Stocks ended a holiday-shortened trading week with fireworks after signs of a slowing labor market raised the odds of a Federal Reserve rate cut coming sooner rather than later.
The cannonball in the market's pool Friday was the June jobs report, which revealed a still strong but cooling labor market. U.S. nonfarm payrolls increased by 206,000 last month, the Bureau of Labor Statistics said Friday, or essentially in line with economists' forecast for the creation of 200,000 jobs. Additionally, the surprisingly strong May jobs report was revised lower to 218,000 new hires from the 272,000 previously reported.
Importantly, the unemployment rate, which is derived from a separate survey, ticked up to 4.1% in June from 4% the prior month. Economists forecast the unemployment rate – which is still at half-century lows – to remain unchanged.
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"Perhaps most concerning is the steady rise in unemployment, which rose for the third consecutive month to 4.1%, the loftiest level since November 2021," writes José Torres, senior economist at Interactive Brokers. "If the trend continues, it will certainly provide the nation with interest rate relief. Market players are responding by raising the odds of the Fed dishing out a September cut."
The June payrolls report is just the latest in a series of data pointing to a weakening jobs market, which in turn supports the case for lower interest rates. Recall that market participants are eagerly awaiting the Fed's first quarter-point cut, which will bring interest rates down from a 23-year high.
Although the Federal Open Market Committee (FOMC) signaled just one cut this year at the Fed's June meeting, a slowing labor market and easing wage pressures have increased the odds of the central bank turning more dovish over the next couple of months.
As of July 5, futures traders assigned a 73% probability to the FOMC enacting its first cut in September, up from 58% a week ago, according to CME Group's FedWatch Tool. Meanwhile, the probability of the first cut coming in December dropped to 22% from 31% a week ago.
Q2 earnings season on tap
Second-quarter earnings season unofficially kicks off next week with quarterly reports scheduled from a major air carrier and two the nation's biggest banks.
The upcoming earnings calendar is relatively quiet to start the week, but traders will surely be busy starting on Thursday when Delta Air Lines (DAL) reports ahead of the opening bell. Morgan Stanley analyst Ravi Shanker says that DAL is one of the "cleanest stories" in airlines right now, citing Delta's outsized exposure to corporate travel vs peers. The analyst rates DAL at Overweight (the equivalent of Buy), calling it a "top pick."
On Friday, JPMorgan Chase (JPM), the nation's biggest bank by assets, is slated to post results, as is Citigroup (C). Jefferies analyst Ken Usdin, who rates JPM at Buy notes that loan growth for many banks remains sluggish due to high interest rates, which could continue to weigh on net interest income (NII) in the near term.
The analyst believes NII growth potential is close to turning, although this largely depends on the timing and magnitude of the Fed's rate-cutting cycle.
Downgrade dings Nvidia stock
Friday was a record-setting day for markets, led by mega-cap tech and communications services stocks such as the Magnificent 7. And yet the market's runaway mega-cap tech winner of the bull market missed out on all the fun.
While Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon.com (AMZN) and Meta Platforms (META) all rallied strongly to end the week, Nvidia (NVDA) slumped 1.9% on an analyst downgrade.
New Street Research cut its rating on Nvidia to Neutral (Hold) from Buy, citing a "health check" on artificial-intelligence stocks. Analyst Pierre Ferragu said in a research note that further upside in NVDA stock "will only materialize in a bull case, in which the outlook beyond 2025 increases materially, and we do not have the conviction on this scenario playing out yet."
As for the main indexes, the tech-heavy Nasdaq Composite added 0.9% to 18,352 while the S&P 500 gained 0.5% to 5,567. Both indexes closed at record levels. The blue-chip Dow Jones Industrial Average rose 0.2% to end at 39,375.
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