How A Booming Stock Market Impacts The Job Market

Inflation slowed in May, raising expectations for interest rate cuts by the Federal Reserve—a promising sign for the United States economy. The encouraging numbers caused a stock market rally following last week’s inflation report, as well as Wall Street professionals boosting their year-end targets higher for major indexes, including the S&P 500.

The May Consumer Price Index showed core CPI, excluding volatile food and energy prices, rose just 0.2% month-over-month, its slowest pace since October 2023, according to the latest data from the U.S. Bureau of Labor Statistics.

The Core Producer Price Index, which measures the average change over time in the selling prices received by domestic producers for their output, remained unchanged, falling below expectations.

Economists believe the data are positive indicators for the Fed’s upcoming preferred inflation gauge—the core Personal Consumption Expenditures index—later this month.

Bank of America anticipates core PCE rose just 0.16% in May, supporting its view that “disinflation is the most likely path forward.”

Strategist Julian Emanuel of Evercore ISI raised his year-end target for the S&P 500, as a result of the promising inflation trend and the “early innings” of artificial intelligence. Emanuel’s new S&P 500 target is 6,000, the highest on Wall Street.

The S&P 500 and Nasdaq hit four consecutive record closes last week as investors cheered cooling consumer and wholesale price inflation readings.

UBS chief U.S. equity strategist Jonathan Golub, with an S&P 500 target of 5,600, said the inflation data provides “potential for even greater upside” to his year-end outlook, Yahoo Finance reported.

Investor Confidence, The Wealth Effect And Hiring

A thriving and robust stock market can impact the job market in contrasting ways. On the positive side, a booming stock market tends to bolster investor confidence. This heightened optimism can motivate businesses to increase their investments, which may include expanding their workforce by hiring additional employees.

A sustained, fundamentals-driven stock market lift is generally positive for job creation, promotions and raises, as it signals economic strength and provides companies with resources for expansion.

When stock prices experience an upward trajectory, it positively impacts the wealth of individuals who hold equity investments, whether through direct stock ownership or indirectly through retirement accounts.

This accumulation of personal wealth cultivates a sense of financial well-being and confidence among these individuals, prompting them to loosen their purse strings and allocate a larger portion of their disposable income toward discretionary spending.

This surge in consumer spending acts as a catalyst, invigorating economic activity across various sectors. As consumer demand for goods and services escalates, businesses may respond by expanding their operations, which could potentially lead to the creation of new employment opportunities to meet the heightened demand.

Negative Impacts Of A Robust Stock Market

A flourishing stock market, while indicative of economic prosperity, can also raise concerns about inflationary pressures. In such scenarios, the Fed may intervene by implementing measures to rein in the overheated economy.

One of the primary tools at the U.S. central bank’s disposal is the adjustment of interest rates. To combat potential inflationary risks, the Fed may opt to increase interest rates. This move aims to cool down the economy by making borrowing more expensive for both consumers and businesses alike.

For businesses, higher interest rates translate into increased costs associated with securing loans or accessing credit lines. This financial burden can potentially hinder their ability to expand operations, invest in new projects or hire additional personnel. Consequently, the pace of job growth may decelerate, and in some cases, companies might even resort to layoffs to maintain profitability and financial stability.

A focus on short-term stock market performance can sometimes lead companies to prioritize stock buybacks and dividends over long-term investments that create jobs. A rising stock market can exacerbate wealth inequality. If only a small percentage of the population owns stocks, the benefits of a boom are concentrated among the wealthy.

Why It’s Complex

While a bullish stock market can be a positive sign for the job market, it’s not a guaranteed predictor. A genuine economic boom with strong underlying fundamentals is more likely to lead to sustainable job growth than a speculative bubble that can eventually burst. An upswing in certain sectors might create jobs in those areas, but not necessarily lead to widespread job growth across the entire economy.