That hope is under threat as the Federal Reserve proceeds with a plan to drive up borrowing costs by rapidly raising interest rates to rein in some loans, consumer spending, business investment and labor demand.
Despite various challenges, the most optimistic market participants predict that employers, workers and consumers may experience a so-called “soft landing” this year, in which the Fed raises borrowing costs, helping to moderate inflation and wage growth without a painful slowdown to kill the recovery: strategists at Morgan Stanley, for example, expect real wages to turn positive broadly by mid-year, outpacing price increases, as inflation decreases and payment rates maintain some strength. That could also be a boon for stocks.
“The labor market is likely to remain tight for the next several quarters despite the Fed’s interest rate hike,” said Andrew Flowers, labor economist at Appcast, a technology firm that helps companies target ads. recruitment. He still sees an “overwhelming appetite” for the hire.
Although especially low unemployment is not usually a bullish sign for stocks, some recent years have bucked the trend. In 2019, when the S&P 500 shed roughly 30 percent, year-end unemployment had fallen to 3.6 percent, in line with current levels.
In such an uncertain environment, forecasts for how stocks will fare at the end of the year vary widely among major Wall Street companies. By various technical measures, the market trajectory is currently near “make or break” levels.
Public companies have “become massively efficient, so from an operational performance standpoint, they’ve been able to take on these additional costs,” said Brian Belski, the chief investment strategist at BMO Capital Markets. Belski’s bank outlook is among the most confident, with a prediction that the S&P 500 index will end 2022 at 5,300, up 27 percent from Tuesday’s close and well above most estimates.
“At the end of the day, I think it’s good for the economy that we’re seeing these kinds of wages,” he said. “Never bet against the American consumer, ever.”