Despite Job Market Anxiety, Wall Street's Wealth Engine Keeps Going

For American workers already uneasy about job security in the age of artificial intelligence, Friday’s employment report was another blow the clearest evidence yet that the labor market is losing momentum.

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For investors, however, the data painted a very different picture. While hiring cools, Wall Street is betting heavily that the Federal Reserve will step in to soften the downturn, protecting portfolios in the process.

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That doesn’t mean equities are immune. Stocks slipped on Friday, though only slightly, as weak hiring raised fresh concerns about corporate earnings. Bonds, by contrast, rallied giving balanced investors a cushion while overall equities remain close to record highs, riding the strongest multi-asset rally in four years.

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The resilience comes despite economic signals flashing red. Payrolls barely moved in August, unemployment climbed to its highest level since 2021, and revisions confirmed the weakest hiring streak since the pandemic. Yet markets are sending a different message: the Russell 2000 Index of small-cap companies has risen for five straight weeks, and credit spreads are sitting near decade lows.

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“Households with assets like stocks or real estate feel wealth is permanent,” said Peter Atwater, adjunct professor at the College of William & Mary. “Those without ownership, meanwhile, are struggling with shrinking income and no cushion.”

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In theory, interest rate cuts are meant to help indebted households and job seekers. In practice, the most immediate benefits tend to flow through financial markets. Rising asset prices stabilize portfolios and sustain spending power, even when wage growth is weak.

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“That wealth effect is keeping consumption afloat, and consumption is what drives the U.S. economy,” said Jeffrey Rosenberg, portfolio manager at BlackRock Inc., in an interview with Bloomberg Television. “That’s what tempers concerns about the labor market slowdown.”

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A new Congressional Budget Office study shows how income inequality is likely to deepen. Under President Donald Trump’s proposed “One Big Beautiful Bill Act,” the lowest-earning 10% of households would lose about $1,200 annually a 3.1% cut to already strained incomes.

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The wealthiest 10%, meanwhile, would enjoy an average gain of $13,600, or a 2.7% increase. The legislation redistributes resources upward, amplifying divides in an economy where hiring is sputtering.

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The fiscal tilt comes on top of a monetary backdrop that favors asset holders. For investors, slower hiring is viewed less as a threat and more as a tailwind: cheaper borrowing costs support portfolios, reduce mortgage rates for wealthier households, and combine with corporate tax breaks to extend gains.

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Traders are currently pricing in as many as six rate cuts by the end of next year an extraordinary pivot with inflation still above 3% and equities near record levels.

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The size of the wager is striking. Before Friday’s report, markets were already on pace for their best quarter since mid-2021. Bond ETFs attracted a record $49 billion in August, while gold surged to an all-time high as the dollar weakened and doubts about Fed independence resurfaced.

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Historically, rate cuts with inflation above 3% alongside a stock rally have been rare. The S&P 500 has climbed 9% in the past three months, a pre-easing surge that hadn’t been seen in two decades until last year.

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For some, that’s a warning sign. When the Fed began easing last year, 10-year Treasury yields shot up a full percentage point within four months. Traders now expect the yield curve to steepen short-term yields falling with Fed cuts while long-term yields rise on inflation fears.

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“If long rates climb while the Fed lowers the front end, stocks could face a sharp selloff as inflation worries return,” said fund manager Jeff Muhlenkamp, who has increased gold exposure. “Gold could rally further in that scenario.”

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Despite those risks, many investors have been rewarded for sticking with optimism during the Trump era. Wall Street confidence has grown around the idea that if markets stumble, the administration will step in. Earlier this year, officials rolled back tariff threats after a selloff, reinforcing the perception of a policy backstop.

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“It’s the buy-the-dip mindset,” said Vincent Deluard, global macro strategist at StoneX Financial. “Every cycle strengthens that conviction. Each time, the policy put resets higher.”

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Monetary easing cycles highlight the uneven outcomes: weaker hiring undercuts workers’ prospects, while lower rates cushion those with wealth to invest. The post-pandemic bull run has widened the wealth gap, with stock ownership at record levels but highly concentrated. The bottom 50% of households collectively own just $500 billion in equities, compared with $23 trillion held by the top 1%, according to Fed data.

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“Investors have been rewarded for ignoring geopolitical and economic risks,” Atwater added. “But those at the top often overlook the despair mounting at the bottom.”

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