The jobs market has meaningfully decelerated the last four months. In the futures market, traders are pricing in six cuts in the next 15 months. The major equity indices are sitting on tons of gains from the April lows; concurrently, signs of fatigue are showing up. Risks are rising of a ‘buy the rumor, sell the news’ phenomenon kicking in into the FOMC cut in nine days.
 

August produced a dismal jobs report. Merely 22,000 non-farm jobs were produced last month, with June revised lower to a negative 13,000, which was earlier reported as gains of 14,000 and 147,000 before that. June was the first down month since the post-pandemic December 2020 reading of minus 183,000.

The labor market has witnessed a sharp deceleration the last four months, averaging 27,000 new jobs. Year-to-date, the economy has averaged 75,000 per month, versus the monthly average of 168,000 in 2024 and 216,000 in 2023.

Concurrently, the unemployment rate registered 4.32 percent last month – the highest since October 2021. That said, unemployment at 4.3 percent by no means requires the Federal Reserve to aggressively lower the rates, but the unemployment trend is up (Chart 1). It has been rising since bottoming at a 54-year low of 3.45 percent in April 2023.
 

The rather stagnant jobs market gives the FOMC leeway to lower the fed funds rate in the upcoming meeting, slated for 16-17 this month. There is one more important data point before that, with August’s consumer price index due out this Thursday. Even if this metric does not cooperate, a 25-basis-point reduction in nine days is almost a certainty.

After August’s jobs report came out last Friday, fed funds futures traders immediately raised the probabilities of easing this year from two 25-basis-point cuts going into the jobs print to three. They are pricing in three more cuts next year, ending 2026 between 275 basis points and 300 basis points. The fed funds rate has been left unchanged at a range of 425 basis points and 450 basis points since last December, when the rates were eased by 100 basis points over three meetings, including a 50 in September.

The economy will have to deteriorate quite substantially for the Fed to ease by 150 basis points in the next 15 months. The central bank has a dual mandate: maximum employment and price stability. Its employment mandate is begging it to adopt a looser monetary policy, but inflation is not giving it free rein.

Core PCE (personal consumption expenditures) and CPI are near three percent annually versus the Fed’s goal of two percent (Chart 2). In April, they respectively bottomed at 2.61 percent and 2.78 percent, rising the next three months to 2.88 percent and 3.06 percent as of July, in that order. Earlier in 2022, they peaked at 5.66 percent (February) and 6.63 percent (September).
 

The confusion thereof is writ all over how small-caps are trading. Small-cap businesses have a large exposure to the domestic economy as opposed to the large-caps which also have international exposure. These businesses also tend to be leveraged. Lower interest rates will help.

The Russell 2000 has rallied since it bottomed at 1733 on 9 April. Last week, it rose one percent to 2391, tagging 2407 intraday Friday. But it remains below its all-time high of 2466 last November, when it barely nudged past the prior high of 2459 from November 2021 (Chart 3).

To bulls’ credit, they have recaptured the crucial 2300, which has proven to be an important price point going back to February 2021. Most recently, breakout attempts were getting resisted from early July. Rate-cut hopes have played a big role in this breakout.

It is possible the small cap index rallies toward its all-time high in the sessions ahead. Failure to decisively take out the old highs will raise the odds of a triple top. A lot will depend on the message coming out of the upcoming FOMC meeting as regards to the rates outlook.
 

The question is if the imminent rate cuts will be enough to reaccelerate the jobs market without exerting meaningful upward pressure on inflation or if the tariff uncertainty has done enough damage to business confidence. Expectations for next year are high – very high.

At the end of August, the sell-side was expecting S&P 600 companies to bring home $71.34 in operating earnings this year and $97.12 next. In May last year, these analysts were expecting $102.88 for this year; the latest estimate is the lowest. Estimates for next year – $104.64 in February – has been revised lower to the latest $97.12. If next year’s estimates come through, they would have grown north of 36 percent. This year, with two quarters in, they are expected to grow north of 15 percent.

The thing is that rate-cut hopes are probably playing a role in next year’s estimates. They are getting revised higher in recent weeks, with a low of $96.21 as of July 23^rd (Chart 4). Even in a normally functioning economy, 2026 estimates look elevated. The sell-side does have a habit of starting out big and then revise the numbers lower as time passes.
 

Expectations are also high for S&P 500 earnings for next year. This year’s expected $258.70 – if realized – would have grown just under 11 percent. The growth rate next year is expected to accelerate more than 16.5 percent to $301.53.

The S&P 500 has rallied massively since the intraday low of 4835 posted on 7 April. Last Friday, it ticked 6533 intraday and closed at 6482, up 0.3 percent for the week. The five-month rally reflects a lot of optimism priced in.

There are signs of fatigue, but bulls are actively defending support. Last Tuesday, they bought the intraday low of 6361, just above the rising 50-day at 6350. Thus far, bears have been unable to cash in on opportunities. Six weeks ago, a bearish engulfing candle was formed, and this got rejected in the very next week. Similarly, a hanging man developed three weeks ago, followed by a doji. Last week, too, a candle with a large upper wick was formed.

Concurrently, the daily Bollinger bands are very narrow. When this happens, a sharp move can follow – either up or down. Bulls are sitting on a lot of gains. The temptation to lock in profit can act as a self-fulfilling prophecy should the large cap index begins to lose support. Once the 50-day gives way, there will be crucial breakout retest at 6100s, which has not been genuinely tested since June (Chart 5).
 

The daily Bollinger bands are also very tight on the Nasdaq 100. This of course follows a 45-percent surge between the April 7^th low of 16542 and the August 13^th high of 23969. Last week, it rose one percent to 23652, with Friday’s intraday high of 23860 remaining under last month’s high. This is in divergence with the S&P 500 which recorded a fresh intraday high last Friday.

With that said, tech bulls do have an opportunity here for a breakout. The Nasdaq 100 has essentially gone sideways the last five to six weeks. A decisive breakout here, followed by a new high, will be huge. And it would have come amidst several indecision or potentially bearish (although not confirmed) candles. Last week’s candle left a little bit of an upper wick on the weekly. In the prior three weeks, there was a shooting star, a hanging man and a spinning top (Chart 6).

In the event of selling pressure, nearest support lies at 22900s, which was defended last Tuesday, with a session low of 22978; this was also a test of the rising 50-day (now 23201).

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