Non-Farm Payrolls Could Propel 'Lagged' Stocks, Says Morgan Stanley Strategist
2min read Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley, who accurately predicted last month's pullback in U.S. stocks, said that shares that have lagged in the U.S. stock market rebound could get a boost if this Friday's non-farm payroll data further proves the resilience of the economy.
Wilson recently released a report stating that stronger-than-expected non-farm employment data could give investors greater confidence that growth risks have subsided. The market currently estimates that the seasonally adjusted non-farm employment-population will increase by 165,000 in August, compared to the previous value of 114,000.
Technology stocks have largely driven the surge in the S&P 500 this year, and investors have turned to other sectors in recent weeks due to concerns about high valuations in technology stocks.
After a historic battle with inflation, traders are also waiting to see how much the Federal Reserve will cut interest rates later this month.
Relevant data shows that about 16% of the S&P 500 index's constituents are at 52-week highs, compared to 4% at the beginning of the year. Since the sharp drop in August, strong data has helped the market recover, and Wilson expects this week's non-farm report to push this trend. However, if the data is weaker than expected and the unemployment rate rises, the stock market will be under pressure, just like last month.
Wilson reiterated his preference for defensive stocks while warning investors to stay away from small-cap stocks or other cheap cyclical stocks that have performed poorly in recent years, mainly because economic growth is slowing down.
He warned in early July that traders should be prepared for a significant pullback in U.S. stocks due to uncertainties surrounding the U.S. election, corporate earnings, and Federal Reserve policy. Less than a month later, the S&P 500 index fell 8.5% from its peak.
However, this may not prove Wilson's strength. As one of the most bearish strategists on Wall Street, Wilson has also been bearish throughout the year, but the S&P 500 index rose 24% last year.
Wilson pointed out that the sweet spot for the U.S. stock market is a series of 25 basis point rate cuts by the Federal Reserve, accompanied by stable economic growth. A more dovish policy reaction than that (i.e., 50 bp cuts) may not be viewed favorably by the equity market if it comes alongside labor market weaknessy.
Wilson warned that one challenge investors face is that the U.S. stock market has already digested the expectation of a soft landing, which limits the overall upside of the index. He added that if the data triggers concerns about a hard landing again, it could cause a significant decline.
The strategist's overall target is for the S&P 500 index to reach 5,400 points by mid-2025, which means the index will fall about 4% from the current level.
September is usually one of the most volatile months for the market, and volatility may intensify around the controversial presidential election, which has been full of surprises. Others are still worried about the huge share of the market occupied by tech giants and are concerned that the hype surrounding artificial intelligence (AI) has been overdone.