Weak U.S. Jobs Report Shakes Wall Street’s Confidence as Economic Reality Sets In

For months, Wall Street has largely dismissed the risks posed by the trade policies of President Trump and the Federal Reserve’s hawkish approach, maintaining confidence that the strength of the U.S. economy would continue to support equity markets. However, that optimism has started to unravel this week following disappointing labor market data and the implementation of a new round of tariffs.

The equity rally that had gained traction since early April, when Trump's "reciprocal tariff" rhetoric triggered a sharp market pullback, saw the S&P 500 and Nasdaq repeatedly reach new highs. But on Friday, investors were jolted by a stark slowdown in job creation. Nonfarm payrolls rose by just 73,000 in July, far below the consensus forecast of 100,000. Compounding the surprise, previously reported figures for May and June were sharply revised down—from 144,000 to 19,000 for May, and from 147,000 to 14,000 for June.

As labor market momentum weakened, investor sentiment swiftly shifted toward risk aversion. Major U.S. indices each fell by over 1% on Friday, with the Nasdaq losing 2%. Simultaneously, demand surged for U.S. Treasuries, driving the yield on the two-year note down to 3.68%, marking its steepest single-day decline since December 2023.

Jeff Schulze, Head of Economic and Market Strategy at ClearBridge Investments, summarized the market’s reaction succinctly: “Bad news is just bad news.” The longstanding narrative that weak economic data might spur the Fed into easing monetary policy—and thus support risk assets—appeared to lose traction amid growing fears of broader economic deterioration.

Schulze cautioned that, with hiring faltering and further tariffs taking effect, negative nonfarm payroll data could emerge in the coming months, heightening concerns of an economic downturn. In response to the jobs report, traders increased their expectations for a rate cut, with the probability jumping from 40% earlier in the week to 91%. The U.S. dollar slid 1% on Friday, its sharpest daily decline since April.

Friday also marked the effective date for a new wave of tariffs introduced by the Trump administration, with rates ranging between 10% and 41%. These measures have raised the average U.S. tariff on global imports to 15%, the highest since the 1930s, placing additional pressure on already fragile market sentiment.

Escalating geopolitical tensions added to the cautious mood. Trump announced that he had ordered the deployment of nuclear submarines to “relevant regions,” responding to remarks from former Russian President Dmitry Medvedev that were described as highly provocative.

This abrupt change in tone stands in contrast to the previous month, when robust earnings and solid economic data had supported a surge in equities and a rally in the dollar, while investors largely abandoned safe-haven assets. Since April, global equity markets had added $15 trillion in value. Now, investors are reassessing the sustainability of those gains against the backdrop of more sobering economic indicators.

The Cboe Volatility Index (VIX), often referred to as Wall Street’s “fear gauge,” surged past the 20 mark on Friday—its highest level since early April, when the reciprocal tariff announcement first rattled markets. Volatility measures for both high-yield and investment-grade corporate bonds also rose in tandem.

The twin declines in U.S. stocks and the dollar serve as a reminder that American assets are not immune to macroeconomic and geopolitical turbulence. Jeffrey Palma, Head of Multi-Asset Solutions at Cohen & Steers, remarked that although economic performance had been resilient and tariff concerns had temporarily subsided, the reemergence of labor market weakness coupled with trade-related uncertainty poses new challenges for investors. He emphasized that this moment underscores the extent of risks that still lie ahead.