Although signs of cooling are emerging in the U.S. job market and the wider economy, these trends could still offer support to stocks, according to analysts at BCA Research.
“The economy is slowing, but not collapsing, and monetary easing is imminent — a backdrop that will benefit equities,” the BCA analysts said in a note to clients.
U.S. stock futures ticked higher on Monday, as investors looked ahead to key inflation data later in the week that could sway the trajectory of upcoming Federal Reserve interest rate decisions. On Friday, the main averages on Wall Street retreated, following the release of a softer-than-anticipated August nonfarm payrolls which underlined an ongoing slowdown in the American labor market.
Observers also noted that September is traditionally a weaker month for market sentiment. Uncertainty over President Donald Trump’s aggressive tariffs, a recent spike in government bond yields fueled by fiscal worries, and caution around the state of a years-long artificial intelligence boom are factors potentially impacting how investors will approach the coming days as well.
Yet, despite Friday’s decline, the benchmark S&P 500 remains not far from a record peak, while valuations in general are lofty.
Underpinning these frothy levels have been hopes that the underwhelming job market figures will persuade the Fed to slash interest rates by at least 25 basis points at its September 16-17 policy gathering. Wagers for a half-point reduction from the current range of 4.25% to 4.5% have even increased.
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Against this backdrop, the BCA analysts said they remain “strategically bullish,” predicting that the Fed will roll out at least two rate drawdowns by the end of 2025. They are also keeping tabs on generative AI enthusiasm and corporate earnings, “even amid numerous risks.”
“However, we are tactically cautious, as seasonality, elevated valuations, and stretched technicals present near-term headwinds,” the analysts flagged.
They recommended that investors assume “neutral” positioning on mega-cap technology firms, be “overweight” on real estate stocks to take advantage of the possible rate cuts, add “defensive” names in the pharmaceutical and utilities sectors, and use metals and miners as an “inflation hedge.”
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