MIXED SIGNALS

September’s employment report was delayed due to the government shutdown, but it was released this week. The data shows that nonfarm payrolls rose by 119,000 in September — a significant “beat” against a dour consensus forecast. The good news was tempered, however, by negative revisions to the July and August data. The revisions to the prior month’s jobs report revealed that the U.S. economy actually lost jobs in August, highlighting a central concern of the Federal Reserve that the U.S. economy is losing steam. To state the obvious, it is difficult to discern true trends when the data is so heavily revised after the fact. However, the mosaic of information we do have on the jobs market points to a slowdown — but not at a pace that would create a recession. We remain in the soft landing camp.

As usual, we look to the bellwethers for signals about the health of the U.S. consumer, and Walmart’s earnings release this week provided some valuable color. Against an environment of uncertainty, Walmart posted earnings that beat expectations, with noted strength coming from higher-income households who continue to see support from strong equity markets and high, and rising, income levels. However, the CFO noted softness and moderation in the low-income household cohort, and this is consistent with our thesis of a “K-shaped” economy. Walmart’s CFO commented that the disparity in wage growth between high-and-low income consumers in October was “as large as it’s been in almost a decade,” and is an area of concern.

Concerns about an AI bubble combined with hefty valuations created a perfect storm over the past week, with the tech-heavy NASDAQ posting its largest one-day swing since April. Despite a recent McKinsey report that highlighted the potential for $7 trillion of spending needed to support AI infrastructure, investors are starting to question growth forecasts, expressing concerns about the ultimate profitability of these investments, and are beginning to worry about some of the financing issues related to the necessary spend. With AI-related stocks priced for perfection, any change in sentiment is bound to have an exaggerated impact on stock prices — particularly at this time of the year, when many investors prefer to lock in meaningful capital gains. 

We noted a sense of market complacency in a prior Weekly Five, and this week saw a change in that tone to one of concern. This is best reflected in the “fear and greed” volatility index (the VIX), which spiked this week. Having started the month in the mid-teens, the VIX nearly hit 30 on Thursday and Friday, although investors seemed to calm down as Friday’s trading session evolved. While falling to below 23 is progress, that level is still elevated next to a relatively lengthy stretch of historically low volatility.

The future will likely hold more periods of elevated volatility as the market continues to digest the combination of slower economic growth and uncertainty around monetary policy. However, it is important to remember that corporate earnings are expected to remain robust into 2026, and the few, anticipated additional cuts to the policy rate should provide a risk-asset tailwind.