Wall Street is betting that a dismal July jobs report will force the Federal Reserve to abandon plans for interest rate hikes, fueling a surge in stock prices.
Labor Market Stagnation Sparks Economic Concern
The Bureau of Labor Statistics’ July report revealed a loss of 23,000 jobs, significantly missing expectations. Simultaneously, the unemployment rate dipped to 4.1%, while labor force participation plummeted to levels not seen since the height of the pandemic.
“The report suggests that the economy is seemingly slipping back toward the ‘no hire, no fire’ narrative that characterized the labor market through much of 2025,” noted Jim Baird, chief investment officer at Plante Moran Financial Advisors.
A Downward Trend in Job Growth
The data highlights a concerning cooling trend in hiring. Ameriprise chief economist Russell Price pointed out that the three-month rolling average of job gains has slumped to just 20,000, with the six-month average weakening to 44,000.
“There were many moving parts, but very little to like about this report,” Price stated. “If the job market falters, consumers and the economy might not be far behind.”
Fed Policy and Treasury Yields
Treasury yields tumbled on Friday in response to the report, effectively reversing gains from earlier in the week when market sentiment suggested the Fed might be trailing behind in its inflation battle. With wage growth coming in softer than anticipated, strategists believe the weak labor numbers provide the Fed sufficient cover to maintain current rates.
“To the point of the wage inflation, I think this really solidifies our view that the Fed is going to stay on hold this year,” said UBS’s Leslie Falconio.
Market Reaction and the AI Trade
Following the release, implied odds of a Fed rate hike in 2026 dropped to 56% on Polymarket, down from 63%. This shift in expectations provided a boost to equities, with the Dow, S&P 500, and Nasdaq all securing weekly gains. Large-cap tech stocks led the charge, led by Nvidia (NVDA) with a 10% weekly surge, while Microsoft (MSFT) and Meta (META) rose 8% and 7%, respectively.
“In terms of what this does to the stock market, it’s probably positive in that it reduces the probability of a rate hike in September,” explained Amber Fairbanks, portfolio manager at Impax Asset Management.
While Fairbanks remains optimistic about the AI sector, she urges investors to practice caution. “I think AI is still an attractive trade, but we have to be a little bit more picky in those companies that are really benefiting from a fundamental perspective, not just to benefit from a narrative perspective.”
Future Projections
Despite the labor market cooling, Yardeni Research remains bullish, projecting that strong earnings will drive the S&P 500 to 8,200 by year-end, representing a potential 5.6% gain from current levels.
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