Wall Street Next Week: Investors Eye Jobs Data as Rate Cuts and Expensive Stocks Hang in the Balance

Next week’s U.S. jobs report could force Wall Street to walk a fine line: signaling a cooling labor market that supports further interest rate cuts, without stoking fears of a recession.

Stocks slipped this week, though major U.S. equity indexes remain near record highs after a powerful rally that has put the benchmark S&P 500 (.SPX) on track for its best third-quarter performance since 2020.

Some investors warn that the market’s surge has left equities vulnerable to any disappointment. Adding complexity, a potential U.S. government shutdown could delay the release of Friday’s payroll report.

“The jobs data will help reveal whether the labor market is simply going through a soft patch,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott. “Nobody’s expecting blockbuster numbers. But if they come in negative, it reinforces concerns that the labor market may be deteriorating more quickly, raising the risk of recession.”

A Reuters poll of economists expects the report to show an increase of 39,000 nonfarm payrolls in September, up from 22,000 the previous month, with unemployment holding steady at 4.3%.

Signs of labor market weakness prompted the Federal Reserve to cut rates this month for the first time this year. The central bank is expected to follow with another quarter-point cut at its late-October meeting, and possibly one more in December. Expectations for continued monetary easing into 2026 have fueled the S&P 500’s latest leg higher, with the index notching 25 record closes in the past three months.

Still, inflation remains elevated, and investors worry that a stronger-than-expected jobs report could force the Fed to slow the pace of cuts. Between March 2022 and July 2023, the Fed aggressively raised rates to rein in price pressures.

Fed Chair Jerome Powell warned this week that inflation risks remain “tilted to the upside,” describing the policy outlook as a “challenging situation.”

“People are asking: if job growth comes in much stronger than expected, do we only get one more cut this year—or none at all?” said Marta Norton, chief investment strategist at Empower.

Beyond the jobs data, Congress faces a deadline to reach a funding deal next week to avoid a partial government shutdown. While markets have often shrugged off shutdowns in the past, another one now could heighten investor anxiety—especially given lofty valuations.

The S&P 500 is on pace for a third straight year of double-digit gains. According to LSEG Datastream, the index last traded at 22.8 times forward 12-month earnings—its highest in five years and well above the 10-year average of 18.7.

“Valuations are stretched,” Norton said. “That means the market has less resilience to any kind of shock.”