All eyes will be on US labor market reports this week, with potentially significant implications for debt and equity markets.
Tuesday’s Job Openings and Labor Turnover Survey (JOLTS) hinted at a slight softening of labor market conditions, with job openings falling marginally and layoffs decreasing slightly. The JOLTS data lags by one month and hence offers a slightly dated perspective, but Friday’s Employment Situation report will provide a timelier picture. In that report, the unemployment rate is expected to remain at 4.1%, while nonfarm payrolls are expected to have grown by approximately 90,000 in September—which would be slightly stronger than the year-to-date average of 80,000 through August and much more robust than the 2025 full-year average of 10,000 jobs per month (Exhibit 1).
While job growth is a sign of economic strength, in this case, it may not be welcome news for investors.
EXHIBIT 1
US Job Growth Is Improving
Average Monthly Change in Private Nonfarm Payrolls
As of August 2026.
Source: Bureau of Labor Statistics, Haver Analytics.
A meaningfully stronger-than-expected report on Friday could raise the risk of US inflation reaccelerating from levels already well above the Fed’s 2% target. This, in turn, could cause bond yields to rise as investors sell over fears that the Fed—already facing rising US rents, energy prices, and semiconductor prices—is behind the curve yet again in its efforts to control inflation.
I believe this sell-off risk is meaningful given recent signs of rising US wages. The Atlanta Federal Reserve recently reported that job-switchers are winning the largest pay increases since 2024, while the Bank of America Institute shows the biggest wage gains since 2023. If my expectations prove correct, the implications for inflation could be more expansive, as workers regaining bargaining power drives costs higher across multiple sectors.
Against this backdrop, US equities could be at risk of a drawdown.
To understand why, consider the events of 2023. That year, the US 10-Year Treasury yield bottomed at ~3.3% in early April before surging over the subsequent seven months to a peak of ~5.0%, while Moody’s Baa Corporate Bond Index yield rose from ~5.4% to ~6.8%. Meanwhile, over the same period, the forward price-to-earnings (P/E) ratio of the S&P 500 Index initially rose from ~18.1x to a peak of ~19.7x in late July as economic optimism and the outlook for revenue and earnings growth improved.
As bond yields continued to surge, however, the relative attractiveness of equities versus debt shifted in favor of debt.
For pension fund managers with return targets of 7%–7.25%, for example, corporate debt became more compelling than equities. Instead of paying ~19.7x for equities at the July 2023 peak, they could pay ~14.7x for a corporate bond index with substantially lower risk. The S&P 500 Index swooned, falling nearly 11% from late July to late October when bond yields peaked.
The market set-up today is similar. The US 10-Year Treasury yield is approaching 5.3%, a level last seen in June 2007; the Moody’s Baa Corporate Bond Index yield stands at 6.7%; and the S&P 500 Index is trading at a forward P/E ratio of ~19.0x.
In this environment, we could see investors reallocating capital away from more expensive, riskier equities to higher-yielding bonds. Non-US markets would not be immune to this drawdown, but I do believe they would be less susceptible to the downside risk due to lower valuations (with better downside protection) and a less challenging inflationary backdrop.
There is no guarantee that this week’s labor report will spook markets—but even if Friday’s data release is benign, I believe equity investors should be on the lookout for the rising risk posed by higher long-term US interest rates.
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Published on 30 September 2026.
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