Big Wall Street call flips script on S&P 500 ‘Goldilocks’ rally originally appeared on TheStreet.
Markets notched record highs last week, but the overall economy seems mostly fuzzy.
The S&P 500 notched fresh all-time highs, and investors are betting big on rate cuts being around the corner.
Naturally, everyone loves a good rate cut, but what if the cuts come for all the wrong reasons?
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Recent data points to a slowdown in the housing market, sticky inflation, and job growth that’s losing steam.
With all that, one major analyst says the Fed’s cuts might not result in the usual “Goldilocks” scenario for the stock market.
The S&P 500 posted record highs last week, but the underlying economy looks anything but steady.
Since early 2025, the job market has shown clear signs of a cool-off, even as inflation remains stubborn.
In May, nonfarm payrolls added only 130,000 jobs, down substantially from April’s 177,000 tally.
Also, March-April numbers were quietly revised lower by 95,000 combined.
Related: Housing market update spells more trouble
On a weekly basis, things get even trickier.
For the week ending June 21, initial claims fell by 10,000 to 236,000, but continuing claims climbed to 1.974 million, the highest since late 2021.
Simultaneously, core inflation isn’t playing along this time.
May’s core PCE, the Fed’s preferred measure, is up 0.2% month-over-month while hitting 2.7% year-over-year, up from 2.5% in April.
The reading highlights that price pressures are still well and truly alive, even as job growth slows down.
For obvious reasons, investors love a Fed rate cut.
Cheaper borrowing facilitates share buybacks, greater spending, and more liquidity sloshing around, which in turn pushes stocks higher.
More on the S&P 500:
In a true Goldilocks setup, you have steady growth and cooling inflation.
However, this time things look a lot different.
Market strategists are of the opinion that the Fed’s next cuts won’t come from strength, but from economic stagnation and sticky inflation.
That awkward mix, with weaker hiring but sticky inflation, is exactly the “growth-splot” that keeps riskier assets on edge.
Investors continue getting impatient over the Federal Reserve’s rate cuts, pricing in close to 18 basis points of easing over the past few weeks.
Nevertheless, JPMorgan strategists, led by Mislav Matejka, feel that the coming reductions are unlikely to drive the expected market bump.
They cite the sluggishness in the economy slowdown and lingering inflationery pressures, instead of a Goldilocks scenario of resilient growth with weak price gains.
Related: Surprising jobs data shows economy in flux
Under this rather spotty outlook, Matejka’s team believes that any Fed cuts will come from weakness, not strength, with inflation still sticky. That combo usually fails to deliver strong market gains.
Since 1980, there’s been a pattern where Fed cuts following a pause during shaky growth result in Treasury yields and cause the dollar to drop, instead of fueling a “risk-on” run.
JPMorgan identifies a similar split now, with the dollar index potentially hitting fresh lows, 10-year yields dropping, and emerging markets (not Europe) looking best positioned to win.
Defensive and high-growth pockets, including areas like staples, health care, utilities, and tech, have historically outperformed in these late-cycle cuts.
It’s important to note that despite the S&P 500 hitting new highs, its modest 5% gain this year pales next to Europe’s 21% surge.
The figure highlights just how uneven things could become if the Fed cuts for the “wrong” reasons.
Related: NYSE closing bell may ring in S&P 500 history
Big Wall Street call flips script on S&P 500 ‘Goldilocks’ rally first appeared on TheStreet on Jun 30, 2025
This story was originally reported by TheStreet on Jun 30, 2025, where it first appeared.