All eyes on US stocks, unemployment data and expected rate cuts

US stock indices are trading higher after an ambiguous set of US unemployment data which simultaneously managed to signal an increase in jobs and in unemployment. Careful unpicking of the numbers indicates that unemployment has actually increased slightly, rather than dropped as indicated by the headline number, but this has not made a dent in markets’ expectations that the Federal Reserve will start cutting rates over the coming months, mostly likely June.

Nonfarm payrolls rose 275,000, higher than the 200,000 consensus forecast, but there were 167,000 of downward revisions to the past two months so the net improvement was little more than 100,000. Recent revisions to previous months’ non-farm payroll numbers have been so high that they have become almost unusable in terms of trying to predict how they will affect the Federal Reserve’s decision making (last month’s revision was 126,000 upward).

A separate survey of households indicated that fewer people were at work in February and that unemployment has increased from 3.7% to 3.9%.

Nevertheless employment numbers are still good enough although with fewer people employed the wage pressure will start to ease slightly, a fact that the Fed will take into account in its decision-making process.

US stocks compared with other global markets

WisdomTree analysts note that inflation rates are decelerating across the globe, falling faster than policymakers expected.

“Equity markets remain impatient. In lockstep, investor expectations for rate cuts in 2024 appear to have diverged from central bank communication, making for a challenging rate environment. Equity markets are shrugging their shoulders at earnings and appear really ready to rally on declining yields,” said WisdomTree’s Market Outlook published in March.

But overall US equities seem set to outperform most other markets across the globe this year except parts of Asia. After a dip in 2023 when earnings per share on US equities shrunk to 0.7%, they are expected to bounce back above 11% this year and follow up with another increase in 2025 by 12.7%.

This is stronger than European, and particularly UK equities, and is only surpassed by Asian stocks excluding Japan where earnings per share are expected to bounce back from a loss of 7.5% in 2023 to plus 20.8% this year and 16.4% in 2025, according to research by WisdomTree.

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The US election effect

After Super Tuesday this week and a sweeping win for Biden and Trump as the nominees of their respective parties, the US presidential race now seems likely to be a Trump-Biden rematch.

So far this year stocks have rallied on all Trump’s successes, including the Supreme Court’s ruling in Trump’s favour in terms of being able to stay on Colorado’s presidential ballot. Some of Trump’s victories on Super Tuesday were staggering in their size: a 70% margin in Alabama, 61% in Texas, some 70% of the vote in California.

In terms of stocks, the expectations are that a Trump win would mean lower taxes, particularly if he succeeds in making his 2017 cuts permanent. A potential revival of the trade battle with China could erode – but not erase – some of those gains as Trump proposed to increase import tariffs by 10%.

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