Last Friday, stock markets rallied enthusiastically only to fade by the day’s end. The Bureau of Labor Statistics posted U.S. nonfarm payrolls rising by 275,000 in February. Hidden at the end of the report is the January job revision, where the future was revised down by 124,000, from 353,000 to 229,000.
Weak job growth and layoffs are good news for stock markets. Wall Street wants a weak job market and economy, which would justify cutting interest rates. Lower rates decrease borrowing costs, stimulate the economy, and increase the attractiveness of stocks.
Markets need to be careful of what they wish for. As U.S. Treasury bond yields fall, especially the 20+ Year Bond (TLT), a weakening economy will hurt corporate profits. Firms already cut their workforce in anticipation of a more competitive economy ahead. Forward-indicating firms like Nvidia (NVDA) lost 5.55% last Friday. The VanEck Semiconductor ETF (SMH) lost 3.92% and is flat in the last week.
Technology firms have the highest risk of giving up significant stock price gains that began last Sept. 2023. Big tech firms like Alphabet (GOOG), Meta Platforms (META), Microsoft (MSFT), Amazon (AMZN), and Apple (AAPL) cannot cut more jobs. This would put pressure on their profit margins.
With weak profit margin growth ahead, MSFT stock, which is stuck at around $400 – $406, could fall back to the $350 range. The stock trades at a forward P/E of 35 times. Nvidia trades at a similar forward P/E and has a higher risk of falling to the $630 – $790 range.