Updating forecasts as jobs market continues to slow

In this article, we review:

• Why further slowing in the labor market, in our view, increases the probability of additional Federal Reserve rate cuts between now and year-end
• Updates to our economic and market forecasts regarding short- and long-term interest rates, inflation, and stock price appreciation
• Why we believe positive economic growth can be preserved and the environment remains favorable for equities and investment-grade corporate bonds

On September 5, the U.S. Bureau of Labor Statistics (BLS) released its August Nonfarm Payrolls Report displaying only 22,000 new jobs added to the economy. This was well below consensus estimates of more than three times that amount and also included 21,000 negative revisions for the months of June and July. This report, in our view, confirms a material weakening trend in the jobs market, increasing the likelihood of additional Federal Reserve rate cuts in the months ahead.

With this report, the three-month rolling average of new jobs has fallen to less than 30,000, and the six-month average has declined to 64,000, noticeably below the calendar year (CY) 2024 monthly average of 168,000. In addition, the unemployment rate rose to 4.3%, its highest level since October 2021. Furthermore, on September 9, the BLS announced an additional 911,000 of negative job revisions for the months of April 2024-March 2025, taking the monthly average for that time frame down from more than 140,000 to 70,000. We would assess that this overall slowing in the labor market has decidedly shifted the Fed's focus to the employment side of its dual mandate.

Given this economic backdrop, we are updating our year-end forecasts as follows:

• We now believe the Fed is likely to implement three quarter-point rate cuts between now and year-end, concluding CY 2025 with a fed funds target range of 3.50%-3.75%. With the newer slowing pace of job growth, we see the Fed as having no choice but to prioritize its objective of maximizing employment (versus stabilizing inflation) before the labor market turns to negative growth and potentially increases the risk of recession. Therefore, we believe the Fed is likely to reduce its fed funds target range by 0.25% at all three of its September, October, and December meetings.
• We also now believe a realistic year-end yield on the 10-year U.S. Treasury bond to be 4.00%. Based on our belief that Fed rate cuts will successfully head off recession probabilities for the year ahead, we would view a more normalized upward-sloping three-month to 10-year Treasury bond yield curve during what could soon be a recovering labor market to be approximately 0.40%. This spread would put the 10-year Treasury yield at about 4.00% at year-end.
• Inflation is likely to finish the year above previous expectations. Given modestly rising inflation reports over the past several months, we are increasing our year-end expectation of core inflation to 3.0%, as represented by a combined average of Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) core rates of inflation. This would include expectations of a slight rise in overall inflation being driven by the initial implementation of tariffs now in effect.
• We are maintaining our forecast of 1.5% cumulative gross domestic product (GDP) growth for CY 2025. Through the first half of 2025, GDP growth has averaged approximately 1.4%, and the Atlanta Fed's most recent tracking estimate for third quarter growth (September 4) stands at 3.0%. It is our belief that should the Fed act to reduce rates beginning in September, this pace of expansion can be preserved.
• We are increasing our year-end price target on the S&P 500® to 6,800. Despite the slowing in the labor market, we are raising our price target on the S&P 500 from 6,600 to 6,800 based on a handful of catalysts (previously identified in our Mid-Year Market Outlook) continuing to play out. These would include Fed rate cuts, a continuing lower tax environment solidified by the recent 2025 Budget Reconciliation Bill, and strong corporate earnings as seen in aggregated S&P 500 Net Operating Income estimates of better than 10% in CY 2025 and 13% in CY 2026, as aggregated and published by Factset Earnings Insight.

From a portfolio positioning standpoint, we continue to remain favorable on stocks and short- to intermediate-term investment-grade bonds in the Single-A and BBB credit categories, where we see current yields as remaining attractive. We would view this asset allocation composition as an appropriate mix of capital appreciation and income against an economic backdrop of positive growth and lower interest rates.

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