May jobs surge of 172,000 pushes stocks lower as rate-cut bets fade

The U.S. added 172,000 jobs in May, more than double the 80,000 consensus estimate, pushing the 10-year Treasury yield above 4.53% and dragging S&P 500 futures down 0.7% as investors priced out near-term rate cuts.

"From the Fed's vantage point, strong job creation and steady wage gains alongside a resilient U.S. consumer suggest that labor-driven inflationary concerns cannot be ignored — a hawkish development," said Jeff Schulze, head of economic and market strategy at ClearBridge Investments.

The unemployment rate held at 4.3%, while prior months were revised higher by a combined 93,000 jobs, bringing the three-month average to 188,000. The 2-year note yield climbed to its highest since February 2025, and CME FedWatch data showed the probability of at least a quarter-point rate increase in October rising above 50%.

The data complicates the Federal Reserve's path as it prepares for its June meeting — the first under Chair Kevin Warsh — with inflation still running well above target as elevated energy prices tied to the Iran conflict persist. Markets now face a higher-for-longer rate environment that threatens to pressure equity valuations, particularly in rate-sensitive tech and growth sectors.

The May payrolls report marks a sharp acceleration from the 9,700 jobs per month averaged in 2025, when the labor market was mired in what KPMG chief economist Diane Swonk described as a "no-hire, no-fire" purgatory. Hiring has rebounded this year to a monthly average of 76,000 from January through April, boosted in part by large tax refunds from President Donald Trump's 2025 tax cuts. Those refunds have largely been spent, while gasoline prices remain above $4 a gallon.

The resilience in hiring has been concentrated in healthcare, which added more than 456,000 jobs over the past year while all other U.S. employers collectively cut 205,000 positions. That pattern reflects structural demand from an aging population rather than broad-based economic strength, according to Martha Gimbel and Ryan Nunn of Yale University's Budget Lab. The drop in immigration and rising baby boomer retirements have also lowered the so-called break-even employment rate to near zero, according to a Federal Reserve report, meaning the economy needs far fewer new jobs to keep unemployment stable.

For the Fed, the data shifts attention squarely back to inflation. Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said the upside surprise shows ongoing economic resilience and will keep the Fed focused on inflation pressures. The central bank's June 16-17 meeting will be closely watched for any shift in language, particularly as energy costs tied to the Iran conflict keep headline inflation elevated.

The cross-asset reaction was immediate. The Nasdaq 100 futures fell 1.4%, with AI-related stocks such as Nvidia, Micron and Marvell Technology leading the decline as higher yields reduced the present value of their future earnings. The last time the 10-year yield traded above 4.53% was in late May, when markets were pricing a similar hawkish repricing after stronger-than-expected job openings data.

"Payroll Blowout! We've gained more and more confidence in the last prints that the Fed doesn't have to be worried about the labor market," said Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management. "Laser focused on inflation and it will all come down to the duration of this War to determine the Fed's next move. For now, the move is to not move: HOLD."

This article is for informational purposes only and does not constitute investment advice.