Economic Concerns Resurface on Wall Street Following Jobs Data, Reports Reuters

By Lewis Krauskopf and David Randall

NEW YORK – Uncertainty surrounding the health of the U.S. economy is causing ripples in the markets, intensifying an already volatile period as investors navigate a shift in Federal Reserve policy, a tightly contested U.S. election, and concerns over stretched valuations.

U.S. stocks declined sharply on Friday after key labor market data indicated a slowdown, suggesting a narrower path for the U.S. to achieve a "soft landing" — a scenario where the Fed successfully curbs inflation without severely harming economic growth.

The Fed is anticipated to reduce interest rates during its upcoming meeting, but the recent data has reignited fears that prolonged high borrowing costs are beginning to impact the economy, posing challenges for investors. The expectations for rate cuts, coupled with resilient economic growth, had previously driven markets to record highs this year.

"The data suggests we are still on the soft-landing trajectory, but there are clearly more downside risks that markets are likely to respond to," stated Angelo Kourkafas, a senior investment strategist at Edward Jones. "The likelihood of increased volatility is realistic."

This diminished risk appetite was evident across markets, with the S&P 500 falling 1.7% on Friday and nearly 4.3% over the past week, marking its worst weekly decline since March 2023. Nvidia, a notable player in the year’s artificial intelligence surge, saw its stock drop more than 4%, approaching its lowest level in about a month, alongside other high-profile tech stocks.

The Cboe Market Volatility index, referred to as Wall Street’s "fear gauge," also reached its highest point in nearly a month.

"There are concerns that the Fed may not act swiftly or decisively enough to avert more serious economic issues," said Keith Lerner, co-chief investment officer at Truist Advisory Services.

Multiple factors are amplifying market uncertainty. Futures trading on Friday indicated investors believed there was nearly a 70% chance of a 25 basis point rate cut by the Fed, with a 30% likelihood of a 50 basis point reduction. Nonetheless, many analysts feel the situation is far from settled.

"Markets are wrestling with whether the August payroll figures indicate a return to pre-COVID labor market conditions or suggest a worrying decline in economic momentum," commented Quincy Krosby, chief global strategist for LPL Financial.

Others were less optimistic. Analysts at Citi suggested the employment report warranted a 50 basis point cut later this month, asserting that the current labor market data indicates cooling, which often precedes a recession.

Upcoming inflation data is expected to provide more clarity on the economy and influence expectations about the extent of potential Fed rate cuts.

Concerns about valuations are resurfacing as well. The S&P 500, which has gained over 13% this year, is currently trading at a price-to-earnings ratio of nearly 21 times expected forward earnings estimates, significantly above its historical average of 15.7.

Despite recent declines, the technology sector within the S&P 500, the largest group in the index, trades at over 28 times expected earnings, compared to its long-term average of 21.2 times.

"We’ve seen significant growth in a short time, and it’s likely some companies are reassessing the costs associated with AI, which could impact large tech stocks," remarked Mark Travis, a portfolio manager at Intrepid Capital Management.

As the U.S. presidential election nears its climax, investor attention is focused on the upcoming debate between Democrat Kamala Harris and Republican Donald Trump, set for Tuesday ahead of the November 5 vote.

The recent market fluctuations have reinforced September’s reputation as a challenging month for investors. Historically, the S&P 500 has averaged a decline of nearly 0.8% in September since 1945, making it the worst month for stocks. Currently, the index has already dropped 4% since the start of the month.

"Investors are hopeful for a soft landing," noted Burns McKinney, senior portfolio manager at NFJ Investment Group. "While it remains a plausible scenario, each weaker employment report makes that prospect less likely."