When good news becomes a problem

Dave Harrison Smith, CFA
Chief Investment Officer
June 9, 2026

 

Labor market strength complicates the Federal Reserve’s path

Americans remain uneasy about the job market. The constant drumbeat of corporate layoffs, particularly in tech-heavy markets like Silicon Valley, has been compounded by an omnipresent narrative of artificial intelligence-enabled worker replacement. This has created a dour outlook for many consumers and investors. The data, however, tell a slightly brighter story.

The Bureau of Labor Statistics (BLS) updated its count of nonfarm payrolls through the end of May, and the report was encouraging. Critically, it reinforced a recent pattern of modest re-acceleration in the labor market after stagnant, and in some markets, outright negative job growth in 2025. The start of 2026 has been notably firm, with the most recent three months showing an economy adding at least 172,000 jobs per month. The average gain of 188,000 jobs per month marks the strongest three-month pace of job growth since March 2024, and punctuates steady re-acceleration in the labor market.

 

Job growth has reaccelerated in 2026
U.S. nonfarm payroll additions, monthly change (thousands), May 2024-May 2026

Continued unemployment claims tell a similar story. Claims, a count of Americans who have been jobless for more than one week, have risen steadily over the last several years, though from a small base, while overall unemployment has hovered in the 4% range. More recently, the trend has improved, with continuing unemployment claims falling to levels last seen in April of 2024.

 

Fewer workers are remaining unemployed
Continued unemployment claims (thousands), May 2022-May 2026

Given growing concern about the accuracy and reliability of government labor statistics from both sides of the aisle, it’s useful to supplement BLS data with private sector measures. ADP’s employment report, which aggregates data from more than 26 million private sector workers in the U.S., provides a useful supplemental check. Encouragingly, this data set also shows a modest re-acceleration off of a challenging 2025, with the recent trend returning to levels last seen in 2024. Job growth has been led by Education and Health Services companies, perhaps reflecting structural demand from our aging society, and a rebound in Information sector jobs. One notable distinction is how job growth differs by company size relative to 2024. In 2024, job growth was broadly distributed across companies of all sizes. 2026, however, has been marked more by strength among the largest, with companies with 500+ employees showing consistent growth, as well as a recent rebound among sub-20-person companies. Mid-sized companies, however, have continued to struggle.

 

Private sector hiring signals similar improvement
ADP private employment growth, monthly change (thousands), May 2024-May 2026

The stock market response to this strong labor market data was decidedly negative, with the S&P 500 down 2.6% and the Nasdaq 4.5% to end the week. The reaction illustrates the challenging nature of making market predictions. A stronger labor market may indicate stability in the U.S. economy, but it paradoxically gives the Federal Reserve more room to focus on taming still-elevated inflation. Futures markets now imply a 69% likelihood of at least one rate hike by year-end, and 26% chance of two or more hikes. This is a significant shift compared to last week, when markets were pricing in nearly even odds of no rate hikes in 2026.

Markets now expect higher rates for longer
Implied Federal Reserve rate changes by year-end 2026, based on futures pricing

For now, it appears we remain in the Goldilocks zone: steady growth, an improving labor market, and strong corporate earnings, without prompting a sharper policy response. The key risk remains inflationary pressure. If inflation becomes too strong for the Federal Reserve’s comfort, its response could be a brake check on economic growth and the business cycle. Labor market stability is good news. Yet in this environment, we are once again reminded how good news can paradoxically create complications for the stock market.

 

 

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