Navigating the Shifting Labor Market: Implications for Wage Growth and Equity Valuations in 2026

The U.S. labor market has entered a period of recalibration, marked by slowing wage growth and revised employment figures. According to the Bureau of Labor Statistics (BLS), the employment growth rate for the year ending March 31, 2025 was revised downward by 911,000 jobs, signaling a significant deceleration in labor market expansion compared to earlier in the year. This trend, compounded by a government shutdown that canceled October's jobs report and the September Job Openings and Labor Turnover Survey, has created uncertainty about wage inflation dynamics. However, certain sectors-particularly manufacturing, asset-backed securities (ABS), and value stocks-have demonstrated resilience, offering strategic opportunities for investors navigating this shifting landscape.

Manufacturing: Productivity Gains and Attractive Valuations

The manufacturing sector has emerged as a key area of strength amid labor market softness. In Q2 2025, labor productivity in the nonfarm business sector rose by 3.3%, with manufacturing contributing significantly to this growth. Durable manufacturing productivity surged by 3.2%, driven by a 3.5% output increase, while nondurable manufacturing productivity grew by 1.9%. These gains reflect improved efficiency and capacity utilization, which have helped offset wage inflation pressures.

Equity valuations in the manufacturing sector also appear compelling. For instance, MTU Aero Engines AG trades at a 15.9x EV/EBITA and 12.1x EV/EBITDA for 2026-below peer averages of 21x and 17x, respectively. RBC Capital Markets forecasts robust free cash flow growth, with FCF yield projected to rise from 2.8% in 2026 to 5.5% by 2029. Similarly, WH Group trades at a high single-digit forward P/E ratio for fiscal year 2026, supported by its focus on downstream packaged meat and a 5-6% yield. These valuations suggest that manufacturing firms are well-positioned to capitalize on structural demand and operational efficiencies.

ABS Sector: Diversified Growth Amid Macroeconomic Shifts

The ABS sector is another area of resilience, KBRA forecasts growing issuance in 2026 amid diverging sub-sector trends. Auto, student loan, and equipment ABS are expected to expand, buoyed by supportive monetary policy and sustained credit demand. Conversely, credit card and solar ABS issuance may contract. The Federal Reserve's anticipated rate-cutting cycle through mid-2026 is likely to further ease borrowing costs, sustaining credit formation.

Investors should also consider strategic acquisitions within the ABS space. For example, ZenaTech's expansion into solar surveying-aimed at establishing 25 Drone as a Service (DaaS) locations by Q2 2026-highlights the sector's adaptability to emerging markets. While ABS valuations are not explicitly tied to wage inflation, their focus on durable cash flows and disciplined capital allocation positions them to weather macroeconomic volatility.

Value Stocks: Operational Efficiency as a Buffer

Value stocks, particularly in the food, beverage, and entertainment sectors, offer another avenue for resilience. Jefferies has highlighted Yum China as a standout, with its shareholder return program and expansion plans to reach 30,000 stores by 2030. The company's operational efficiency and strong balance sheet provide a buffer against inflationary pressures. Similarly, Yili is poised for margin expansion through product diversification in non-liquid milk sectors.

In the manufacturing segment, WH Group's earnings stability-85% of which derive from downstream packaged meat-further underscores the sector's ability to navigate wage inflation. These examples illustrate how value stocks with robust cost controls and scalable business models can thrive even in a slowing labor market.

Strategic Positioning for 2026

For investors, the key lies in identifying sectors and companies that align with structural trends rather than cyclical fluctuations. Manufacturing firms with high productivity and attractive valuations, ABS issuers leveraging macroeconomic tailwinds, and value stocks with operational discipline all represent compelling opportunities. As wage growth moderates and labor market softness persists, these sectors offer a hedge against volatility while delivering long-term value.