Rising Prices and Job Cuts Test Market Confidence

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

We’ve now entered the sixth week of the federal government shutdown, making it the longest on record. The shutdown appears to be nearing an end as of this writing, after a group of moderate Senate Democrats voted in favor of a deal that could reopen the government later this week.

While the past week offered some solid economic data, the new information did little to clarify where the economy and markets are headed. To a large extent, we’re still “driving in the fog,” in the words of Fed chair Jerome Powell, as quoted in last week’s commentary.

That said, some aspects of the economy’s condition are becoming increasingly clear. As in previous weeks, data releases last week showed overall economic growth persisting despite signs of a cooling labor market and still heightened inflation. This growth has been driven largely by parts of the economy that are less sensitive to high interest rates—namely, large companies and higher-income consumers—with small companies, the manufacturing sector and lower- to middle-income consumers faring less well. The result is a bifurcated economy and bifurcated markets.

Household debt increased 1 percent in the third quarter, according to the New York Fed, and the overall percentage of outstanding debt in some stage of delinquency inched up from 4.4 percent to 4.5 percent. These findings suggest many U.S. consumers, especially those in their 20s and 30s, continue to face challenges related to high interest rates. Preliminary results from the University of Michigan show a decline in consumer sentiment over the past month, particularly around personal finances and year-ahead business conditions. But the survey draws a clear line between consumers with little or nothing invested in the stock market and those who are heavily invested.

“This month’s decline in sentiment was widespread throughout the population, seen across age, income, and political affiliation,” wrote surveys of consumers director Joanne Hsu. “One key exception: Consumers with the largest tercile [those in the top third] of stock holdings posted a notable 11% increase in sentiment, supported by continued strength in stock markets.”

The survey also shows that 71 percent of consumers believe there will be more unemployment over the next year, up from 32 percent in November 2024 and the second-highest percentage since 1978. The latest hard data seems to support their pessimism. While previous data showed both low hiring and low firing, new data suggests that we could be shifting to an environment of even lower hiring and a growing number of firings.

Consulting firm Challenger, Gray & Christmas reported that U.S. companies’ job-cut announcements nearly tripled from September to October, rising from 54,064 to 153,074. American employers have announced 1,099,500 job cuts in 2025, up 65 percent from the first 10 months of last year. Most of these payroll reductions have to do with cost-cutting or bankruptcy, and nearly 300,000 are due to DOGE’s downsizing efforts; only 48,400 have to do with artificial intelligence. Just 488,077 workers have been hired so far this year, the lowest 10-month figure since 2011.

The weakening labor market continues to be coupled with heightened inflation. The prices index from last week’s Institute for Supply Management (ISM) Services Purchasing Managers Index (PMI) Report registered 70 percent, its highest level since October 2022. This figure typically has a strong correlation with overall inflation. It lends support to other recent data, including the Consumer Price Index for September, which showed inflation rising by 3 percent year over year. The opening of the Supreme Court case concerning the legality of U.S. tariffs adds another layer of uncertainty to the prices consumers will pay in the coming months.

Before last week, economic uncertainty generally hadn’t led to market sluggishness. Last week was a different story, as the S&P 500 slid 1.6 percent. The biggest driver of the downturn was a sharp sell-off in leading AI-related stocks and other mega-cap tech names as investors showed growing concern about lofty valuations and the viability of some AI-related entities.

As media chatter about a potential AI bubble grows louder, investors are becoming increasingly concerned about the possibility of a market downturn. There is no doubt that the market has been hyper-concentrated the past few years: Only 28 percent of stocks in the S&P 500 have beaten the index so far this year, and just 28 percent and 32 percent outperformed the benchmark in 2023 and 2024, respectively. In all, roughly 70 percent of S&P 500 stocks have underperformed the index over the past three years, and about a quarter of stocks have declined. Large-Cap stocks have significantly outperformed Small Caps during that time.

These dynamics relate to the bifurcated economy. When interest rates are high, investors are drawn to less rate-sensitive assets. Those include shares of the “Magnificent Seven” tech companies and other AI-related companies. We believe the economy will broaden in the future and that markets will soon begin to broaden, just as they did in the aftermath of the dot-com bubble in the early 2000s. Back then, the impact of the internet spread through the economy as more businesses and consumers began to benefit from it. We see a similar path for AI in the months and years ahead.

