A moderately cooling labor market could increase the likelihood of more rate cuts by the Federal Reserve—a tantalizing prospect for many investors eyeing future earnings growth—fueling bullish behaviors in the stock market, according to Morgan Stanley analysts.

“We are now firmly back in a good is bad/bad is good regime,” Michael Wilson, chief U.S. equity strategist and chief investment officer for Morgan Stanley, wrote in a note to investors on Monday.

Fed Chair Jerome Powell’s divisive cut last week, the Fed’s third cut in as many meetings, was based on consistent data showing a softening job market, including unemployment rising three months in a row through September, and the private sector shedding 32,000 jobs last month, per ADP’s November report. 

According to Powell, the quarter-point cut was defensive and a way to prevent the labor market from tumbling, adding that while inflation sits at about 2.8%, which is higher than the Fed’s preferred 2%, he said he expects inflation to peak early next year, barring no additional tariffs.

He added that monthly jobs data may have been overcounted by about 60,000 as a result of data collection errors, and that payroll gains may actually be stagnant or even negative.

“I think a world where job creation is negative…we need to watch that very carefully,” Powell said at the press conference directly following the announcement of the rate cut. 

Wilson suggested that Powell’s emphasis on the jobs data, as well as his de-emphasis on tariff-caused inflation, makes the labor market a crucial factor in monetary policy going into 2026. 

As a result of the government shutdown, the Labor Department’s job market report will be released on Tuesday, which will contain data from both October and November, and is expected to show a modest 50,000 payroll gain in November, with the unemployment rate ticking up from 4.4% to about 4.5%, consistent with the trend of a labor market that is slowing, but not suddenly bottoming out. 

‘Rolling recovery’ versus plain bad news

The Morgan Stanley strategist has previously argued that weak payroll numbers are actually a sign of a “rolling recovery,” with the economy in the early stages of an upswing slowly making its way through each sector. It follows three years of a “rolling recession” that Wilson said had kept the economy weaker than what employment and GDP figures suggested.

In Wilson’s eyes, because jobs data is a lagging metric, the trough of the labor cycle was actually back in the spring, coinciding with mass DOGE firings and “Liberation Day” tariffs. For a more accurate representation of the health of the economy, Wilson argued to look instead at the markets. The S&P 500, for example, is up nearly 13% over the past six months.

However, with Powell basing his policy decisions on data such as jobs, Wilson noted, the Fed could still see more room to cut, even as Morgan Stanley sees a labor market that is not in jeopardy.

“In real time, the data has not been weak enough to justify cutting more,” Wilson told CNBC last week prior to the Fed meeting. “But when they actually look at the revisions now…it’s very clear that we had a significant labor cycle, and we’ve come out of it, which is very good.”

But just as economists weren’t in consensus for the Federal Open Market Committee’s most recent rate cut, the possibility of more meager jobs numbers is not universally favored.

Claudia Sahm, chief economist at New Century Advisors and a former Fed economist, agreed the jobs data is a lagging economic indicator, but warned it could indicate a recession is underway, not that we’re already in the clear. What was particularly concerning to her was that lagging labor data could bear worse job news, as layoffs have yet to surge following shrinking job openings. 

She told Fortune ahead of the Fed’s decision last week that additional rate cuts would not be welcome news, but rather a sign the Fed had acted too late in trying to correct a battered labor market.

“If the Powell Fed ends up doing a lot more cuts, then we probably don’t have a good economy,” she said. “Be careful what you wish for.”