JPMorgan's Gabriela Santos on Fed Rate Cuts, Labor Market, and Equity Rally

Labor Market Cooling and Fed Policy

• 📉 The labor market is showing signs of cooling, with a decrease in demand for labor but no massive layoffs or significant spike in unemployment.
• 📊 The August jobs report is expected to show around 85,000 jobs added, bringing the 3-month average down to approximately 54,000.
• ⚠️ An upcoming annual benchmark revision is anticipated to lower the monthly average hiring by about 50,000, indicating cooling started earlier.
• 🎯 The Fed is increasingly focused on the labor market's cooling, which, alongside inflation data, is influencing their policy decisions.

Interest Rate Cuts and Market Expectations

• ✂️ A 25 basis point rate cut in September is largely priced in by the market, with expectations for a total of 60 basis points of cuts by the end of next year.
• 📈 The market is currently in a "sweet spot" with restrictive policy, but a significant slowdown in the labor market leading to more rate cuts could be negative for equities.
• 🏦 Rate cuts are expected to primarily lower short-term rates (one year and below), not significantly impact longer-term rates like mortgage rates.

Equity Market Performance and Outlook

• ✅ The S&P 500 reaching new highs is seen as a healthy rally, with companies consistently exceeding earnings expectations.
• 🚀 There's a broadening of the rally beyond AI-focused tech to include industrials and utilities, which is considered sustainable.
• ⚠️ A rally in cyclical stocks (consumer discretionary, home builders) is viewed as a potential "sugar boost" and may be short-lived, though rate cuts could benefit home builders by lowering mortgage rates.
• 🌍 The strategist suggests increasingly favoring markets in Europe, Japan, and emerging markets for the future.