stocks rose on Friday as better-than-expected jobs data spurred investor enthusiasm about the economy.
A strong economy means strong profits, which means rising stock prices. Nonfarm payrolls increased by 254,000 in September, up from 159,000 in August. And the unemployment rate fell from 4.2% to 4.1%.
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The optimistic figures argue for a soft landing for the economy, many experts say. This is a continuous reduction in inflation without a slowdown in the economy.
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That sentiment is driving shares. “Markets can take confidence to maintain their recent euphoria and continue to broaden,” Lara Castleton, head of U.S. portfolio construction and strategy at Janus Henderson, wrote in a note.
The euphoria stems from the S&P 500's rise to 43 all-time closing highs this year. And “broadening” refers to the extension of the rally beyond the big tech companies.
“We must be careful, however, of placing too much emphasis on printing a single job, particularly given the recent trend of downward revisions,” Castleton said.
Jobs numbers will likely make the Fed less dovish
The jobs data should prevent the Federal Reserve from cutting interest rates by 50 points in November as it did in September, experts say. Interest rate futures point to a 97% chance the Federal Reserve will cut rates by 25 basis points at its next meeting, and a 3% chance it won't move.
“The Federal Reserve will breathe a sigh of relief to see job growth rebound in September after a rough patch in the summer,” said Bill Adams, chief economist at Comerica Bank in Dallas.
Both stock bulls and bears can profit from the view that the Federal Reserve will lower rates only by small amounts. Bulls may argue that smaller rate cuts are a sign of strength in the economy.
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And bears may argue that rate cuts generally boost stocks, so the smaller the rate cuts, the smaller the benefit for stocks.
Meanwhile, earnings and valuations paint a mixed picture for the market.
Analysts expect S&P 500 earnings per share to rise 4.2% in the third quarter from a year ago, according to FactSet. That would represent a slowdown from 11.3% in the second quarter, but it's still a solid number.
Still, valuations appear expanded. As of Oct. 4, the S&P 500 was trading at 21.4 times analysts' earnings estimates for the next 12 months, FactSet says. That's well above the five-year average of 19.5 and the 10-year average of 18.0.
Nationwide is excited about the stock
One optimistic expert is Mark Hackett, head of investment research at Nationwide, the financial services company. He also cites broadening stocks that are going up.
Over the past two months, the percentage of S&P 500 companies that have outperformed the index is the highest in 30 years, he said.
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Additionally, “investor sentiment is strong, but not excessive,” Hackett wrote in a commentary. Bank of America's Bull & Bear indicator stands at 6.0 (on a scale of 0 to 10), up from 5.4 last week.
“That is the largest increase of the year, based on strong flows and technical factors supporting the credit market,” he said.
Goldman's Rubner is also excited
Scott Rubner, managing director of global markets at Goldman Sachs, is also bullish on the stock. Over the next three weeks, expect a lot of volatility as supply of shares outstrips demand.
But “I'm bullish on stocks for a year-end rally starting Oct. 28, and I'm concerned my 6,000 target is too low,” he wrote in a comment Wednesday. quoted by Bloomberg.
The fund manager buys and sells:
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That level would represent an increase of 4.3% from Friday's close of 5,751.
One big reason for Rubner's enthusiasm: Since 1928, the S&P has risen 4% on average from Oct. 27 through the end of the year, Rubner said. Additionally, investors shift from cash to stocks once the uncertainty of the presidential election fades, he said.
To be sure, Rubner's year-end S&P 500 target beats Goldman's chief U.S. equity strategist David Kostin's 5,600.
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