The mega-caps just don't hire like they used to.

That thinking is at the root of an argument made by a pair of finance researchers in a new working paper that attempts to explain the historically wide disconnect between U.S. stock market performance and the overall economy.

As equities have rallied with domestic job losses still at unprecedented levels, Frederik Schlingemann, a finance professor at the University of Pittsburgh, and René Stulz, a finance professor at Ohio State University, argue that the public companies that have benefited most from the bull market have relatively little impact on domestic employment.

"We show a strong downward trend in the extent to which a firm's market capitalization reflects its concurrent contribution to employment," Schlingemann and Stulz wrote in the paper, which was published by the National Bureau of Economic Research earlier in October.

Apple Inc., which has the highest market capitalization of any company, with $2.04 trillion, employs only 137,000 people. Walmart Inc., which has a market cap of about $410 billion, employs 2.2 million.

"When you don't manufacture, or you outsource that manufacturing abroad, as in the case of Apple, clearly that means fewer jobs per dollar of market cap in the U.S.," Peter Cecchini, CEO and founder of AlphaOmega Advisors, said in an interview. "Most employment growth is in jobs that are not innovative in the traditional sense, like food service. The pandemic's acceleration of the destruction of brick-and-mortar jobs … is yet another form of the same already-extant trend."

The paper comes as the S&P 500 fell by nearly 34% from a record high Feb. 19 to March 23 and then climbed by 60% to a new record high Sept. 2. The index was about 3.4% below its record high on Oct. 19.

The U.S. unemployment rate jumped from 3.5% before the pandemic hit to a record 14.7% and then back down, but only to 7.9% in September.

This dislocation between stocks and jobs has accompanied the U.S. economy's shift from manufacturing to services, a trend that hinders job growth, AlphaOmega's Cecchini said.

The top companies by market cap in the 1950s were General Motors Co. and AT&T Inc., which were also the top two U.S. employers, report co-author Stulz noted. Apple is the 40th-biggest U.S. employer.

Manufacturing employment, once the main driver of the labor force, has fallen by 30.9% since 1973, the authors noted. Meanwhile, employment in education and health services, professional business services, and leisure and hospitality has increased by 374.8%, 267.8%, and 210.5%, respectively, over the same time.

These growing industries sectors are "poorly represented" on the stock market, Schlingemann and Stulz wrote.

Jobs vs. value

Publicly listed companies in education and health services employ about 862,000 people, just 3.6% of the total, 24.1 million people employed in that U.S. sector, they wrote. Business services, for another example, employ 21.3 million, but only 11.6% of those employed work for companies which are publicly listed.

By contrast, listed companies in the trade, transportation and utilities sector employ about 41% of workers.

While stocks and the economy have never moved in exact sync, the impact of mega-cap tech companies in the past few years broadens the disconnect.

"High valuations lead to situations where market capitalization are less instructive about the current economic contribution," Stulz said.

The S&P 500's forward price-earnings ratio was 23.68x on Oct. 19, down from the recent high of 25.22x but well above the 17.93x average valuation a year earlier, according to S&P Global Market Intelligence data.

Watching the market, he said, may give a far less clear view of the economy than before as increasing market cap and limited employment skew toward companies which may have little in common with the direction the economy moves, he said.

"They are only a fraction of the economy and their market capitalization can move differently from their contribution to the economy, so to gauge the health of the economy, one has to look more comprehensively than just the stock market firms," he said. "For instance, right now, the small companies that are not listed are in a great deal of trouble. That's not visible in the stock market because stock market companies are doing better."