The US labor market's relationship to S&P 500 earnings

The labor market is a crucial factor in the Federal Reserve's decision-making process, particularly when it comes to interest rate adjustments. However, the labor market's influence extends beyond monetary policy, impacting both corporate earnings and investor portfolios.

Catalysts anchor Madison Mills explores how labor market dynamics can affect financial markets (^DJI, ^IXIC, ^GSPC).

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Angel Smith

Transcripción del vídeo

We know that the labour market extremely important to the Federal Reserve.

That's why we got all eyes on that September 6 jobs report.

But the labour market, also a critical driver of your portfolio.

According to the Macro Institute, it is the most important driver of company earnings.

And as you can see here, the year over year change in the average weekly overtime hours worked is directly linked to the S and PSS and P 500 forward EPS.

So you can see this purple line that the S and PSEP and the blue is the average weekly overtime hours in the manufacturing sector.

And you can see it's just about kind of that Venn diagram that turns into a circle here, right S and P 500 company forward earnings directly tied to those average weekly hours.

And this makes a lot of sense.

The companies that are able to keep up their balance sheets and have strong earnings moving forward.

Those are also the same companies that are able to spend a little bit more money on their labour force.

Maybe they in the process of growing, and that's why it's specific to the overtime hours worked that increasing as companies are experiencing more forward demand.

Now, what's really interesting about the moment in time that we are currently in?

Will this dynamic start to change ever so slightly?

Because we are nearing the end of our earnings cycle so far this quarter?

It's looking like not only it was a good quarter in terms of earnings, but it was more broad based.

That's why we're seeing this rotation narrative.

Get some buzz on Wall Street here, but we're seeing some cracks in the labour market.

Just a little bit of softness, a little bit of companies, uh, practising attrition, for example, slowing down on hiring.

So if we do start to see a bifurcation in a chart like this, that could spell bad news for the Fed.

And it could also mean bad news to come for the S and P 500 earnings cycle.

Moving forward into Q three.

So definitely a chart like this, something you want to keep in mind when you're looking at your investments heading into the second half of this year,