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Falling oil has given stocks a boost, but Friday’s jobs report will test whether the relief rally can last.
A Goldilocks read could revive the AI trade. Too hot or cold, and Wall Street gets queasy again.
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The stock market has spent the better part of the last few weeks torn between two narratives.
On one hand, the AI trade has been on shaky footing under the weight of capex and valuation worries . On the other hand, oil prices — and, by extension, inflation expectations — have been falling, offering an encouraging sign that the recent stock sell-off could simply be a contained reset.
Oil’s decline continued on Wednesday after a Democratic sweep in the midterm elections, with Brent crude falling below $100 per barrel for the first time in months. All major US stock indexes soared, a sign that investors are embracing the low-oil/moderating-inflation narrative.
But the verdict is still far from final, and Friday’s jobs report for October is the closest thing to a tiebreaker that we’re going to get. Economists expect about 65,000 payroll additions, a number that could either signal a healthy cooldown, more troubling growth headwinds, or renewed inflation trouble.
Let’s break down what investors should be watching:
The Goldilocks zone
In a perfect world, investors will get a so-called Goldilocks reading — hiring that’s cool enough to take pressure off the Fed to keep rates higher for longer, but not so weak that it confirms outright economic weakness.
More specifically, the best-case scenario for stocks would be a modest payroll number, steady unemployment, and tame wage growth. That would reinforce the oil-price relief investors got this week, and offer a signal that inflation is finally cooling without taking the economy down with it.
If that plays out, Treasury yields could keep falling, giving expensive AI growth stocks — including many of the names that bore the brunt of the recent sell-off — some much-needed breathing room.
That would allow investors to refocus on whether specific companies can turn AI development into revenue — and whether their huge capex bills are worth it.
How the jobs report could spoil the party
While the Goldilocks zone is the ideal outcome, there are still two ways Friday’s report could trip up investors.
First, a weak payroll number would raise fears that recent wobbles in AI are part of a broader economic slowdown. Such an outcome could also lower yields, which might provide some near-term support. But the prospect of a genuine growth scare is likely to overrule that over time.
Second, on the other end of the spectrum, a surprisingly strong jobs number could threaten to rekindle the inflation fears quieted by oil’s drop. That could send yields back up and put fresh pressure on the AI trade, particularly companies that have leaned more heavily on debt financing. Firms want to avoid that, especially with investors already asking tougher questions about financing.
In the end, Friday’s report won’t be able to answer whether AI will deliver on all its promises. But it could answer the more immediate question of whether markets have enough macro breathing room to stay patient while they wait.
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