Payroll trends, inflation deceleration and sector signals: Insights from Denise Chisholm - December 18, 2025

Small business hiring intentions strengthen as borrowing costs ease

Denise began by emphasizing that payroll reports are lagging indicators and can often be misleading about forward conditions. Instead, she highlighted leading signals from the NFIB Small Business Survey, which recently showed a top decile increase in hiring intentions. Historically, such an inflection has aligned with a 70 to 75 percent probability that small business payrolls will grow over the following year. She noted that this cycle remains unusual because the economy experienced what she calls a full employment recession in 2022 followed by a full employment recovery, meaning job losses never meaningfully accelerated. As a result, job growth may remain modest but appears durable. Small businesses are also beginning to report lower borrowing rates for the first time in this cycle, which improves their ability to hire and expand.                    

The Fed is cutting because it can not because it must

Turning to inflation and monetary policy, Denise pointed out that U.S. core inflation recently came in at 2.6 percent year over year, slightly below the Federal Reserve’s earlier expectation of 2.8 percent. Even with mid-year tariff related price increases, the broader trend still reflects a top quartile deceleration in inflation. Historically, periods of top quartile deceleration have aligned with constructive backdrops for equities, especially in more economically sensitive sectors. Denise stressed that the Fed’s cuts are occurring because the data supports them rather than because economic stress forces action. When the Fed is able to normalize policy under these conditions cutting because it can the environment has typically supported both employment durability and profit growth. She noted that one or two additional rate cuts in 2026 would be consistent with the pattern established after the three cuts delivered in 2025.

Sector outlook: Technology, financials, and consumer discretionary

Denise reiterated that she continues to favour three key sectors. Technology remains her strongest overweight because its secular profitability tends to benefit most from disinflation through multiple expansion. She does not expect a broad rotation away from technology. Instead, she anticipates greater market breadth while technology continues to show durable leadership.

Financials have become increasingly compelling in her view. Over the last four years, the sector has traded largely sideways, but this range bound behaviour is exactly what she finds attractive given current valuations. Financials have returned to bottom decile valuation levels at the same time that earnings have remained resilient. Historically, when the Fed cuts rates, the yield curve has steepened roughly 75 percent of the time, a dynamic that tends to benefit banks that borrow short and lend long. Although consolidation or deregulation could create additional upside, Denise described these as potential positives rather than necessary components of her thesis.

Consumer discretionary remains her third ranked sector. While it is rate sensitive, it has been less sensitive than technology due to differing margin profiles. She also reiterated her view that homebuilders, despite going sideways or underperforming, may still offer opportunity based on long term patterns she continues to monitor.

Wages, labor supply and productivity trends

Addressing concerns about labour supply and wage inflation, Denise noted that the U.S. labour force experienced almost no growth for roughly 25 years prior to the pandemic, yet GDP expanded steadily through that period. She explained that low unemployment is not a reliable predictor of wage acceleration, highlighting that wage growth is now decelerating despite a tight labour market. In her view, this weakens arguments that wage pressure will drive a renewed inflation problem. Denise also acknowledged optimism surrounding AI driven productivity improvements but clarified that such gains have not yet appeared in the data. She emphasized that affordability challenges will improve gradually through economic durability rather than through immediate productivity gains or rapid price declines.

U.S. vs. international markets: Earnings momentum still favors the U.S.

Denise concluded by comparing U.S. valuations with those of international markets. Although the U.S. appears more expensive, she cautioned that valuation alone has not been predictive of future performance. Markets outside the U.S. have experienced long term structural de rating because their earnings cycles have been weaker relative to the U.S. At present, U.S. earnings growth has re accelerated to top quartile levels, while earnings in Europe and Japan are decelerating. Although increased defence spending in Europe could eventually influence corporate fundamentals, there is still no evidence of such a shift in the earnings data. Based on current trends, she expects U.S. leadership to continue into 2026.

Conclusion: A data driven view of the road ahead