RBC Capital analysts warned that the softer-than-expected U.S. jobs report last Friday has added fresh uncertainty to the stock market, adding to existing concerns over high valuations and seasonal patterns.
“Friday’s jobs report may inject some fresh uncertainty about the labor market backdrop into a U.S. equity market that’s been priced for perfection,” the firm said in a client note.
Non-farm payrolls increased by just 22,000 in August, well below expectations, while June’s figures were revised down to a decline of 13,000 jobs.
RBC observed that the S&P 500 initially rose as investors factored in a potential Federal Reserve rate cut in September, but ultimately “ended down a bit on the day as the reality of a slowing labor market, and the idea that cuts may actually be needed and not merely preemptive, settled in.”
The analysts cautioned that U.S. stocks could experience heightened volatility in the coming months. “Our worries have centered on elevated valuations in the S&P 500 and Nasdaq 100,” RBC noted. “The tendency of September and October to be tough months for S&P 500 performance… and the sudden deterioration in AAII net bullishness.”
Sector positioning offered a silver lining. RBC reiterated its overweight stance on the S&P 500 Materials sector, citing “generally favorable signals,” solid fund inflows, and attractive valuations.
However, they highlighted weak equity flows among retail investors, which “cause us to question whether retail investors can be relied on to buy dips in the short term.”
Overall, RBC concluded that while recession risks remain contained, U.S. equities face pressure from slowing labor dynamics, lofty valuations, and declining investor enthusiasm.
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