Article Content
MarketFlick Insights
At a glance
- July nonfarm payrolls fell by 23,000 versus an expected gain of 83,000, showing further labormarket easing.
- A cooler labor market and slower wage growth can increase the economys sustainable growth rate without stoking inflation, in 22V Researchs view.
- If slack rises and wage pressures abate, the Fed could have room to cut rates in response to demand shocks.
- Higher sustainable growth could lift the equilibrium interest rate (R*), so longdated Treasury yields may remain around the mid4% area rather than collapsing.
- DeBusschere expects AIdriven efficiencies to add roughly 150 basis points of margin improvement on average, supporting corporate profitability.
- Lower equity risk premiums and better margins could help the S&P 500 reach about 8,500 on a roughly 12month horizon, with a preference for cyclical stocks.
- Nearterm market moves reflect strong earnings, the weaker jobs report and continued sensitivity to geopolitical and inflation data (including upcoming CPI).
A surprisingly weak jobs report has the S&P 500 chasing fresh highs and some market strategists say that is exactly what equities need.
The U.S. nonfarm-payrolls report for July showed a loss of 23,000 jobs versus an expected gain of 83,000, evidence that the labor market is cooling even as overall economic activity remains firm. The employment-to-population ratio dipped and nominal wage growth is slowing two developments investors and policy watchers are watching closely.
Bad news is good news, for now, wrote strategists at Citi Research, reflecting the markets current view: softer labor-market data reduce the chance of further aggressive Fed tightening and increase the prospect of policy easing later on.
Dennis DeBusschere, chief market strategist at 22V Research, framed the story this way in a note published over the weekend: a benign slowing of growth could raise the economys implied speed limit the maximum sustainable growth rate perhaps lifting it above 2% without triggering wage-driven inflation. That dynamic, he argues, would give the Federal Reserve more room to respond to demand shocks with rate cuts so long as labor-market slack rises and wage inflation eases.
That view has implications across markets. DeBusschere does not expect long-term Treasury yields to collapse: a higher sustainable growth rate tends to push up the economys equilibrium interest rate (R*). He expects 10-year Treasury yields to remain near about 4.5% even as the Fed gains optionality. (The markets traded 10-year yield was in the mid4% range when the report was released.)
For stocks, the combination of a more durable expansion, easing wage pressure and an eventual path to rate cuts could be powerful. DeBusschere sees those forces compressing the equity risk premium the extra return investors demand to hold stocks over a riskfree asset and boosting valuations. He projects the S&P 500 could reach roughly 8,500 over a roughly 12month horizon and says he prefers cyclical stocks to defensive names in that environment.
Corporate profits strengthen the bullish case. DeBusschere points to gains from artificialintelligencerelated efficiency claims, estimating on what he calls an unscientific extrapolation an average margin boost near 150 basis points for businesses that successfully deploy AI. Better profitability plus a lower equity risk premium lifts the upside for equities.
What the market is doing right now
The S&P 500 was trading near record territory amid a strong earnings season and a pullback in aggressive Fedhike expectations after the weak jobs print. Major market measures and asset prices showed the following moves around the open: the S&P 500 and Nasdaq were slightly higher, the Dow Jones Industrial Average lagged, the dollar index rose, gold futures were trading around the mid$4,000s per ounce, and 10year Treasury yields nudged higher into the mid4% area.
Commodities and singlename moves featured in the headlines. Oil prices climbed as hopes for an immediate U.S.Iran deal that would ease Strait of Hormuz tensions dimmed. Energy supply worries supported crude and Brent futures. In corporate news, Berkshire Hathaway said secondquarter profit more than doubled, helped by investment gains. Intel shares slid after the chipmaker said it would sell $15 billion of common stock. Apple was downgraded by analysts at Jefferies amid reports a planned allglass iPhone was canceled. Meta Platforms founder Mark Zuckerberg published a long essay defending artificial intelligence.
Coming data and calendar
Investors will also be parsing the July consumerprice index when it is released, a key check on whether the cooling in wage growth is showing up in broader inflation measures. Cleveland Fed President Beth Hammack was scheduled for a Yahoo Finance interview the same day, and Fed commentary will remain important as markets interpret the jobs data.
Risks and nuances
DeBusscheres bullish pathway depends on a delicate balance: enough labormarket cooling to ease wage pressures without tipping the economy into a sharp downturn. If growth softens too quickly, the profit picture could deteriorate and equity risk premiums could widen instead of narrowing. Likewise, geopolitical shocks that push oil and risk premia higher could upset the constructive backdrop.
Bottom line
The July payrolls surprise underscores a familiar, if counterintuitive, market theme: softer economic data can reduce nearterm policy risk and be supportive for stocks. Strategists who see the data as a benign slowing expect a durable expansion, firmer longrun rates and a path to lower shortterm policy rates a mix that can be favorable for equity valuations, especially if AIdriven productivity gains lift corporate margins.
