Are Fed Rate Cuts Coming After the Latest Jobs Numbers?

Introduction and Overview

Hello and welcome to this month’s market update for August 2025. My name is Steve Latham. I am the Chief Investment Officer for Bernicke Wealth Management. This month we’re going to go over a couple of different items. We have a lot of economic data flowing through the pipe that has started to determine the forward focus for what the Federal Reserve is going to do with interest rates.

We’ll look at how the second quarter earnings are wrapping up. But first, before we do that, we’re going to jump right into the most recent jobs data that we received last week for the month of July.

Jobs Data Review

As you can see here in front of us on the left hand side, we have the monthly jobs reports. These are the net non-farm payroll job additions going back to the beginning of 2021.

Now, as you can see, that was right after COVID, where we had a significant number of jobs lost. But we rebounded and we rebounded significantly to the point where we were almost adding a million jobs a month in certain months right after COVID. Now, of course, that’s a pretty unsustainable number. We can’t add a million jobs every month forever.

But you do see the trend softening over time, albeit we’re still adding jobs every month, for the past three years. The controversy comes in over the last month where not only did we have a jobs number that came in below consensus at 73,000 jobs, but we also had revisions for the prior two months, which is a standard practice because we’re continuing to get data in that revised the jobs numbers lower to the tune of over 250,000 jobs.

And so as a result, we still see net positive job additions. And you can see that in the numbers here over on the right for May, June and July. The P just stands for pending. But we saw that 73,000 in July and then revisions down 14,000 for the last couple of months. So we’re still adding jobs. But right now the market believes that in order to make up for demographic loss, you need to add at least about 125,000 jobs a month just to maintain a neutral unemployment rate.

With that said, the unemployment rate is still around 4 to 4.2% right now. So it’s not terribly high. It’s not terribly low either. But the reduction of job additions is going to put more ammunition behind the Federal Reserve to potentially cut interest rates in an attempt to stimulate an increase in job additions going forward.

Fed Policy: The Role of Inflation

Now, the other factor that the Federal Reserve is going to be looking at is inflation.

And what I have here in front of us is inflation going back the last ten years. Of course, you can see back in 2020 right here where COVID hit, we had the federal funds rate down here at the bottom dropped to effectively zero for a long period of time. And up here we have inflation, a couple of different metrics that we follow, significantly increasing through 2022.

And now we’re on the other side of it down through 2024 and into 2025. We’re still above that 2% number the Federal Reserve is looking at. Depending upon your measure, we’re somewhere between 2.5 and 2.7%. So it’s not terrible, but it’s not continuing to trend down. And that was one of the reasons why the Federal Reserve wanted to maintain the interest rate level where it’s at right now, the upper end being 4.5%.

If you are on the lower end or you focus on the nuances of this, you can be between 4.25 and 4.5% right now.

But that said, there’s still going to be some focus on what is driving inflation going forward. Right now, as far as the Federal Reserve is concerned, they’re concerned that the tariff regime that we’re currently implementing amongst a number of trading partners throughout the globe could have what some may consider a temporary impact, others may consider it being a little more substantial.

Certainly, if you’re looking at some of the inputs that we would be seeing, like metals, pharmaceuticals, mining materials, auto parts, and so on and so forth. These are all issues that the Federal Reserve has to grapple with without having the full set of data. So that was one of the reasons why they weren’t wanting to reduce interest rates.

But the employment situation may start to change that for them.

Corporate Earnings Review

Now moving on to earnings. It’s actually been a really great quarter for earnings. Every quarter, public companies are required to disclose their earnings, how they did the last quarter and potentially provide guidance on how things are doing going forward. Some companies are a lot more transparent than others.

But what we do see is so far the majority of companies have reported. Last week, we had behemoths like Apple, Meta, Microsoft, Amazon, Google. They have all reported. And so we’re getting a pretty good picture of where corporate health lies. And so far, it’s pretty good. What you see here in the chart in front of you is the number of companies or the percentage of companies that have beat the estimate of Wall Street analysts. Green companies are those that beat, yellow have met analysts’ expectations, and companies in red have missed analyst expectations…. And this is broken up by sector. So we have information technology over here on the left, where 97% of companies in that sector so far have beaten earnings expectations for the second quarter of 2025. Communication Services—including Google and Meta, Disney and other media companies—are also doing really well. Financials: over 90% of companies here have beaten their earnings expectations, and those are the largest companies that carry our stock market forward.

Cheerful to say stock market, not economy, because the economy isn’t just technology behemoths. There are a number of other facets to the economy as well. But as far as the stock market is concerned, it’s doing really well. So these large companies are continuing to drive momentum in the stock market, even though you have areas of the market like the materials sector, where less than half of those companies who have reported have exceeded their earnings expectations.

There’s less materiality there.

Those companies, as a result of there being fewer of them and not of the size of the larger tech companies, just don’t have the weight or the gravity within the stock market to move markets one direction or the other. If Facebook misses their earnings, that miss is a lot more meaningful than a smaller materials company that’s trying to dig precious metals out of the ground.

Earnings Growth Analysis

And we can see that also with the growth rates of these companies. So not only do we want to know what earnings look like, but we also want to know how quickly they’re growing those earnings. And once again, you have the behemoths within the tech sector and the communications sector really carrying forward that growth.

Over here on the left side, we have communication services where earnings growth year-over-year as a result of today’s earnings is at 40%. Just last month at the beginning of July, the expectation was that it would be closer to 30%. So we’re seeing those stocks grow faster and they are bigger than their peers in other sectors of the economy. Technology is another one where today they’re expected to grow faster around 21% year-over-year versus just a month or two ago, where it was only expected for them to grow 16%.

And then similarly with financials, they had a very big leap this quarter where they’re growing a little over 12% year-over-year. They were only expected to grow just over 2% year-over-year.

When we’re looking at what’s driving the stock market forward, we need to take into account all facets—the different areas where growth is happening and who is driving that growth.

And as much as we don’t like a handful of companies driving that growth, that’s exactly what’s happening today. That growth is really snowballing in a positive way for those companies. And they’re already large, so they carry a lot more weight in the market. That’s your Nvidia’s, your Microsoft’s, your Google’s, your Metas, and so on.

Conclusion and Looking Ahead

So that’s all to say that we’re still in a relatively healthy environment.

The economy is in a relatively good position. Even though we had a couple of slower jobs numbers, we’re still overall at a good spot unemployment-wise. And the Federal Reserve is finding that as a cue to start to react and potentially reduce interest rates, which act as a stimulus to the overall economy, allowing you to borrow cheaper, put more money in the market, and allow people to spend a little bit more.

That would then turn into greater earnings growth for the companies that we are looking at today. If you have any questions on any of this, please don’t hesitate to reach out. We’re always happy to answer, and thank you for joining us this month.