime (Slow): Defensive positioning makes sense. Healthcare and Staples hold up best.
- If growth stabilizes: Moderate (1-2%) is the Goldilocks zone. Industrials, Discretionary work well.
- If contraction comes: Deep Contraction is actually good for stocks (+2.88%/mo) as Fed cuts. Financials lead.
- The danger zone: Mild Contraction (-2% to 0%) is worst. Uncertainty is highest; avoid over-leveraged positions.