Positive employment data could support lagging stocks

The upcoming labor market data could trigger an upward movement for underperforming stocks, according to Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley. The recent stock market surge, driven by investments in artificial intelligence, has increased the S&P 500 by about 20% and the Dow Jones Industrial Average by roughly 6,000 points over the past twelve months. However, many other stocks have lagged in the shadow of tech enthusiasm. This could change if the forthcoming nonfarm payroll numbers, to be released this Friday, exceed forecasts, Wilson suggests. “A stronger-than-expected payroll number and a lower unemployment rate would likely give markets more confidence that growth risks have diminished, keeping stock valuations high and potentially allowing some of the lagging stock markets to catch up,” Wilson wrote in a Tuesday note. Morgan Stanley analysts forecast that the U.S. added 185,000 nonfarm payrolls in August, above the consensus estimate of 162,000 and an increase from the 114,000 additional jobs in July. The bank also expects the unemployment rate to fall to 4.2%, in line with consensus. This would be a slight decline from the 4.3% rate in July, which was a surprising increase from June’s 4.1%. If the labor market report underperforms for the second consecutive time, recession fears could be rekindled, according to Wilson. “Conversely, another weak report and a further rise in the unemployment rate would likely rekindle growth fears and put stock valuations under pressure as we saw last month,” Wilson said. Weak employment data could also compel the Federal Reserve to cut interest rates more aggressively than projected. A series of 25-basis-point cuts could “represent the optimum for equity multiples if accompanied by stable growth,” whereas a 50-basis-point cut “may not be positively received by the stock market if accompanied by labor market weakness.” The stock market rally has broadened in recent months as investors have become increasingly cautious about returns from AI investments, given a planned trillion-dollar spending wave in the coming years. This was evident last week when Nvidia extended its post-earnings loss to 13%, as results missed the highest targets, and questions persist among investors about AI returns for the chipmaker’s customers. As other sectors catch up, about 16% of the S&P 500 is now at 52-week highs, up from 4% at the start of the year, Bloomberg data shows.