JPMorgan Strategists See Bullish Stocks Signal in US Jobs Data

(Bloomberg) — A reading on the US labor market that spells bad news for the economy is actually a bullish signal for stocks, according to JPMorgan Chase & Co. strategists.

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Weekly jobless claims are tracking more than 10% higher than the prevailing three-month moving average and “historically that’s been associated with a recession every single time,” strategists led by Mislav Matejka wrote in a note on Tuesday. Still, the S&P 500 has tended to gain 11% on average in the following 12 months, they said, citing data going back to 1970.

The JPMorgan strategists are encouraged by the fact that companies continue to boost their earnings forecasts, while also betting that the Federal Reserve will make its last large increase in interest rates next month. They have been among the staunchest optimists out of top-ranked voices on US equities this year, even as the S&P 500 struggled to sustain a rebound amid fears that scorching inflation and a hawkish Fed will stall economic growth.

The US benchmark staged a furious summer rally, but pulled back to the lowest in a month after Fed Chair Jerome Powell on Friday dashed hopes of a pivot in policy until there’s a meaningful reduction in inflation. JPMorgan’s Matejka, however, says consumer prices continue to show signs of peaking.

And although business activity data also suggest the worst is yet to come for the economy, corporate earnings revisions are holding up, improving the outlook for equities, Matejka said. “We held a view over the past 2-3 months that ‘bad dataflow will start to be seen as good’ and believe this will likely continue to hold.”

His views contrast with strategists at Morgan Stanley and Bank of America Corp., who do expect a lengthy period of higher interest rates to increase the pressure on profit margins. A strong employment report for August, due this Friday, could result in an even bigger-than-expected rate hike from the Fed next month, BofA strategists said on Monday.

Read More: Wall Street Fears What Higher Rates Will Do to Corporate America

While equity investors are worried about the impact of slowing growth on stocks, positioning data suggest they aren’t panicking yet. Although the S&P 500 has slumped since Powell’s remarks on Friday, the Cboe Volatility Index — known as Wall Street’s fear gauge — is stuck near 25, lower than in the six other instances this year when stocks experienced a similar selloff. A rally in US equity futures on Tuesday also suggests that investors see the latest retreat spurred by concerns over hawkish central bank comments as overdone.