U.S. jobs report tops expectations

Transcript

Hi, I'm Chris Nelson. Welcome to the market weekend review for the week ending February 13th. We'll cover the jobs report, the election outcome in Japan, and the tech stock market action. Let's start with the January US jobs report, which was a positive surprise. Payrolls rose by 130,000 in January, a clear step up from 48,000 in December after revisions and well above expectations. The unemployment rate also fell to 4.3% an encouraging and historically low level. But the mix is the story. Job growth was concentrated in health care and social assistance which continued to add consistently. Construction also contributed. On the other hand, we saw modest job losses in higher paying segments like financial activities and in parts of the information sector areas that investors tend to associate with stronger wage growth and white collar demand. From a P Fed perspective, we think this supports patience. If the economy is still adding jobs and unemployment isn't rising, it's harder to argue that interest rates are meaningfully restricting activity. Markets did react, though. Gold extended its pullback as the stronger labor data tempered expectations for near-term cuts. In short, job growth was better than feared, but the composition left some uncertainty around the outlook. Moving to Japan, the big development this week was the election outcome and what it implies for fiscal policy. Japan's Prime Minister Sanay Takichi and the ruling block won a supermajority, giving the PM a mandate for stimulus, tax relief for consumers, investment in strategic industries, and higher defense spending. Investors have had some concerns about how this additional spending will be financed. Japan's debt load is already large at more than 200% of GDP. So, does this mean more borrowing, higher yields, and yen weakness? Well, the market reaction was more constructive than cautious. Japanese equities surged to fresh records after the win. JGB yields edged higher, and the yen actually firmed modestly, which tells you investors aren't pricing significant fiscal concerns. The takeaway, investors are embracing the growth impulse while watching the bond market closely. And on valuations, after last year's run, Japanese equities look less cheap than they did, but the market still has a tailwind if reforms, capex, and shareholder focus stay on track. Finally, a word on tech. After dominating last year, tech has lagged as investors rotate out of the most expensive AI related names. Unease over high valuations, spending plans, and growth rates were amplified by recent capex announcements. Indeed, the big four, Amazon, Alphabet, Meta, and Microsoft are on track to spend over 650 billion in 2026, a 60% increase from 2025. Beyond that, investors are keying in on who gets paid and who gets disrupted. And some software names have sharply corrected. When we compare what active institutional managers are saying, three themes stand out. First, the biggest, most established software programs still have real advantages. They're already embedded in large companies, and many managers believe AI is more likely to add features and expand spending over time than instantly replace these systems. Second, investors are becoming more selective. They're looking for businesses that are hard to replace. The plumbing of technology, think back office like accounting, infrastructure, and other critical tools. Third, the risk case is also straightforward. AI could compress profit margins if it makes software easier to copy, harder to price, or less sticky. In other words, some software companies may find it tougher to keep charging the same way they have in the past, particularly for seatbased models. Investors are watching a few simple signposts. Are companies actually deploying and paying for AI at scale, or is it mostly hype? And is AI driving new spend? Can revenue grow more without seats? We'll see. You could say that the market is reacting like a judge at the Winter Olympics. Strong routines get attention, but medals go to execution. Thanks for listening. Hi, I'm Sophie Antal, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.

Key takeaways

U.S. job growth surprises to the upside
Japan election outcome boosts growth expectations
Investors grow more selective in tech

U.S. hiring beats forecasts in January

The January U.S. jobs report, published on Wednesday, surprised to the upside. Payrolls rose by 130,000, a clear step up from December’s revised total of 48,000 and well above consensus expectations. Meanwhile, the unemployment rate fell to 4.3%, a historically low level and a sign the labor market remains resilient.

However, the composition of job growth tells a more nuanced story. Gains were concentrated in healthcare and social assistance, with the construction sector also contributing. Meanwhile, higher-paying sectors such as financial services and parts of the information sector saw modest job losses. Those areas are typically associated with stronger wage growth and white-collar demand.

From a U.S. Federal Reserve (Fed) perspective, continued job growth and a stable unemployment rate support rates staying on hold for now. If employment is still expanding, it’s harder to argue that policy is meaningfully restricting activity. Markets did react, though, with gold extending its recent pullback as the stronger data tempered expectations for near-term rate cuts.

In short, U.S. job growth last month was better than feared. Still, where those gains occurred leaves some uncertainty around the broader outlook.

Markets embrace Japan’s growth push

In Japan, Prime Minister Sanae Takaichi and the ruling bloc secured a supermajority in the country’s Feb. 8 elections. This gave Takeichi’s party a mandate to pursue stimulus, tax relief for consumers, investment in strategic industries, and higher defense spending.

In the wake of the election, questions quickly turned to funding. Japan’s public debt already exceeds 200% of GDP (gross domestic product), leading investors to wonder if additional spending could lead to more borrowing, higher bond yields and a weaker yen.

The market reaction, however, was more constructive than cautious, with Japanese equities surging to new records. Meanwhile, government bond yields edged slightly higher, while the yen firmed modestly. This combination suggests investors are embracing the potential growth impulse while monitoring fiscal dynamics.

Tech leadership faces closer scrutiny

After leading markets last year, technology shares have lagged as investors rotate away from the most expensive AI-related names. Concerns around valuations, spending plans, and growth assumptions have intensified, particularly following recent capital expenditure announcements.

The largest technology firms are on track to spend more than $650 billion this year, representing a 60% increase from 2025. That scale of investment has sharpened investor focus on returns and execution. Investors are increasingly asking who benefits and who faces disruption. Three key themes stand out:

Large, established software platforms retain structural advantages.
Many are deeply embedded within enterprise systems. AI may expand functionality and spending over time rather than replace these platforms outright.
Selectivity is increasing.
Investors are gravitating toward businesses that are harder to replicate, including infrastructure and mission-critical back-office tools.
Risks are becoming clearer.
If AI lowers barriers to entry or weakens pricing power, profit margins could face pressure. Companies that rely on seat-based pricing models may find it harder to sustain historical revenue growth.

For now, investors are watching practical signposts and asking questions like: Are companies deploying AI at scale? Is AI generating incremental spending? Can revenue grow without simply adding users?

The answers are still emerging. In the meantime, the market is acting like a judge at the Winter Olympics, where strong routines may draw attention, but medals are reserved for those who can actually execute.

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