The latest jobs report showed that unemployment ticked lower because of a decline in the labour force participation rate.
But many of the people many people leaving the workforce are actually quitting their jobs.
David Rosenberg believes this trend puts pressure on companies to raise pay to keep their workforce, which is bad news for profit margins and ultimately stock prices.
“At a time when firings are at record lows and job openings are rising at a double-digit annual rate, the number of people quitting their current job for greener pastures elsewhere is on a discernible uptrend. All this points to higher wage growth ahead, and frankly, this is a good thing for society.
“But the flip side is that as the labour share of the national income pie mean reverts off its all-time lows, we are likely to see profit margins pinched.
“This is the big risk – margin compression affects the ‘E’, while inflation, insofar as the tight historical relationship with final prices holds, even if to a smaller degree this time around, affects the P/E.”
Here’s a look at how this would play out with charts: