Slowing labor market vs strong corporate earnings: Who wins?
Barbara Reinhard, CFA
CIO, Multi-Asset Strategies and Solutions
Investors have mostly been celebrating the S&P 500’s strong earnings season. But at the same time, a notable slowdown in labor markets is brewing: July’s nonfarm payrolls rose by just 73,000 versus expectations of 105,000, and prior months saw a downward revision of 258,000 jobs. Can corporate earnings remain resilient in this scenario? Let’s take a look.
With approximately two-thirds of S&P 500 companies having reported, 82% have delivered positive EPS surprises, and 79% have exceeded revenue expectations. The blended year-over-year earnings growth rate stands at 10.3%, marking the third consecutive quarter of double-digit growth—and significantly outperforming the June 30th estimate of 4.9%.
Valuations remain elevated, with the forward P/E ratio of 22.2x above both the 5- and 10-year averages. Normally, this may be reason for caution in a slowing labor scenario. But the low job figures make it much more likely that the Fed will cut interest rates—the market is now pricing in two rate cuts by year end, versus one before the July nonfarm payroll figures.
Given the potential for lower rates and the resilience shown by U.S. large caps through 2Q’s policy turmoil, we continue to favor high-quality companies that demonstrate strong pricing power and operational flexibility in this environment—especially relative to international markets.
Maverick Lin contributed to this article.
All data from FactSet.