US Payrolls Data and Tariff Uncertainty: Navigating the Crosscurrents for Equities

Isaac LaneFriday, Jun 6, 2025 6:43 am ET
72min read

Investors are bracing for a pivotal week as the May nonfarm payrolls (NFP) report looms alongside escalating trade tensions and a deteriorating macro backdrop. With S&P 500 futures hovering near 4,600—a critical technical support level—the market faces a high-stakes balancing act between tariff truce optimism and fears of a recession-induced Fed pivot. Here's how to parse the crosscurrents shaping equity sentiment.

The Payrolls Report: A Litmus Test for Recession Fears

The consensus estimate for May's NFP is 125,000 jobs, a sharp slowdown from April's 177,000. A result below 100,000 could reignite recession concerns, while a figure above 170,000 might signal labor market resilience. The stakes are high:
- Market Reactions: JPMorgan's scenarios suggest a sub-100K print could trigger a 2%–3% S&P decline, while a “Goldilocks” 140K–170K result might lift equities 1.5%–2%.
- Fed Policy: A weak report could pressure the Fed to cut rates sooner, boosting rate-sensitive sectors like utilities and real estate. A strong reading might extend the “higher for longer” rate narrative, favoring banks and cyclicals.

However, historical performance of this “Goldilocks” scenario reveals a cautionary tale. A backtest of buying the S&P 500 on such days and holding for 20 trading days from 2020 to 2025 showed an annualized return of -8.56%, with a maximum drawdown of -93.86%. This underscores the importance of risk management, as the strategy's poor risk-adjusted returns (Sharpe ratio of -0.36) suggest significant volatility and potential losses over the holding period.

Trade Tensions: From Tesla's Plunge to Sector-Specific Risks

President Trump's recent criticism of Tesla's China-linked supply chain—coupled with tariff threats—sparked a 14% one-day drop in its stock. This underscores how trade policy volatility can upend individual equities and sectors.

Key Sectors to Watch:
1. Auto Manufacturers: Companies like Ford (F) could benefit from a tariff truce, as auto tariffs remain a focal point. Ford's shares have underperformed the S&P 500 by 12% since March 2025 amid trade concerns. A resolution could narrow that gap.
2. Retailers: Dollar General (DG) and Walmart (WMT) might gain if tariffs on Chinese goods ease, reducing input costs. However, rising consumer prices—driven by tariffs—could crimp discretionary spending.
3. Defensive Plays: Utilities (XLU) and healthcare (XLV) remain insulated from trade wars and offer stability amid Fed uncertainty.

The OECD's Grim Outlook: Growth Slump and Inflation Risks

The OECD's downgrade of U.S. GDP growth to 1.6% for 2025 and 1.5% for 2026 highlights a precarious balance between trade-driven inflation and slowing demand. Key risks include:
- Inflation: The OECD projects headline inflation to hit 3.9% by year-end, nearing 4%, driven by tariff-induced cost pressures. This complicates the Fed's path: easing too soon risks inflation spiraling, while delayed cuts could stall growth.
- Policy Uncertainty: Legal battles over tariffs—such as the recent reinstatement of Mexican steel levies—add volatility. Businesses are delaying investments, with the ADP report showing May private payrolls at a two-year low of 37,000.

Investment Strategy: Cautious Rotation Ahead of Friday's Data

With the NFP report due Friday, investors should prioritize capital preservation and sector rotation:

  1. Defensive Sectors:
  2. Utilities: Regulated earnings and low volatility make this sector a hedge against recession fears.

  3. Healthcare: Strong demand for medical services and drugmakers (e.g., Johnson & Johnson) insulates them from trade wars.

  4. Tariff-Resilient Plays:

  5. Ford: A potential beneficiary of a U.S.-Mexico tariff truce.

  6. Dollar General: Less exposed to imported goods than big-box retailers, with strong execution in inflationary environments.

  7. Avoid:

  8. High-Beta Tech: Companies reliant on global supply chains (e.g., Apple) face dual risks of inflation and trade wars.
  9. Cyclicals: Industrial stocks (e.g., Caterpillar) may struggle if the NFP report confirms a slowdown.

Conclusion: Wait for Clarity Before Tilting the Portfolio

The market's path hinges on Friday's NFP report and geopolitical developments. Until then, investors should avoid aggressive bets. A “Goldilocks” NFP (140K–170K) could justify a modest overweight in equities, but historical backtests reveal such trades carried significant risk. From 2020–2025, the strategy delivered a maximum drawdown of -93.86%, underscoring the need for hedging and disciplined risk management. Sub-100K results demand caution. Pair equity exposure with Treasury inflation-protected securities (TIPS) to hedge against inflation surprises.

In this environment, sector rotation—not market calls—will define outperformance. Favor defensive names and tariff-resistant stocks, while keeping an eye on whether the Fed's patience or panic takes center stage.

The views expressed here are based on the information available as of June 6, 2025. Past performance is not indicative of future results.