Jobs Report Fuels Market Optimism: UBS

The weaker-than-expected April jobs report has sparked optimism for a soft landing in the US economy, prompting UBS to reiterate its positive outlook for quality bonds and quality stocks. Friday's report showed a smaller-than-anticipated increase in employment growth, alongside moderating wage growth and a slight uptick in the unemployment rate.

"The latest sets of economic indicators and market development continue to support our view of a soft landing for the US economy, which should allow the Fed to cut rates later this year, providing a supportive backdrop for quality bonds and quality stocks," says UBS.

The report highlights several key takeaways from the April jobs report and recent economic data:

Labor Market Shows Signs of Cooling

The April jobs report revealed a slowdown in employment growth, with nonfarm payrolls increasing by 175,000, below consensus expectations. Average hourly earnings growth also reached its lowest level since June 2021, and the unemployment rate ticked up to 3.9%. Additionally, data from the Job Openings and Labor Turnover Survey (JOLTS) pointed to a decline in job openings and a lower quit rate compared to pre-pandemic levels, further suggesting a cooling labor market.

Fed Signals a Bias Toward Easing

Following the release of the jobs report, Federal Reserve Chair Jerome Powell downplayed concerns about potential rate hikes, reinforcing the central bank's belief that current policy is sufficiently restrictive to bring down inflation. UBS remains confident that shelter inflation will decline based on recent rental data, while the April ISM services survey indicated a slowdown in broader economic activity.

Corporate Earnings Remain Healthy

With companies representing 80% of S&P500 reported their earnings, the first-quarter results have been solid. 76% of these companies beat earnings forecasts and 60% exceeding sales estimates. Guidance has also been positive, leading to rising consensus earnings estimates for the second quarter. UBS expects earnings growth to broaden out beyond large-cap growth companies and projects a 9% increase in earnings for the full year 2024.

Positive Outlook for Quality Assets:

With the Federal Reserve likely to begin easing monetary policy later this year amidst declining inflation, UBS maintains its positive outlook for quality bonds and quality stocks. The firm believes current bond yields are attractive and sees potential for capital gains as investors anticipate a more meaningful rate-cutting cycle in 2025 and 2026. Additionally, growing investments in generative artificial intelligence are expected to further support equity market growth.

"So, with the Fed likely to begin easing later this year amid falling inflation, we maintain our positive outlook for quality bonds and quality stocks," concludes UBS.