Why stocks didn't like a strong jobs report
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The job market is holding up way better than expected, and when that became clear on Friday with the release of the May employment report, the major stock indexes fell.
Why it matters: It was just the latest reminder that the stock market is not the economy.
Driving the news: The S&P 500 broke its streak of nine weekly gains, and the tech-heavy Nasdaq had its worst week since the "Liberation Day" sell-off last year, per FactSet.
Zoom in: The semiconductor sector, on an epic run of AI exuberance all year, took a hit.
- The iShares Semiconductor ETF, which holds big chip stocks like Nvidia, Broadcom, Micron, etc., tumbled 7.3% for the day.
Where it stands: This all started happening Friday after the Labor Department put out a blockbuster jobs report, finding the U.S. economy added 172,000 jobs in May — more than double economists' forecasts.
- They also revised upward the numbers from the previous two months.
- Basically, the job market isn't just holding up — it is booming, as Axios' Courtenay Brown explained.
Between the lines: Investors had been banking on job growth slowing and the Federal Reserve cutting interest rates.
- The report Friday changed the equation — markets are now pricing in rate hikes.
Follow the money: A higher rate environment puts a damper on stocks, particularly those of high-growth AI companies.
- Stock prices are the present value of future earnings and growth. Higher interest rates (and inflation) mean that those future numbers would be worth less.
- Plus, rate increases mean higher borrowing costs — and that will make it more expensive for the big hyperscalers to keep spending so much money.
The intrigue: A few analysts also say that investors are pulling money out of certain stocks to free up capital for the SpaceX IPO.
The big picture: At the start of the Iran war, Wall Street was talking a lot about stagflation — that thing of when inflation goes up and unemployment rises at the same time. It happened in the 1970s during that era's oil crisis, and the fear was we were headed that way again.
Friction point: They got it half right. Inflation is rising, but jobs are doing OK!
What to watch: Investors will find out more about inflation this week. The CPI report is due out Wednesday morning.
- Analysts are forecasting a scorcher — inflation rising 4.2% from last year.
