A Bull Run Could Ride on the Labor Market

Feb 21, 2024

Will economic strength bolster corporate profits and lift stocks higher this year? Look to the U.S. labor market for clues.

Lisa Shalett

Key Takeaways

  • The state of the U.S. labor market may determine how economic strength affects corporate earnings and stock prices.
  • Businesses keep adding jobs, despite slowing workforce growth, which may drive up wages and dent company profitability.
  • However, labor-market tightness could be easing just enough to support gains in companies’ productivity.
  • Investors should watch incoming data on job creation, wages and layoffs while maintaining a diversified portfolio. 

U.S. stocks have reached a series of new record highs in recent weeks, building on last year’s double-digit gains. What is driving investors’ optimism – and is it sustainable?


At the beginning of the year, investors mostly seemed bullish about the fact that the U.S. economy was slowing down, since that would likely generate interest-rate cuts by the Federal Reserve. But investors have stayed buoyant despite recent data pointing to strong economic growth, which suggests rate cuts may be delayed. Instead of retrenching, investors have simply shifted the narrative, indicating that potential strength in corporate earnings may justify higher stock prices.


However, with equity valuations already rich, can today’s economic strength translate to positive surprises in company earnings? The answer likely hinges on what happens in the U.S. labor market.

Watch the Workers

If the labor market remains tight, with more jobs than available workers, companies may feel pressure to continue increasing wages – which could be good for consumer spending, but would likely weigh on company profits. With additional “slack” in the labor market (i.e., competition for jobs), companies could see productivity improve, with positive effects on profits – but there’s a risk that a decline in jobs could also bring down consumer spending.


Can the economy strike a balance between the two sides of that scale?


On one hand, there is mounting evidence that the labor market remains tight and pressure on companies to increase wages will continue to grow:


  • Companies keep adding jobs. January’s non-farm payrolls blew past economists’ estimates, registering 353,000 jobs created versus the expected 185,000. Notably, in January, the unemployment rate remained at 3.7%, against estimates of 3.8%, and wage growth re-accelerated to 4.5% year over year, well above the 4.1% forecast.
  • The overall workforce isn’t growing much. Recent metrics suggest less than 1% annual growth, compared with the 2% pace seen between January 2022 and December 2023. What’s more, the labor force participation rate (i.e., the percentage of all people of working age who are employed or actively seeking work) may be topping out, as the rate for the prime-age cohort—those between 25 and 54—is now 83.2%, a full percentage point above the pre-COVID average.
  • More people are retiring. “Excess” retirements, or those above the predicted trend, hit a new record in the fourth quarter of last year, at over 2.5 million, or 1.5% of the labor force.


On the other hand, there are also signs of labor-market slack developing:


  • Company management are discussing staff reductions. A Bloomberg analysis of corporate-earnings call transcripts showed that references to “job cuts” have hit the highest level since the beginning of the COVID shutdowns in early 2020.
  • Continuing jobless claims are grinding higher. The number of U.S. residents filing for ongoing unemployment benefits has risen from 1.806 million in the first week of 2024, to 1.895 million the week ended Feb 3.
  • Immigration could drive new growth in the labor force. Foreign-born workers accounted for 18.6% of the U.S. workforce in January, or 29.8 million jobs, up 4% from a year ago. This population has an unemployment rate of 4.5%, versus the aggregate 3.7%, providing a source of slack.

Implications for Investors

Today’s labor-related data is difficult to parse but increasingly important to watch. Investors should pay attention to job creation, wages and layoffs.


Morgan Stanley’s Global Investment Committee continues to emphasize building highly diversified portfolios, within which investors should consider favoring exposure to U.S. stocks through equal-weighted versions of equity indices, rather than market-cap-weighted indices.


We also encourage active stock picking, and believe that real estate investment trusts (REITs), gold, hedge funds, investments in Japan, emerging markets other than China, and select European companies are likely to be outperformers. Also consider allocating more of your portfolio to fixed income in order to help further diversify.


This article is based on Lisa Shalett’s Global Investment Committee Weekly report from February 20, 2024, “Slack or No Slack?” Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast based on this report.

Find a Financial Advisor, Branch and Private Wealth Advisor near you. 

Check the background of Our Firm and Investment Professionals on FINRA's Broker/Check.

Discover More

Insights to help you go further.