After a disappointing August jobs report, markets are almost fully convinced that the Federal Reserve will deliver a 25-basis-point interest rate cut at its policy meeting next week. A number of investors are even positioning for the possibility of a more aggressive move. For wealth advisors and RIAs, the implications of a shift in monetary policy are nuanced. While lower borrowing costs may support equities in the near term, several strategists caution that the underlying dynamics in the economy could limit the benefits of easier policy.
The immediate reaction from traders has been straightforward: a more dovish Fed should support risk assets after a volatile summer marked by thin liquidity, trade-related concerns, and erratic market leadership. Yet not everyone is convinced that rate cuts represent an unqualified positive. Advisors who are guiding client portfolios through late-cycle conditions will need to evaluate both sides of the argument — the potential boost from easing, and the risks that may accompany it.
Ed Yardeni, president and chief investment strategist of Yardeni Research, is among those warning that policy missteps could create distortions. He has argued that cutting rates into an already resilient economy risks fueling what he calls a destabilizing “melt-up” in equities. His concern is that additional liquidity will chase limited opportunities, intensifying speculative behavior without resolving the economy’s structural challenges.
Specifically, Yardeni points to the labor supply shortage as a critical bottleneck. With the US workforce constrained by an aging population and tighter immigration policies, adding more monetary stimulus won’t create new workers. “By cutting rates this month, the Fed would be stimulating an economy that doesn’t need easier policy,” he said. “Stimulating demand without solving the labor undersupply only intensifies the imbalance.”
For advisors, this perspective underscores the importance of distinguishing between cyclical and structural factors. Monetary easing may smooth short-term volatility, but it cannot address labor force participation or demographic trends. In client conversations, it may be worth highlighting that an apparent policy tailwind could quickly transition into a source of volatility if investors begin to perceive a divergence between fundamentals and asset prices.
Yardeni also warned of the behavioral risks associated with easy money. Productivity gains remain steady, and the unemployment rate is still near historic lows. Against that backdrop, an additional rate cut could encourage a “fear of missing out” rally driven more by flows than by earnings. That type of market environment, he noted, often concludes with sharp corrections that can be particularly punishing for clients who entered late in the cycle.
Other market voices share this cautious view. Stuart Kaiser, head of US equity trading strategy at Citi, has suggested that weak payrolls data represent a stronger signal for equity investors than rate cuts. His view is that slowing hiring and a drift higher in unemployment will ultimately weigh more on earnings than the marginal benefit of lower rates. “A negative growth signal is more powerful than the benefit of cuts being priced in,” he said.
For RIAs, the takeaway here is that the labor market remains central to forward-looking equity performance. If businesses pull back on hiring, revenue growth slows, and corporate margins face pressure. In that scenario, the multiple expansion that often accompanies Fed easing may struggle to hold. Advisors may want to prepare clients for a period where markets cheer the Fed while earnings continue to disappoint — a divergence that requires careful portfolio positioning.
Additional risks are emerging from sector-specific pressures. Torsten Sløk, chief economist at Apollo, highlighted mounting job losses in industries directly exposed to tariffs, including manufacturing, construction, retail, and transportation. Employment growth in these sectors has turned negative, signaling that trade policy uncertainty is adding strain to an already uneven economy. Advisors with client exposure to cyclicals may want to reassess risk levels, particularly if trade frictions remain unresolved.
Inflation dynamics further complicate the picture. Thursday’s release of the Consumer Price Index (CPI) is expected to show “core” inflation rising 0.3% month over month and 3.1% year over year. That would keep inflation firmly above the Fed’s 2% target. Citi analysts have noted that it would take a significant upside surprise to derail next week’s cut, but any renewed signs of inflation could limit the Fed’s ability to pursue an extended easing cycle.
For advisors, the inflation backdrop raises critical allocation questions. If the Fed cuts while inflation remains sticky, clients may face a challenging mix of slower growth and elevated prices — a scenario that tends to favor real assets, alternatives, or inflation-sensitive strategies. It also suggests a potential cap on how aggressively the Fed can cut, reducing the scope of monetary support for equities.
Another variable to watch is the annual benchmark payroll revision due Tuesday. Some strategists project a downward revision of as many as 900,000 jobs, a significant adjustment that would reinforce the message of labor market weakness. For investors, the revision could serve as another catalyst for volatility, underscoring the risks of relying on headline data without considering revisions and longer-term trends.
Against this backdrop, the central question is whether the Fed can cut rates deeply enough to offset mounting growth risks without reigniting inflation. Morgan Stanley’s Mike Wilson believes equities’ ability to withstand labor market weakness will depend on the Fed’s response. However, he cautions that the central bank may not have much room to maneuver. With inflation still elevated and jobs data weak but not catastrophic, the Fed is unlikely to commit to a sweeping easing cycle. That setup, he said, could mean “choppy” price action through the traditionally volatile months of September and October.
For advisors, that outlook translates into a need for patience and discipline. Portfolios may need to withstand higher near-term volatility as markets digest the dual challenges of slowing growth and constrained policy flexibility. At the same time, Wilson remains constructive on the medium-term outlook. He sees any pullback as creating room for a stronger finish to the year and continued gains into 2026, supported by what he expects will be a broad-based earnings recovery. Advisors may want to emphasize this timeline to clients, framing short-term turbulence as an opportunity rather than a reason to retreat.
Goldman Sachs’ David Kostin offers a somewhat more optimistic near-term view. He notes that equities typically rally during Fed cutting cycles as long as the economy avoids recession — which he does not see as the base case. Kostin projects the S&P 500 to reach 6,600 by year-end, citing renewed earnings growth in 2026 as the foundation for continued equity gains. He also sees room for small-cap stocks to rebound, given how much they have lagged in the higher-rate environment.
For wealth advisors, Kostin’s outlook suggests opportunities to diversify client portfolios beyond the large-cap names that have dominated returns in recent years. Small- and mid-cap equities, as well as select cyclicals, could provide relative value if lower rates ease financing pressures and reinvigorate growth expectations. However, advisors should remain attentive to liquidity risks and volatility, which can be more pronounced in smaller-cap exposures.
Ultimately, the market’s next phase will depend on how effectively the Fed can balance its dual mandate. If rate cuts are deep enough to sustain growth but measured enough to avoid reigniting inflation, equities could enjoy a favorable backdrop into 2026. If, however, the Fed miscalculates — either by overstimulating or by moving too cautiously — volatility will remain elevated, and investors may face greater downside risk.
For advisors and RIAs, the coming months demand a heightened focus on risk management, scenario planning, and client communication. Rate cuts are not a silver bullet, and in many ways, they raise as many questions as they answer. Will easing extend the cycle, or will it accelerate distortions? Will inflation reemerge as a constraint? How will labor markets evolve as demographics and trade pressures persist?
The answers to these questions will shape asset allocation decisions heading into 2026. Equities may continue to climb, but not without setbacks. Fixed income could provide ballast if growth slows further, while alternatives and inflation-sensitive exposures may play a larger role in diversified portfolios.
For clients, the key message is balance. Rate cuts may provide relief, but they cannot eliminate the structural challenges in the economy. Advisors who help clients navigate these crosscurrents — combining tactical flexibility with long-term discipline — will be best positioned to guide portfolios through the late-cycle environment.
