By Lewis Krauskopf
NEW YORK (Reuters) -Next week's U.S. jobs data may need to tread a fine line for Wall Street, revealing a cooling labor market that supports further interest rate cuts without fueling fears about a recession.
While stocks have edged lower this week, U.S. equity indexes remain near record highs after a relentless rally that has put the benchmark S&P 500 on pace for its best third-quarter performance since 2020.
Some investors say the market's ascent is making stocks vulnerable to any
disappointments. Complicating the release of the jobs data is the potential for a U.S. government shutdown next week that, should it come to pass, could mean the employment report is not released as scheduled next Friday.
The jobs data will help show whether the labor market is "simply experiencing a soft patch," said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
"Nobody is expecting to see a blockbuster number here," Luschini said. "At the same time, were it to come in negative, it would confirm suspicions that perhaps the labor market is deteriorating rather rapidly, which obviously begs the question could we actually be at the throes of a potential recession."
The report is expected to show non-farm payrolls rose by 39,000 in September, according to a Reuters poll of economists, after an increase of 22,000 the prior month. The unemployment rate is estimated to be 4.3%.
The Federal Reserve this month cut interest rates for the first time this year after signs of struggle in the labor market. The central bank is expected to enact another standard quarter-percentage point rate reduction at its next meeting at the end of October and perhaps one more at its last meeting of the year in December.
Expectations of such monetary easing, including more cuts in 2026, have helped drive the latest leg of a rally in which the S&P 500 has posted 25 record closing highs over the past three months.
With inflation still elevated, however, investors are wary that a strong employment report could lead the Fed to slow down its pace of cuts. The Fed raised rates from March 2022 to July 2023 to get inflation under control.
Fed Chair Jerome Powell this week said near-term inflation risks were "tilted to the upside" as he noted a "challenging situation" facing the central bank.
"What people are looking for, is if jobs come in a lot more benign...are we looking at just maybe one cut or no cuts for the rest of the year?" said Marta Norton, chief investment strategist at retirement and wealth services provider Empower.
Ahead of the jobs data next week is a deadline for congressional Democrats and Republicans to come to an agreement to fund the government and avoid a partial shutdown. While investors have tended to shrug off past shutdowns, such an event this time could cause more angst in markets.
One factor is elevated stock valuations, with the S&P 500 now on track for its third-straight year of double-digit percentage gains.
The index was last trading at 22.8 times expected 12-month earnings for its constituents, according to LSEG Datastream. That is around its highest level in five years and well above its 10-year average of 18.7.
"Valuations are at extremes," Norton said. "It means a low immune system for any sort of risk that's out there."
(Reporting by Lewis Krauskopf; Editing by Jamie Freed)
