GUEST BLOG / REPORT FROM EDWARD JONES & CO.--As the year winds down, investors finally received the last major economic data releases before the markets exhale for the holidays. The long-delayed employment and inflation reports arrived with caveats attached, distorted by the recent government shutdown and incomplete data collection.
Even so, beneath the noise, the numbers reinforce a cautiously constructive outlook for 2026 and hint that the subtle rotation already underway in market leadership may have more staying power than many expected.
The November inflation report delivered an unexpected headline. Consumer prices cooled more sharply than forecast, with headline CPI slowing to 2.7 percent from 3.1 percent and core CPI easing to 2.6 percent from 3 percent. Core inflation is now rising at its slowest pace since 2021, and both readings came in below every economist’s estimate.
That surprise, however, comes with an important asterisk. Because the shutdown prevented the Bureau of Labor Statistics from collecting a full set of October data, portions of the report relied on assumptions rather than observations.
Shelter inflation, which accounts for roughly one-third of CPI and typically moves gradually, showed an unusually sharp slowdown. It appears the BLS assumed zero housing inflation for October due to missing data, likely overstating the true pace of disinflation. For that reason, it may take another month or two before investors and policymakers gain a clearer read on underlying price pressures.
Even so, the broader trend remains encouraging. Housing disinflation should continue to ease services inflation into 2026. A faster deceleration would be welcome, but the more likely scenario is inflation holding rangebound in the first half of the year and remaining modestly above the Fed’s 2 percent target through 2026, albeit improved relative to 2025.
The labor market tells a similarly mixed story.
The delayed October and November employment reports revealed sharp month-to-month swings that obscure the underlying trend. November job growth came in stronger than expected, but only after October posted the largest monthly decline since 2020. That drop was largely driven by a one-time reduction in federal employment as deferred resignations rolled off payrolls.
Looking past the headline volatility, private-sector hiring appears steadier. Across October and November, the private sector added roughly 121,000 jobs, a pace consistent with a cooling but still functional labor market.
Hiring remains concentrated in health care, while manufacturing has continued to shed jobs. The unemployment rate rose to 4.6 percent in November, a four-year high, but for a constructive reason: more workers re-entered the labor force. For every positive datapoint, there is a counterweight.
Taken together, however, the most likely path forward is gradual stabilization rather than deterioration. We expect monthly job gains to improve modestly into the 50,000 to 100,000 range, while slower labor-force growth, partly tied to lower immigration, keeps unemployment near 4.5 percent in 2026.
Against this backdrop, the Federal Reserve appears positioned to maintain a bias toward easing. Chair Jerome Powell has already cautioned against over-interpreting shutdown-distorted data, which helps explain why bond-market expectations for rate cuts barely moved after the latest releases.
Still, moderating wage growth and a cooling but non-recessionary labor market give dovish policymakers room to argue for gradual cuts next year. Wage growth slowed to 3.5 percent in November, the lowest since 2021, easing pressure on inflation.
Combined with softer hiring, though not outright weakness, this environment supports a slower, shallower cutting cycle rather than the aggressive easing seen in past downturns. That policy mix, easier monetary conditions alongside a still-growing economy, has important implications for markets in 2026, particularly as leadership dynamics begin to shift.
After years of dominance by a narrow group of mega-cap technology stocks, signs of broadening have emerged. Since early November, investors have gradually rotated away from the most expensive segments of the market.
Artificial intelligence remains a powerful long-term driver, but concerns around capital spending, returns on investment, rising debt issuance, and potential overbuilding have prompted what appears to be a healthy pause rather than a collapse.
At the same time, improving liquidity and the prospect of sustained productivity gains, partly driven by AI itself, may lift profitability across sectors that have lagged. Cyclical stocks, mid-caps, value-oriented investments, and international equities all trade near long-term average valuations relative to their own histories.
Since November, the equal-weight S&P 500 has outperformed its market-cap-weighted counterpart, a subtle but encouraging signal of healthier market breadth heading into the new year. The implication is not a rejection of technology or innovation, but a widening of opportunity. Leadership within tech may broaden, and leadership beyond tech may finally reassert itself.
Looking ahead to 2026, uncertainty remains and the data fog may take time to lift. Still, the economic and market backdrop supports another year of positive returns, even if the drivers look different than they have over the past several years. A balanced approach remains prudent. Maintaining exposure to innovation and AI makes sense, but spreading that risk through benchmark-neutral tech positioning and a more even balance between growth and value can help reduce concentration.
Broadening equity exposure to include mid-caps, cyclicals, and international markets may capture improving earnings momentum at more reasonable valuations. In fixed income, bonds continue to offer attractive income and portfolio stability.
Even after recent declines, long-term Treasury yields remain near the upper end of their post-2008 range, supporting a benchmark-neutral duration stance. Finally, as cash yields drift lower alongside Fed rate cuts, it may be worth reassessing whether excess cash could be deployed more productively, depending on individual goals and risk tolerance.
After a noisy close to 2025, the path forward appears steadier than the headlines suggest.
The market may be changing character, but not losing its footing.
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