GOOD NEWS FOR THE ECONOMY. BAD NEWS FOR STOCKS.

THE JOBS REPORT CHANGED THE STORY

The U.S. economy added 162,000 jobs in August. Unemployment stayed at 4.1%.

On the surface, that's a healthy labor market. But Wall Street didn't celebrate.

Because in today's market, strong economic data can actually increase the risk of higher interest rates. And investors just got another reminder.

THE FED IS WATCHING INFLATION, NOT JUST JOBS

Following today's employment report, the probability of a 25-basis-point September rate hike jumped to 59%. That's roughly a 3-in-5 chance.

Fed

The message is simple: The economy isn't weak enough to force the Fed's hand.

Which means inflation remains the problem. And that makes next Friday's CPI report potentially one of the most important market events of September.

GOOD DATA ≠ GOOD FOR STOCKS

Stocks reacted accordingly: $S&P 500(.SPX)$ : -0.38%. $NASDAQ(.IXIC)$ -0.29% Dow: -0.51%.

Even the Nasdaq struggled despite strength in semiconductors. $Philadelphia Semiconductor Index(SOX)$

SOX

Because higher rates increase the discount rate applied to future earnings. And that's particularly painful for high-growth companies where investors are paying today for profits expected years into the future.

NEXT FRIDAY COULD BE THE REAL TEST

Forget the jobs report for a moment. CPI is next.

If inflation comes in hotter than expected:

Rate-hike odds could rise. Treasury yields could climb. Tech valuations could come under pressure. Nasdaq volatility could accelerate.

But if CPI comes in cooler:

Rate-hike expectations could collapse. Yields could fall. Growth stocks could breathe again. The AI trade could get another boost.

One number. Two completely different market outcomes.

AND LOOK AT THE ROTATION

There's another fascinating story developing underneath the surface. Software has staged a major comeback.

IGV

$iShares Expanded Tech-Software Sector ETF(IGV)$ is now up 15% since early July.

Meanwhile, the PHLX Semiconductor Index is down 18% over the same period.

That's a huge reversal. Earlier this year, semiconductors massively dominated software.

The market is rotating.

The question is whether this is temporary positioning…or the beginning of a much bigger change in the AI trade.

THE BIG DEBATE

What happens after next Friday's CPI?

A) CPI COOLER : STOCKS RIP HIGHER
B) CPI HOTTER : MARKET SELLS OFF
C) CPI IN LINE : CHOPPY / SIDEWAYS
D) CPI DOESN'T MATTER: EARNINGS WILL WIN

Drop A, B, C or D

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This summary is for informational purposes only and does not constitute financial advice. Investors should conduct their own research before making investment decisions.

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