Markets Rotate Beneath the Surface as Growth and Labor Signals Diverge
February 9, 2026
Financial Markets
Equity markets finished the week mixed, but the headline index performance masked a significant shift beneath the surface. Rather than a broad risk-off move, markets continued to exhibit a clear rotational dynamic. The S&P Small Cap 600 and the equal-weighted S&P 500 advanced on the week, while the market-cap-weighted S&P 500 and technology-heavy NASDAQ Composite lagged. In several sessions, the market-cap-weighted S&P 500 declined even as more stocks advanced than declined, highlighting improving breadth and a redistribution of leadership away from mega-cap tech and AI infrastructure-linked names. On Wednesday alone, the S&P Small Cap 600 and the equal-weighted S&P 500 gained nearly 0.9% despite declines in the S&P 500 and NASDAQ Composite, underscoring investor willingness to reallocate rather than retreat. More speculative and high-volatility assets struggled, however, with cryptocurrencies falling sharply and precious metals remaining volatile and trending lower after their recent historic rallies.
| Index | Prior Week | Year-to-Date | 1-Year |
|---|---|---|---|
| S&P 500 | -0.09% | 1.36% | 15.42% |
| S&P 500 Equal Weighted | 2.15% | 5.61% | 13.82% |
| Dow Jones Industrial Avg. | 2.50% | 4.35% | 13.93% |
| NASDAQ Composite | -1.83% | -0.89% | 17.12% |
| Small Cap S&P 600 | 3.96% | 9.79% | 12.86% |
Market movements reflected a reassessment of several interrelated themes, including the scale and timing of AI-related capital expenditures versus near-term payoffs, the potential for AI to disrupt traditional software business models, and renewed signs of labor-market softening. These concerns weighed particularly heavily on richly valued AI-adjacent equities and contributed to a more defensive tone midweek. Importantly, the broader growth backdrop remains best described as mixed, not broken. While labor indicators softened, other measures of activity and demand continue to point toward an economy that is slowing gradually rather than deteriorating abruptly.
From an earnings perspective, fundamentals remain supportive. Fourth-quarter reporting is on pace to deliver a fifth consecutive quarter of double-digit earnings growth, with S&P 500 profits tracking close to 13% year over year—well above the approximately 8% growth expected at the start of the quarter. Nearly 90% of that earnings growth has been driven by technology-related businesses in the information technology and communication services sectors. Looking ahead to 2026, these contributors are expected to remain important, though growth is anticipated to broaden beyond this narrow group.
Economics
This week’s economic data were distinctly two-handed, pointing to improving activity alongside a cooling labor market.
On the activity front, January’s ISM Manufacturing Index rose to its highest level since August 2022, delivering the first expansionary reading after ten consecutive months in contraction and only the second expansion in the past three years. The details were notably strong, with new orders jumping nearly ten points—the most significant one-month increase outside the pandemic period since 2021. Together, the data reinforced the market’s recent pro-cyclical tone and the narrative of gradually broadening economic momentum.
Services activity remained steady but mixed. January’s ISM Services Index came in largely in line with expectations, with respondents citing both tariff-related uncertainty and optimism tied to accelerating AI and data-center investment. Consumer spending was generally described as resilient, though some early-year softness was noted. Consumer sentiment data from the University of Michigan reflected a similar two-handed picture. Preliminary February sentiment rose to its highest level since August 2025 and has now improved for three consecutive months, but remains well below year-ago levels. Gains were concentrated among households with significant equity exposure. At the same time, sentiment among those without stock market participation remained subdued, highlighting ongoing economic bifurcation driven by asset ownership, price pressures, and job-security concerns.
Labor market indicators pointed more clearly toward renewed softness. January ADP private payrolls rose by just 22,000, well below expectations, and December’s reading was revised modestly lower. While wage growth remained stable, job creation has slowed meaningfully over the past several years. Private employers added roughly 398,000 jobs in 2025, down sharply from 771,000 in 2024, reinforcing the view that labor demand is cooling rather than accelerating.
Layoff data added to these concerns. Challenger Gray & Christmas reported more than 108,000 announced layoffs in January, the highest January total since 2009 and more than triple December’s level. Although AI was cited in roughly 7% of announced cuts and its direct impact remains difficult to quantify, the theme has moved quickly to the forefront. The sharp repricing of software equities in recent weeks reflects how rapidly these labor and disruption risks have entered investor focus.
Other labor indicators reinforced the cooling trend. December JOLTS job openings fell to 6.54 million, the lowest level since September 2020, with notable declines in professional services, retail, and finance. Initial jobless claims also surprised to the upside, rising to 231,000, while continuing claims remained elevated, suggesting longer job searches for displaced workers. Interpretation remains complicated by the partial government shutdown, which has delayed the January employment report until Wednesday of this week.
Conclusion
The economic picture remains distinctly two-handed. Activity indicators suggest that growth is still expanding, while labor data increasingly point toward cooling conditions. That combination can be supportive for markets if it helps ease inflation pressures and allows the Federal Reserve to remain flexible. The key risk is whether labor weakness accelerates beyond a gradual normalization.
Overall, this week’s market action served as a reminder that leadership can shift quickly, especially when the most richly valued segments of the market and high-volatility assets stumble simultaneously. For now, market action appears consistent with repositioning rather than a fundamental break in growth. With activity still expanding and earnings growth exceeding expectations, the broader backdrop remains constructive, albeit increasingly selective.
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