Stocks and Bonds Are Now at Risk From a Sputtering Jobs Market in the Second Half of 2025

As the second half of the year begins, investors have shifted their focus from tariffs to a potentially more pressing concern: the labor market. While trade tensions, especially the “liberation day” tariffs introduced by President Donald Trump in April, had previously unsettled markets, it’s now the health of the job market that has investors on edge.

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Over the past six months, the labor market has held up relatively well even as the bond market turned volatile and the S&P 500 narrowly avoided entering bear territory. Despite a gradual slowdown in hiring, the unemployment rate had remained stable, hovering between 4% and 4.2%.

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But that stability may now be under threat. With June’s official jobs report due Thursday, investors are worried that weakening momentum could turn into a full-blown downturn. The concern intensified after ADP data released Wednesday showed a decline in private-sector employment — the first drop since 2023. That development has fueled fears that the labor market could soon unravel, triggering a stock market selloff and renewed pressure in the bond market.

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Jack McIntyre, portfolio manager at Brandywine Global Investment Management, noted the recent slowdown in hiring trends, which he believes aligns with broader economic shifts, including the impact of Trump’s tariff policies. While he doesn’t anticipate a sharp decline in the June employment numbers, he does expect further weakness in the coming months. “I am very much on board that the payroll numbers are going to keep driving lower,” McIntyre said.

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The U.S. economy has added an average of 135,000 jobs per month over the last quarter — a notable decline from the 186,000 monthly average a year ago. While the general forecast on Wall Street anticipates about 110,000 jobs added in June, Luke Tilley, chief economist at Wilmington Trust Investment Advisors, thinks the actual figure might come in under 100,000. He cited survey data indicating growing uncertainty among businesses about tariffs and their effect on hiring decisions.

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Wednesday’s ADP report further soured the mood, showing private-sector payrolls fell in June — a discouraging signal for broader employment trends. Tilley also projects a slight increase in the unemployment rate to 4.3% for June and warns that Trump’s tax and spending initiatives could further complicate the picture.

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The Senate recently passed a version of a tax bill that would allow companies to fully deduct the cost of equipment purchases, which could lead businesses to prioritize capital investments over adding workers.

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The risk that job growth could continue to weaken or even stagnate is weighing heavily on investor sentiment. Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions, emphasized that while layoffs aren’t widespread, new hiring has also slowed significantly. “If you don’t have a job, it’s becoming hard to find a job,” he said.

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A softening labor market may also affect consumer behavior. If hiring continues to slow, households could be forced to dip deeper into their savings to maintain spending levels — a dynamic that could increase the chances of a recession. Janasiewicz even sees a realistic scenario where the economy produces close to zero net new jobs in the coming months, which he believes could lead to a decline in stock prices and a widening of bond spreads.

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On the policy front, there is some hope that the Federal Reserve could step in if the labor market continues to show signs of stress. While it remains uncertain how much Trump’s tariffs will push inflation higher, Janasiewicz believes any increase in goods prices could be offset by falling shelter costs, creating a window for the Fed to resume rate cuts as early as September.

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Fed Chair Jerome Powell reiterated this week that the central bank will continue to monitor economic data closely, stressing that any decision on interest rates will be made “meeting by meeting.” Should the job market deteriorate quickly, Janasiewicz said the Fed would likely respond with a couple of rate cuts — a move he believes would stabilize the situation and potentially prevent a deeper recession. If stocks were to drop significantly, he would view that as a buying opportunity.

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Tilley, meanwhile, maintains a more cautious stance. He estimates a 50% chance of a U.S. recession within the next year, largely because of weakening consumer strength and the potential for tariffs to dampen spending. However, he also sees any downturn as manageable, followed by a recovery roughly one year later. “It seems risky to bet against equities,” he added, given the market’s potential for resilience.

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Bond yields, which surged following last November’s elections, have started to ease again. McIntyre expects the 10-year Treasury yield, which was at 4.24% on Tuesday, to continue drifting lower. “I’m still biased toward yields not plummeting but drifting lower,” he said. “I think that’s the pain trade.”

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Despite the economic uncertainty, major stock indexes remain in positive territory for the year. As of Tuesday, the Dow Jones Industrial Average was up 4.6%, the S&P 500 had gained 5.4%, and the Nasdaq Composite was also higher by 4.6%, according to FactSet.

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