By Hannah Erin Lang and Shradha Dinesh

The labor market is looking more sluggish than economists expected. Wall Street's response? Rotate.

Weak jobs data on Thursday sparked a new round of what investors call the rotation trade: driving down shares of the artificial-intelligence giants that fueled the rebound from wartime lows, and sparking new gains in healthcare, consumer staples and other stock sectors left behind during this year's chip-stock surge.

The Dow Jones Industrial Average climbed to a new record, rising 1.1%, or around 595 points, while the Nasdaq composite slid 0.8%. Tech declines weighed on the S&P 500, too, where eight of 11 sectors climbed, but the index eked out just a small gain of less than one point.

Investors are growing more confident that cooling inflation and a stagnant job market will discourage the Federal Reserve from raising interest rates later this year, a move that would weigh on stocks. After Thursday's labor print came in weaker than expected, traders readjusted their Fed forecasts. They now put the odds of a July increase at roughly 20%, down from about 30% before the report, according to CME Group.

"There was this thought process that the Fed would be squarely focused on inflationary pressures," said José Torres, senior economist at Interactive Brokers. "Now, they're going to have to at least consider the labor side of their mandate as well."

The U.S. added 57,000 jobs in June, down from May and roughly half the 115,000 jobs that economists expected.

Treasury yields retreated after the report, before paring those declines, with the yield in the 10-year note ending the session mostly unchanged. Growing optimism about the economic outlook had sparked a recent climb in yields, which rise when bond prices fall.

A few months ago, a broader move into old-economy stocks and other less tech-y corners of the market was shaping up to be the story of 2026. Then came the war with Iran, a generational oil shock and a blistering chip-stock rally that left investors reeling and ultimately put highflying artificial intelligence stocks back in the spotlight.

Those stomach-churning swings also scrambled interest-rate forecasts: At the start of 2026, most traders were looking forward to lower rates as inflation cooled. But as higher energy costs lifted prices, hopes for a cut practically disappeared — even with a new chairman at the helm of the Fed. Soon, most investors started to expect higher rates.

Thursday's reports makes a rate increase less likely, because policymakers will have to weigh damaging the labor market alongside their goal of taming price increases, some analysts said.

Equity investors are essentially betting on a just-right scenario in which inflation cools while the job market holds steady, said Mark Vitner, chief economist at Piedmont Crescent Capital. That would offer a boost to equities, without stoking fears of a slowdown.

"I think we're closer to that than we are to a case where the Fed has to aggressively raise interest rates," Vitner said. "I just don't see a scenario where that happens."

Write to Hannah Erin Lang at hannaherin.lang@wsj.com and Shradha Dinesh at shradha.dinesh@wsj.com