Why the January jobs report has the bulls excited even if it means fewer rate cuts this year

A surprise blockbuster jobs report could support the broadening of the stock market rally, even as it keeps the Federal Reserve on hold. Investors breathed a sigh of relief Wednesday, after the Bureau of Labor Statistics said the U.S. economy added 130,000 jobs in January . That was far above the Dow Jones consensus estimate for 55,000, as well as an improvement from the December number, which was downwardly revised to a gain of 48,000. The unemployment rate also edged lower, to 4.3% from 4.4%. .SPX 1D mountain S & P 500, 1-day The indication of a stronger economy added conviction to the rotation trade, as traders resumed shifting some of their bets away from technology and into those cyclical stocks most likely to benefit from economic growth. Stocks rallied, with construction equipment maker Caterpillar , closely tied to swings in the economic cycle, advancing nearly 3%. “The bigger implication may be for stocks,” Brad Conger, investment chief at Hirtle Callaghan, wrote of the January jobs report. “A stronger job market will support the ‘broadening trade’ – the rotational to industrial cyclicals and consumer discretionary from technology.” So far this year it’s the equal weighted S & P 500 that has outperformed, rallying roughly 6% while the conventional, market cap-weighted version of the index has gained just 2%. The small cap S & P Small Cap 600 has jumped more than 10%. Software stocks, as tracked by the iShares Expanded Tech-Software Sector ETF (IGV) , have plunged more than 19% as a group. Conger said that he favors homebuilders, REITs and luxury goods, which he said are “under-appreciated” beneficiaries of stronger growth. Fed on hold Suddenly, the January jobs report also makes it more likely the Fed will keep monetary policy close to where it is this year. The central bank at its most recent meeting indicated that the economic outlook is improving, even removing the warning that there are “downside risks to employment” from its regular policy statement. The timeline for interest rate reductions have been pushed further out in 2026, though markets are still pricing in two quarter-point reductions this year, according to the CME FedWatch Tool. “Today’s data shows an acceleration in employment that was strong enough to drive unemployment lower— vindication for Chair Powell’s holding pattern,” wrote Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. Still, the unexpected strength of the payroll report is at odds with recent data outside the BLS indicating the labor market is in trouble. Layoffs at U.S. employers hit their highest January total going back to 2009, according to data from outplacement firm Challenger, Gray & Christmas. Recent ADP data showed private hiring is little changed. Job openings were recently reported to have plunged to a level not seen since September 2020 . What’s clear is that the strong January number will heighten the importance of Friday’s inflation data, which will give investors greater clarity into where the risk lies between the Fed’s dual mandate of encouraging maximum employment and ensuring stable prices. “The immediate rally may not last as the real story will come on Friday with the CPI,” said Jay Woods, chief market strategist for Freedom Capital Markets. “That’s when the Fed narrative will come back into focus. For now it’s what the bulls needed, but not enough to give the Fed ammo to cut before Powell’s term ends” in May.