JPMorgan sees S&P 500 drop on payrolls as good news turns bad

JPMorgan expects the S&P 500 to fall after Friday's payrolls report, warning that strong job growth would lift bond yields and drag equities.

A "good news is bad news" environment is likely after the release, with 30,000 to 70,000 new jobs the appropriate range for markets, the team led by Andrew Tyler at JPMorgan said in a report.

Analysts expect 55,000 jobs added in August. Stronger payrolls would push bond yields higher and drag stocks, the team said, because more hiring fuels consumption and strengthens companies' confidence to add staff. A sharp miss, such as another decline in employment, could re-ignite stagflation concerns.

The report lands as markets price a roughly 60 percent chance of a Federal Reserve rate hike in September, up from 41.4 percent last week, per CME Group's FedWatch Tool. Friday's data is the last jobs release before the Fed's September decision.

The payrolls report follows a Jackson Hole symposium where new Fed chair Kevin Warsh described inflation as too high despite July's lower-than-expected CPI and PCE readings. Warsh said forward guidance had "overstayed its welcome," leaving markets to parse incoming data for policy cues.

The labor market has shown signs of softening. The economy is expected to have added 50,000 jobs in August, compared with a loss of 23,000 in June. Private-sector employment numbers arrive Wednesday, followed by initial jobless claims Thursday.

Revisions Point to a Weaker Labor Market

The Bureau of Labor Statistics removed another 79,000 jobs in the 12 months through March this year, according to The Kobeissi Letter, which tracks the data. That follows last year's record 911,000 downward revision and marks the fourth consecutive annual adjustment, matching the streak that ended in 2010 after the 2008 financial crisis.

"All eyes are on the labor market," The Kobeissi Letter said in commentary on X, noting the data would form the last jobs figures before the September rate decision. The downward revisions suggest the labor market has been weaker than initially reported for years, complicating the Fed's assessment of how much slack remains.

Oil Spike Adds to the Macro Mix

Oil markets added to the volatility backdrop as renewed US strikes on Iran sent Brent crude back above $90 a barrel, with WTI passing $85, up 2.5 percent on the day. European stocks came under pressure, with Germany's DAX down 0.7 percent. US stock futures pointed to a lower open Monday as the oil spike and rate-hike bets weighed on sentiment.

The strikes followed a US-Venezuela energy deal granting Washington significant control of the country's oil reserves, with a daily output target of 1.5 million barrels and total reserves of 65 billion barrels worth around $5.4 trillion.

For equities, the combination of a hawkish Fed, rising yields and firmer oil prices leaves the S&P 500 exposed to a downside reaction regardless of the payrolls outcome, JPMorgan's analysis suggests. The team's base case is that any print outside the 30,000 to 70,000 range — or a strong number that lifts yields — pressures stocks. A print near consensus would leave the index vulnerable to the yield channel, while a sharp miss would revive stagflation fears that hit cyclicals hardest.

This article is for informational purposes only and does not constitute investment advice.