The Bad News Bulls

There is an old market adage that “bad news is good news”—the idea that a weakening economy can be a gift to stocks if it nudges the Federal Reserve (Fed) toward easier policy. Rarely has that logic been on fuller display than this past week, when the worse the economic headlines got, the higher the market climbed. The capstone came Friday morning, when a genuinely ugly jobs report sent the S&P 500 (S&P) not lower but higher, to yet another record close.

It was, by almost any measure, a spectacular week for equities. The S&P finished Friday at an all-time high of 7,757, capping a 3.6% weekly gain, its best week since April and its first record high in two months. The Dow Jones Industrial Average (Dow) vaulted above 54,000 for the first time in its history, while the Nasdaq Composite surged 5.2% as beaten-down semiconductor stocks came roaring back. Even the small-cap Russell 2000 joined in. After several choppy months, the rally finally broadened beyond a handful of mega-cap names, a welcome change from the narrow leadership that had defined much of the summer.

And yet the economic news underneath was anything but celebratory. On Friday, the Bureau of Labor Statistics reported that the U.S. economy lost 23,000 jobs in July, the first monthly decline since February and a stunning miss against expectations for a gain of roughly 83,000. Worse, payroll figures for May and June were revised down by a combined 103,000, erasing much of what had looked like steady spring hiring. The unemployment rate actually ticked lower, to 4.1%, but for an unwelcome reason: Americans left the workforce, dragging labor-force participation to 61.4%, its lowest in more than five years. Wage growth was nearly flat, slowing to 3.2% over the past year, the softest pace since 2021. Private employers still added a modest 30,000 jobs, but the overall picture was of a labor market quietly cooling.

Coming into the week, the Fed, which held its benchmark rate at 3.50% to 3.75% at its late-July meeting, had been leaning hawkish, with Chair Kevin Warsh signaling he would raise rates in September if inflation stayed hot and several officials openly favoring a hike. The soft jobs report gutted that case almost overnight; market-implied odds of a September increase fell from roughly 70% to under 50%. Treasury yields dropped in response. The two-year note, which tracks Fed expectations most closely, slipped to about 4.19%, its lowest since mid-July, while the 10-year eased to around 4.64% and the 30-year held near 5.19%. The yield curve, which had been flattening as investors braced for another hike, bull-steepened as the short end fell and the front end began pricing in a friendlier Fed. A positively sloped curve is normally a picture of health; the wrinkle this time is that it steepened not because growth is accelerating, but because the labor market is cooling.

Falling oil prices offered a second tailwind. After more than five months of war and a Strait of Hormuz that Iran has kept effectively closed since late February, negotiators spent the week inching toward a deal to reopen the waterway. Trump administration officials repeatedly suggested an agreement was near, and crude fell more than 7% on the week as traders anticipated freer-flowing oil. However, the deal is far from final: Iran is insisting on some measure of control over the strait, the lifting of the U.S. naval blockade and compensation for war damage. The two sides offered mixed messages into the weekend. Still, even the prospect of cheaper energy is a gift to consumers and to a Fed still worried about inflation—one more reason the week’s glass looked half full.

Beneath the macroeconomic drama, corporate earnings continued to bolster the rally’s foundation. With most of the second-quarter reporting season now complete, the large majority of companies have beaten estimates, and profit growth is near record levels. The week delivered some striking milestones. Amazon topped a $3 trillion market value for the first time. Caterpillar booked the first $20 billion quarter in its century-long history, buoyed (fittingly) by surging demand for the engines and generators that power artificial intelligence (AI) data centers. Boeing had its best week since the spring after regulators cleared its long-delayed 737 MAX 7. And Nvidia jumped more than 11% after SpaceX said it would build its AI infrastructure exclusively around Nvidia chips. Beaten-down semiconductor stocks roared back, and AI reasserted itself, once again, as the market’s center of gravity.

For now, the bad news bulls have the upper hand, and their reasoning is sound enough: a cooling economy points to a friendlier Fed, cheaper oil eases inflation and resilient earnings help justify the prices being paid for stocks. However, some investors still feel cautious: bad news is good news only until the economy slows from cooling to stalling, at which point weak data stops signaling rate relief and starts signaling recession. As we’ve seen many times over the last few years, the market’s mood can turn on a dime. With the August-through-October stretch historically the roughest of the calendar for stocks and valuations already elevated, a weakening labor market is an unusual foundation for record highs.

Looking forward to this week, inflation returns to center stage: the July Consumer Price Index (CPI) lands Wednesday and the Producer Price Index (PPI) follows Thursday, offering the first read on whether the summer’s energy-driven price pressures are easing now that oil has turned lower. Investors will also watch July retail sales and the preliminary August reading on consumer sentiment for further clues on the health of the consumer, alongside the tail end of second-quarter earnings. With Fed officials back on the speaking circuit, every data point will be filtered through a single question: does it make a September rate hike more or less likely?

Forecast and prior figures are shown where confirmed; blanks indicate consensus estimates still to be set or reports without a standard forecast. Release dates are approximate and subject to change.

Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market.

5826808 Exp. 08/31/2029