Morgan Stanley: Strong job data may boost underperforming US stocks

According to the information from Zhitong Finance and Economics APP, Michael Wilson, Chief U.S. Stock Strategist at Morgan Stanley, stated that if the data released on Friday further proves the resilience of the U.S. economy, stocks that have lagged behind the overall U.S. market may receive a boost.

Wilson stated in a research report that stronger-than-expected employment data may make investors "more confident that the risks to economic growth have diminished." The U.S. August non-farm payroll report will be released on Friday. The market currently expects that the number of new non-farm payrolls in August will increase from 114,000 in July to 165,000, while the unemployment rate will slightly decrease from 4.3% in July to 4.2%.

The significant rise in the S&P 500 index this year has been largely driven by technology stocks, while the performance of other sectors has been notably weaker than that of tech stocks. However, in recent weeks, this trend has started to change as concerns about the overvaluation of tech stocks have prompted investors to shift towards other areas of the market. Data shows that about 16% of the components of the S&P 500 index are trading at 52-week highs, compared to only 4% at the beginning of the year.

Wilson reiterated his preference for defensive stocks and warned investors against buying small-cap stocks or other cheap cyclical stocks that have underperformed in recent years, mainly because economic growth is slowing down.

Wilson had previously warned in early July that investors should prepare for a significant market pullback due to uncertainties surrounding the U.S. election, corporate earnings, and Fed policy. Less than a month later, the S&P 500 index fell 8.5% from its peak. Although Wilson had also predicted a decline in U.S. stocks last year, this prediction did not materialize.

After the pullback in August, strong economic data helped U.S. stocks recover. Wilson expects that this week's employment report will support this trend. However, he added that weaker-than-expected job additions and an increase in the unemployment rate will "put pressure on stock valuations" as it did last month.

Wilson pointed out that a series of 25 basis point rate cuts by the Fed and stable economic growth would be the "sweet spot" for the stock market, but "if a more accommodative policy stance (i.e., a 50 basis point rate cut) coincides with a weak labor market, it may not be well received by the stock market."

Wilson warned that one challenge facing investors is that the U.S. stock market has already priced in expectations of a soft landing, limiting the upside potential of the S&P 500 index. He stated that if economic data once again triggers concerns about a possible hard landing for the economy, it could lead to a "substantial" decline in U.S. stocks. The strategist predicts that by mid-2025, the S&P 500 index will reach 5400 points, which implies a decrease of about 4% from the current level