Stocks could look right past the weak jobs report to another strong earnings season

Traders on the floor of the New York Stock Exchange, June 18, 2021.

Source: NYSE

As summer winds down, investor focus may shift to the prospect that another strong earnings season is on the horizon, but trading could remain sluggish in the post-holiday week ahead.

Stocks were mixed in the past week, ahead of the long Labor Day weekend, with the Nasdaq outperforming, the S&P 500 slightly higher and the Dow flat. The best performing sectors were on the defensive side, led by real estate investment trusts, utilities, consumer staples and health care.

“You’ve got this Labor Day effect. People are back from vacation,” said Art Hogan, chief investment strategist with National Securities.

Hogan said investors expect the trading activity to pick up as a result, but it typically remains slow in the holiday shortened-week. Investors may assess their summer performance and move to lock in gains or add hedges.

“If you look back at the last five post-Labor Day weeks that have happened with the market near all-time highs, the post Labor Day week is the worst for September,” Hogan said.

Friday’s disappointing August jobs report, with just 235,000 jobs added, was a dampener for sentiment, but stocks were mixed.

“My outlook for the last several weeks is sideways to moderately higher, and that seems where they’re headed. There isn’t a lot of bearish data accumulating. At worst we go sideways,” said Randy Frederick, Charles Schwab managing director of trading and derivatives.

Ignoring jobs report

Frederick said he expects the market to ignore the weak jobs report, which was about 500,000 lower than expected. “I don’t think there’s spillover much into next week for the most part,” he added. “The markets are down a little bit, but I think they’ve taken it in stride better than might be expected.”

Weekly jobless claims data Thursday could be even more important than usual because of the big miss in August’s employment report. Jobs data is important because that is one area where Federal Reserve Chairman Jerome Powell said he would like to see more improvement before the central bank can decide to slow its bond purchases.

The market has been fixated on the Fed’s move to end its $120 billion a month bond buying program because it is viewed as a precursor to interest rate hikes, though Powell has stressed that the two are not linked.

“If feels like [the jobs report] pushes the announcement of a taper to the November meeting, rather than the September meeting, and for the most part that was consensus,” Hogan said.

Hogan said the market will also be watching any inflation-related data, so that makes Fridays’ producer price index important after it surged last month. The consumer price index, released the following week, will be even more important for the market.

John Briggs, head of macro strategy at NatWest Markets, said the markets will be watching for any Fed-related headlines after the disappointing employment report.

“Next week, you have [New York Fed President John] Williams speaking. His take will be important. He’s viewed as being close to Powell,” Briggs said. Willliams speaks at a briefing on the economy Wednesday afternoon.

What’s next for stocks

Besides the Fed, the next big event for stocks will be the third-quarter earnings season, which gets underway in early October. Before that, investors will be watching for any company comments on results.

Frederick said the strength of earnings has been propelling stocks and could keep doing so. “The market was so overvalued for awhile until earnings caught up, but earnings were spectacular and now the valuations aren’t as high as they were a few months ago, so we can do this,” he said.

According to Refinitiv, earnings are expected to increase by 29.8% for the third quarter, after the second quarter’s stunning 95.6% increase.

“There’s a vacuum of earnings related news,” said Frederick, noting the market could be influenced by geopolitical events in the meantime.

But even if the market loses steam, he doesn’t expect a major sell-off because for now, dip buyers continue to come in whenever the market has a setback.