While it is impossible to predict an exact time frame for this trajectory, we can confidently recommend long-term diversification as the best path forward. Building diversified portfolios that reflect a wide range of opportunities and risks will help position investors to capitalize on a more balanced market.

Wall Street wrap

Services sector showed signs of growth: The ISM Services PMI expanded in October, coming in at 52.4 percent, 2.4 points higher than September’s 50 percent reading. October marked the eighth month in 2025 in which services were in expansion.

New orders spiked from 50.4 to 56.2, the highest level since October 2024. Business activity also expanded, registering 54.3 percent, 4.4 points higher than the reading of 49.9 percent in September—the lone month since May 2020 that the reading fell into contraction territory.

Other numbers pointed to continued inflation. The Services Prices Index came in at 70 percent, the first time it has hit that figure since October 2022. The index has now exceeded 60 percent for 11 straight months, the longest such streak since it had 30 consecutive readings above 60 percent between October 2020 and March 2023. The Employment Index contracted for the fifth consecutive month, although its 48.2 percent reading was one point higher than September’s 47.2 percent.

“October’s Services PMI is a continuation of a downward trend of more than 10 percentage points in the 12-month average since February 2022, when it was 62.6 percent,” wrote Steve Miller, chair of ISM’s Services Business Survey Committee. “The rebounds in both the Business Activity and New Orders Indexes in October are positive signs, while the continued contraction in the Employment Index shows a lack of confidence in the continued strength of the economy.” Manufacturing continued to contract despite slight rise in demand: Manufacturing was in contraction for the eighth consecutive month, with the ISM Manufacturing PMI registering 48.7 percent for October, a 0.4-point decrease from September. This index has been in contraction territory for 34 of the last 36 months.

Readings for new orders reflected contraction for the second consecutive month, coming in at 49.4 percent, though that reading was 0.5 points higher than September’s 48.9 percent result. New orders have now been in contraction for eight of the past nine months. The production index registered 48.2 percent, a 2.8 percent drop from September’s 51 percent.

“In October, U.S. manufacturing activity contracted at a faster rate, with contractions in production and inventories leading to the 0.4-percentage-point decrease of the Manufacturing PMI,” wrote Susan Spence, chair of the ISM’s Manufacturing Business Survey Committee. “A chain reaction of one-month index improvements started with New Orders in August and flowed to Production in September. In October, it manifested in a 1.7-percentage-point increase in the Backlog of Orders Index. These short gains have not appeared to translate into sustained growth for the sector, a reflection of continuing economic uncertainty.”

Consumer sentiment souring: Consumer sentiment dropped by about 6 percent in November. Preliminary results from the University of Michigan’s Consumer Sentiment report landed at 50.3, just above the all-time low of 50 in June 2022.

Sentiment about current economic conditions registered at 52.3, the lowest since the survey’s inception in 1978. Consumers’ view of their current personal finances versus a year ago came in at 65, the lowest level since the 2008 financial crisis.

As noted above, 71 percent of consumers believe unemployment will rise over the next year, a 39-point uptick from November 2024 and the second-highest percentage since 1978.

By and large, consumers said they think now is not a good time to buy, with declining confidence about purchasing large household durables, vehicles and homes. Meanwhile, year-ahead expected business expectations fell 11 percent compared to October, and the share of consumers making unprompted mentions of the negative effects of high prices on their personal finances rose for the fifth consecutive month, to 48 percent. Long-run inflation expectations declined from 3.9 percent last month to 3.6 percent in November, but this figure remains historically high.

Weak hiring, more firing: The latest ADP National Employment Report showed that the private sector added 42,000 jobs in October, the first month with a net jobs gain since July. The three-month average increase in private-sector jobs was just 3,300, and the six-month average was 20,000, indicating ongoing weakness in the labor market. A similar report from Revelio Labs showed that nonfarm employment (including government workers) contracted by 9,000 jobs in October, bringing the three- and six-month average to 13,000 and 7,000, respectively.

The latest jobs data from consulting firm Challenger, Gray & Christmas confirmed this assessment, with just 488,077 workers being hired so far this year, the lowest 10-month figure since 2011. The same report shows that U.S. companies’ job-cut announcements rose from 54,064 in September to 153,074 in October.

The week ahead

Tuesday: The NFIB will release its Small Business Optimism Report, which covers the economic health and outlook of small businesses. Last month showed declining small business optimism, with the uncertainty index rising to the fourth-highest reading in more than 50 years. We’ll be watching to see how small business owners respond to continued inflation pressures and labor market challenges.

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