Economy created more jobs than expected, stocks sell off

The May jobs report came in meaningfully stronger than expected, with nonfarm payrolls rising by 172,000 and the unemployment rate holding steady at 4.3%. The details were concentrated but still important: leisure and hospitality added 70,000 jobs, local government added 55,000, and health care added 35,000, while financial activities declined by 22,000. The revisions were also notable, with March revised up from 185,000 to 214,000 and April revised up from 115,000 to 179,000, meaning the prior two months were 93,000 stronger than previously reported. Wages remained firm, with average hourly earnings rising 0.3% in May and 3.4% year-over-year. Markets reacted negatively because the report pushed yields higher and made it harder for investors to argue that the Fed needs to cut rates soon; the 2-year Treasury yield rose to near 4.15% and the 10-year at 4.54%, while the S&P 500 fell over 2.5% and the Nasdaq declined over 4% as technology shares came under pressure.

• While poor consumer confidence has been widely discussed, consumer spending has defied this sentiment
• This may be due to the labor market being much stronger than expected
• While this is positive for the economy, it has negative repercussions for stocks and bonds
• A strong labor market and sticky inflation make it unlikely the Federal Reserve can continue to lower interest rates
• In fact, as of today, the market is now pricing in a HIKE in interest rates, something that was almost unfathomable earlier in the year
• Higher yields remain the key pressure point for equities, especially growth and technology stocks
• Higher yields are also bad for real estate and over-levered companies waiting for lower rates to refinance their debt

The Elon premium

SpaceX is preparing what could become the largest IPO in history, with Reuters reporting that the company is targeting a $1.75 trillion valuation and looking to raise at least $75 billion in an all-primary offering. The company has reportedly set a fixed price of $135 per share, rather than using the traditional IPO process of setting a range and adjusting based on investor demand during the roadshow. Reuters also reported that investor demand is already running at roughly two times the size of the offering, or about $150 billion, with pricing expected on June 11 and trading expected to begin on Nasdaq the following day. The enthusiasm is understandable given SpaceX’s position across rockets, satellite communications, Starlink and potential AI infrastructure, but the valuation leaves very little room for disappointment. Reuters also noted that SpaceX posted a $4.94 billion net loss in 2025 despite revenue rising 33% to $18.67 billion, making this as much a test of investor appetite for long-duration growth stories as it is a traditional IPO.

• While quickly growing companies deserve a valuation premium, SpaceX carries an “Elon premium”
• Many investors willing to buy shares at this type of valuation are betting Elon will be able to achieve things that seem unthinkable today (as he has in the past)
• As an example, Musk can receive 200 million super-voting restricted shares if SpaceX reaches a $7.5 trillion valuation and establishes a permanent human colony on Mars with at least 1 million people
• The IPO also highlights how much value creation now happens in private markets before public investors get access
• Everyone will be watching closely if the market can absorb an offering of this size, and if it may be a sign of a near-term market top

Earnings growth strongest since 2021

First-quarter earnings season is now largely complete, and the results were much stronger than investors expected coming into the quarter. Reuters, citing LSEG data, reported that S&P 500 profits were tracking toward roughly 28% year-over-year growth, which would be the strongest quarterly earnings growth since Q4 2021. FactSet’s May 8 update showed blended earnings growth of 27.7%, revenue growth of 11.3%, and 84% of reporting companies beating EPS estimates, above both the 5-year and 10-year averages. The breadth was also encouraging, with FactSet showing 10 of 11 sectors reporting year-over-year earnings growth and all 11 sectors reporting revenue growth.

• Earnings remain a major support for the equity market, even as rates have moved higher
• Revenue growth above 11% suggests the quarter was not simply about cost-cutting
• Even more encouraging is that this is happening while GDP is growing in the 1.5%-2% range
• One caveat is that much of the growth was generated by big-cap technology companies
• That said, breadth across sectors was there, so companies in most parts of the economy seem to be operating well in this environment

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