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A blockbuster US jobs report presented financial markets with a new wrinkle in the outlook for the economy and interest rates. A combination of resilient jobs growth, elevated inflation and tighter borrowing conditions creates a challenging landscape for the Federal Reserve, which has already raised interest rates at a record pace to combat stubborn price pressures. The Fed must now attempt a soft landing in a crosswind. Forecasts suggest that policymakers will decide to hold rates steady when they meet next week. However, following an unexpected surge of 339,000 jobs in May, market participants have recalibrated their rate expectations for the remainder of the year. Bets have risen that the Fed will deliver another quarter-point hike next month. Interest rate futures also reveal that investors are no longer pricing in multiple rate cuts arriving later this year, driving short-term rates higher of late.

Against this backdrop, equity indexes have mounted a strong first half of 2023 by riding a wave of enthusiasm over artificial intelligence, which has boosted the value of technology companies. The tech rally—fueled largely by a handful of the sector’s biggest names—has overshadowed weaker showings in other corners of the market as well as deteriorating economic trends, including a rise in household debt, a contraction in manufacturing activity, and softer data on wage growth and labor productivity. PGIM Quantitative Solutions examines the macroeconomic environment and tech’s outperformance in a new blog post, highlighting the importance of diversification to protect against downside risk.