Weak Jobs Cement Fed Rate Cuts–And Wall Street Eyes Records Again

Wall Street could be marching into a bad-news-is-good-news environment, as deteriorating labor market data bolsters the odds of imminent rate cuts — potentially giving stocks the lift they need to break new records.

After a brief pullback from last week's all-time highs, the S&P 500, tracked by the Vanguard S&P 500 ETF VOO, recovered strongly and now sits just 0.5% below its all-time high.

Investors appear ready to reward weak jobs data, with hopes the Federal Reserve may finally pivot to easing policy as early as this month.

Labor market weakness: How bad is it?

July's official jobs report delivered a significant downside surprise, with just 73,000 jobs added, far below the typical monthly range needed to sustain healthy employment growth.

Economists are bracing for another weak print in Friday's non-farm payrolls report, with the consensus looking for just 75,000 new jobs in August.

On Thursday, private payrolls data from the ADP National Employment Report added to the gloomy narrative.

August saw only 54,000 new jobs created, down sharply from 106,000 in July, and missing economists' expectations of 65,000. The ADP report tracks employment trends based on payroll data from 25 million workers.

"The year started with strong job growth, but that momentum has been whipsawed by uncertainty. A variety of things could explain the hiring slowdown, including labor shortages, skittish consumers, and AI disruptions," said Dr. Nela Richardson, chief economist at ADP.

Jamie Cox, managing partner at Harris Financial Group, said the Fed no longer has a "free pass" on the labor market.

"ADP data continue to reinforce the narrative that the rate of positive change in the labor market has slowed significantly, so you can expect the Fed to tilt its balance of risks to cut rates in September."

ISM data confirms labor market cooling

Additional evidence of labor softness came from the ISM Services Purchasing Managers' Index. The employment subindex fell into contraction territory for the third consecutive month, and the fifth time in the past six months.

Eric Teal, chief investment officer at Comerica Wealth Management, said various structural shifts are putting downward pressure on hiring.

"We continue to see softness growing in the labor market as tariff policy uncertainty lingers, immigration changes take effect, and AI adoption grows. The silver lining is the weaker the jobs data, the more cover there is for stimulative interest rate cuts that are on the horizon."

What are markets expecting from the Fed?

According to the CME FedWatch Tool, futures markets now price in a 97% chance the Federal Reserve will cut interest rates at its Sept. 17 meeting. The probability of a second consecutive cut in October is at 52%, while odds of at least two rate cuts by year-end stand at 90%.

If Friday's payrolls report confirms labor market weakness, rate-cut bets could firm further – offering a fresh tailwind for stocks even in what is historically a negative month for equities.

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