Jobs Are Slowing, Markets Are Running—For Now
Summary
- Stocks extended their rally in August, with gains broadening beyond mega-caps and small caps finally showing signs of life, even if they remain behind year-to-date.
- Bonds also delivered solid returns as softer labor data and steady inflation pulled Treasury yields lower, leaving the U.S. bond market up more than 6% in 2025.
- The Fed is signaling rate cuts ahead, with markets now pricing in three by year-end 2025—but the impact will depend on whether cuts come from recession fears or cooling inflation with growth intact.
- Labor market data are weakening across multiple fronts, and while the labor force isn’t shrinking, fading job strength risks creating ripple effects through spending, earnings, and ultimately asset prices.
Market Observations
Owning risky assets has been a rewarding exercise lately. Global stocks pushed higher in August, and U.S. stocks notched their fourth straight monthly gain. What’s more, the rally wasn’t just carried by a few mega-cap names this time. It was broad. Every major U.S. size and style index finished higher, and small-cap stocks even managed to outpace their larger peers. Although, small cap stocks are still lagging year-to-date.
What fueled the move higher? First, markets latched onto a weaker-than-expected July jobs report, which boosted expectations for a September Fed rate cut. Then, at Jackson Hole, Jerome Powell all but nodded along, hinting strongly that easing is coming despite inflation running hotter than the Fed would like. And finally, corporate America did its part: Q2 earnings beat analyst estimates, with S&P 500 profits growing 10.8%—nearly triple preseason forecasts, according to Bloomberg.
Source: Morningstar Direct. Nova R Wealth. June, July, and August are 2025 monthly returns. YTD returns are returns are from 1/1/2025 to 9/9/2025. See important disclosures at the end of this material.
Beyond equities, fixed income quietly had its moment too. Softer labor data and inflation roughly in line with expectations pushed most U.S. Treasury yields lower in August. Lower yields helped boost fixed-income investments, with the broader U.S. bond market rising 1.2% in the past month. The Bloomberg U.S. Aggregate Bond Index has now gained an impressive 6.1% for the year as of September 9.
Fed Put
Recent data show inflation stalling above the Fed’s 2% goal, with some measures pointing to tariff-related price pressures offsetting earlier softness in services. Not great. At the same time, as we discuss later in this blog post, hiring is slowing and the labor market looks increasingly fragile.
The Fed’s job is always a balancing act—price stability on one side, employment stability on the other. Right now, it seems the labor market is taking priority, at least for several voting members and Fed Chair Jerome Powell himself.
At the Fed’s annual Jackson Hole gathering, which is basically the Super Bowl for central bankers, Powell used his keynote speech to signal that a rate cut could come as soon as the next policy meeting in September. The decision is prickly, with clear divisions among policymakers, but Powell hinted strongly that the current restrictive stance may no longer be justified.
Following the speech, futures pricing shifted rapidly, with markets now expecting three interest rate cuts by the end of 2025 instead of two. This would bring the federal funds rate down from 4.50% to around 3.75%, a significant change in expectations in a short time.
Source: Bloomberg; Federal Reserve; Nova R Wealth. Data from 12/31/2022 to 12/24/2024. Projected data from 12/31/2024 to 12/31/2027. Market Expectations data as of 9/10/2025. FOMC Projection data as of 6/18/2025.
Naturally, the next question is how markets will respond once the Fed cuts for the first time after being on hold for longer than six months. As always, there is nuance. What matters most is the reason for the cut. If the Fed is cutting because it expects the economy to slip into recession, the outlook for performance is bleak. But if the cut comes because inflation has slowed while growth continues, the picture can be far more attractive.
Source: Goldman Sachs Global Investment Research.
Labor Market
Sometimes it’s hard to make sense of economic data. It’s messy, it’s noisy, and it often tells a dozen different stories at once. But the labor market right now isn’t one of those moments. Job creation is deteriorating. That’s a fact, and it doesn’t take a PhD in economics to see that.
In the chart below on the left-hand side, you can see nonfarm payrolls gains since the end of 2021. After recent revisions, June actually clocked in negative, and the overall trend has been drifting lower for quite a while.
Source: Bureau of Labor Statistics; Bloomberg; Nova R Wealth. Data from 12/31/2021 to 8/31/2025.
If we peel back some of the layers, the weakness jumps out in a few telling ways.
- The unemployment rate, a widely quoted indicator of the labor market, stands at 4.3%, which is historically low, but the direction of travel is concerning.
- A broader gauge, the U6 underemployment rate (which includes people stuck in part-time jobs but wanting full-time work), has climbed from the mid-6% range to above 8%. That doesn't sound dramatic in isolation, but the labor market is a bit like a snowball rolling downhill; once it gets moving and starts picking up speed, it can be tough to stop.
- Other supporting evidence includes: weaker ISM employment survey readings, fewer small businesses planning wage increases, a slide in the JOLTS survey of voluntary quits, and a growing number of long-term unemployed. Even recent college grads are having a harder time landing steady work.
Now, it’s important to separate “slowing” from “shrinking.” A deteriorating trend is not the same thing as a labor force that’s collapsing. One check here is the employment-to-population ratio for workers aged 25–54. As Jed Kolko at the JP Morgan Institute points out, if the labor force were truly shrinking, this ratio would be falling. So far, that hasn’t happened.
Source: Bureau of Labor Statistics; Bloomberg; Nova R Wealth. Data from 9/30/2011 to 8/31/2025.
Overall, job strength is fading in the United States. Whether it’s from tariffs, AI, or elevated rates is hard to say, but ripple effects matter. Weaker job growth means slower income growth, which curbs spending, which hits corporate earnings, which eventually shows up in asset prices. It’s a chain reaction, and once it starts, it can be hard to contain.
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