By Martin Baccardax

The stock market is moving into Friday's jobs report, which undoubtedly will play big in the Fed's next policy decision, with a renewed appetite for risk and a cautious tone on interest rates.

A hike comes to mind. Actually, though, just the opposite. A cut.

A nascent, but growing chorus on Wall Street is suggesting the central bank will pivot toward a rate cut as bond yields extract a little speculative froth from lending markets and job growth slows to a point that supports economic growth but tames inflation.

If that happens, get ready.

That combination could provide a crucial floor of support for stocks, which climbed to fresh all-time highs this week on a revived AI trade, and take the market firmly higher right to the end of the year.

To get there, though, depends on the Fed. And all eyes Friday will be on the July unemployment rate.

Economists are looking for 4.2%, unchanged from June and holding at the lowest levels in more than a year. Job growth, however, is slowing, with Wall Street looking for a hiring gain of 97,000.

That split probably capped wage gains, which spillover into inflation pressures but maintains solid growth into the back half of the year.

Even a tick higher on the unemployment rate could trigger stocks to march higher.

"A 4.2% rate clears the way for investors to focus on strong fundamentals, supporting risk-on factors," said Dennis DeBusschere, chief market strategist at 22V Research. "A higher rate implies a higher speed limit on growth, while 4.1% and below is more obviously risk-off."

"Bond markets, meanwhile, are doing the Fed's heavy lifting," he said. "Fed Chairman Kevin Warsh -- who has faced criticism for shifting communications toward data-dependency -- watched long yields surge without moving short rates."

The central bank held rates steady in June for the seventh consecutive month. The last move was a cut in December.

That led to a big march higher in Treasury bond yields. The 10-year note, up 17 basis points in the past month, is trading at 4.638%. And the 30-year has added more than 32 basis points in only about a week, reaching its highest level since 2007.

Then, set the bond moves against the backdrop of another big uptick in AI spending. The four biggest hyperscalers -- Microsoft, Amazon, Alphabet, and Meta Platforms -- expect to top $750 billion this year and at least $1 trillion next year.

"The market, rather than the Fed, is beginning to discipline the AI infrastructure boom through higher real rates and wider hyperscaler credit spreads," said Barry Knapp of Ironsides Economics.

"A rate hike would likely have created counterproductive effects, while market-driven tightening better addresses excessive capex without crushing the broader economy."

Rate traders agree, putting the odds of a September hike at 55% -- a sharp drop from July's 80% and the lowest in nearly a month. Bets on increases for December have also dipped.

The Iran war, of course, remains the wild card in all this. Will there be a peace deal between Tehran and Washington? Will higher crude prices keep pushing up inflation?

Brent prices have f allen more than 20% since late July, but still sit more than $10 a barrel higher than last year -- a level that suggests they'll keep squeezing CPI and PCE higher until at least the early winter.

Knapp isn't expecting a rate hike this year, and suggests the Fed could respond to oil-driven inflation by shrinking its $6.7 trillion balance sheet.

A balance-sheet move certainly isn't far-fetched since Warsh has made clear any number of times where he stands, including his confirmation hearing. He has called the balance sheet "bloated" and a tool for "a bygone crisis era [that] can be reduced significantly."

A Fed that doesn't move rates is the Wall Street consensus right now. But the voices for a cut are getting louder. And it might not take more than a weak jobs report, a peace deal, and market-based guardrails on tech capex to convince the chorus to raise the rooftop with shouts for a cut early next year.

And if the background noise turns raucous, the S&P 500 will rocket to 8000 points -- at least.

Write to Martin Baccardax at martin.baccardax@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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August 06, 2026 15:15 ET (19:15 GMT)