2024 stock market outlook

As jobs get harder to find, stocks could be in trouble after the best first half to an election year in half a century. Investors should be mindful of all jobs reports but pay particular attention to the Employment Situation report because of the important information it provides. Investors may not be able to predict the market's reaction to the report, but it can be used to help determine where a country or place is in its economic cycle.

Jobs report matters to investors, slowing job growth may cause the Fed to reduce interest rates, which historically correlates with higher stock prices. On the other hand, job growth and low unemployment may spur the Fed to pump the brakes on economic growth by increasing interest rates, which typically depresses stocks. Another reason why the jobs report may not reliably indicate the stock market is because the market can incorporate employment data from alternative sources. The Employment Situation report is not updated in real time; it is released only once per month. Meanwhile, other reports can provide insights into the job market.

A high unemployment rate indicates that the economy is not producing enough jobs - prolonged states of high unemployment erode purchasing power, drag down productivity, and eventually affect the physical and mental health of a workforce. In contrast, a low unemployment rate indicates that the economy is doing well. This is reflected in the stock market, as investors are more likely to invest in companies that are thriving.

So how much can the unemployment rate determine stock prices, and how does that prediction affect particular stocks? Is there a link? Keep reading to learn more about the above topics in much more detail, including the relationship between unemployment, stock prices, inflation and the economy.

Can the unemployment rate predict stock prices?

The unemployment rate serves as an indicator of economic health, potentially forecasting stock prices. Higher unemployment generally indicates reduced demand for companies' products and services, leading to lower stock prices. Investors tend to favor profitable businesses in stable economies, so they may reduce their investment when economic indicators like unemployment suggest potential profitability risks.

• a high unemployment rate
  When the unemployment rate is high, it triggers actions from the Federal Reserve such as lowering interest rates and engaging in open market asset purchases. By reducing interest rates for borrowers and businesses, the Fed aims to decrease the unemployment rate. Lower interest rates stimulate borrowing and spending, increasing demand for goods and services and thereby generating more jobs.
• a low unemployment rate
  Conversely, a low unemployment rate signals a robust and thriving economy. In such conditions, investors are inclined to buy assets, anticipating rising demand. The Federal Reserve typically maintains a more passive stance as long as economic growth remains stable and consistent.
  
  Whether for good or for ill, the unemployment rate impacts stock prices due to the Federal Reserve's involvement in the stock market's preservation. Unemployment rates can provide valuable insights for investors seeking optimal times to purchase stocks.

Inflation and interest rates

Generally, stock prices have increased when unemployment was low and decreased when unemployment was high. But the relationship between unemployment rate and stock market is more complicated than this, their relationship might be influenced by many other factors. One of the main factors is inflation, which can lead to higher interest rates. Higher interest rates can lead to more expensive borrowing and lower stock demand. With a higher interest rate, investors will be less likely to borrow money because the return they need to achieve to earn a profit will be harder to attain since the market as a whole will slow.

Employment numbers only tell a part of the economic story, and investors should consider other indicators like gross domestic product, consumer spending, and capital investment when trying to paint a picture of the economic cycle.

Stock Market Forecast for The Next Six Months

The technology and communication services sectors have been the driving forces behind this year's market rally, demonstrating impressive breadth. In 2024, only two out of the 11 market sectors posted negative returns, with real estate and consumer discretionary being the worst performers. Historically, a strong start to the year for stocks has been a positive sign for investors. Since 1950, there have been 19 instances where the S&P 500 has gained at least 10% through the end of May. Refer to the chart below to observe this trend.

As of June 7, when 99% of the companies had announced results, 79% of S&P 500 firms had topped Q1 estimates, FactSet Research said. That was slightly above the five-year average of 77%. However, they topped Wall Street estimates by 7.4% in aggregate, or below the five-year average of 8.5%.

As for Q2, 67 S&P 500 companies have issued negative earnings guidance so far vs. 44 with positive guidance, said John Butters, senior earnings analyst at FactSet.

Butters noted that the forward 12-month price-to-earnings ratio for the S&P 500, at 20.7, is running well past the 10-year average of 17.8 times earnings. So the stock market seems to think that earnings will continue to rise at a favorable clip. Adam Parker, founder and CEO of Trivariate Research, made a similar point in an early June interview on CNBC, citing research that found 75% of large-cap companies are forecast to expand their profit margins over the next 20 months.

The index has averaged an 8.8% gain in the second half of those years, according to Carson Investment Research.

Of course, past performance is never a guarantee of future returns. But history appears to be on the side of the coming quarters.

S&P 500 forecast

Wall Street analysts are projecting that S&P 500 companies will continue to overcome rising costs. Analysts estimate S&P 500 earnings increased 9.2% year over year in the second quarter. They project another 8.3% in the third quarter and anticipate 17.5% in the fourth.

But the S&P 500’s forward 12-month P/E ratio is 20.3. Its 10-year average forward P/E of 17.8 suggests stock valuations may be stretched.

Most analysts remain optimistic that the S&P 500 will continue advancing. The average analyst price target for the S&P 500 is 5,925.80.

DJIA forecast

The Dow Jones Industrial Average lagged in the first half of 2024.

Many investors are focusing on growth stocks and risk assets rather than blue-chip investments. If that trend continues, it could be bad news for the Dow.

But investors could look to blue-chip stocks for safety if they become concerned about macroeconomic and geopolitical uncertainty.

Nasdaq forecast

Not surprisingly, the Nasdaq has outshined the S&P 500 this year. If everyone continues to buy growth stocks, the Nasdaq rally will continue.

Artificial intelligence chipmaker Nvidia is the best-performing stock in the Nasdaq 100. It has ridden impressive revenue growth numbers with impressive gains this year. If the AI technology investment boom fizzles, Nvidia and the Nasdaq could lag.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.