According to Morgan Stanley strategists, who successfully predicted the recent correction in the US stock market, if the data released on Friday further proves the resilience of the economy, the laggards in the market may get a boost.

In a research report, Michael Wilson, Chief US Stock Strategist at Morgan Stanley, wrote that stronger-than-expected employment data could give investors "more confidence that growth risks have receded".

Economists surveyed by Bloomberg expect the report to show that the US economy created 0.165 million jobs last month, up from 0.114 million in July.

Technology stocks have largely driven the surge in the S&P 500 index this year, while other sectors still have a long way to catch up. In recent weeks, due to concerns about overvaluation of technology stocks, this trend has started to change, prompting investors to enter other sectors of the market. According to data compiled by Bloomberg, about 16% of stocks in the index are currently at 52-week highs, compared to 4% at the beginning of the year.

Wilson reiterated his preference for defensive stocks, while warning against buying small-cap stocks or "other cheap cyclical stocks that have performed poorly in recent years, mainly because he expects growth to continue to slow down".

Wilson warned in early July that traders should prepare for a significant market pullback amid uncertainty surrounding the US election, corporate earnings, and Federal Reserve policy. Less than a month later, the S&P 500 index fell 8.5% from its peak. Wilson also predicted a market decline last year, which did not materialize.

Strong economic data since the August sell-off has driven the recovery of US stocks, Wilson expects this week's job report to also support this trend. On the other hand, he wrote that weaker-than-expected job growth coupled with rising unemployment rates will "put pressure on stock valuations like last month."

Wilson added that the "sweet spot" for the stock market will be the Fed's consecutive 25 basis point rate cuts and steady economic growth. "In contrast, if the data shows weakness in the labor market, and a more moderate policy response (i.e. 50 basis point rate cuts), the market's reaction may not be as positive."

Wilson warned that an "challenge" facing investors is that US stocks have already priced in a soft landing, limiting the upside for stock indices. He said that if the data rekindles concerns about a hard landing, it could trigger a "substantive" decline.

The strategist expects the S&P 500 index to reach 5400 points by mid-2025, which implies a decrease of about 4% from the current level.

Editor/new