The jobs slowdown actually means the recession's over, not starting, argues Morgan Stanley

Morgan Stanley strategists, led by Mike Wilson, interpret recent weak jobs data, including August's lower-than-forecast 22,000 nonfarm payrolls, as evidence that the U.S. is in an early-stage economic recovery, signifying the end of a rolling recession rather than the onset of a new one. They anticipate a September Fed rate cut will catalyze the next bull market leg, though near-term market choppiness is expected due to Fed rate cut uncertainty. Despite this, they project a strong market finish to 2024 and into 2026, recommending defensive big-cap healthcare stocks and upgrading small-caps to neutral.

Analysis

Morgan Stanley presents a counter-consensus view, interpreting the weak August nonfarm payrolls report (+22,000) as confirmation that the U.S. economy is in an early-stage recovery, having already concluded a 'rolling recession' that began in 2022. This outlook is supported by a V-shaped rebound in earnings revisions breadth, which the firm identifies as a classic early-cycle signal that historically follows, rather than precedes, a recession. The soft labor data is expected to solidify a Federal Reserve interest rate cut in September, a crucial catalyst for the next leg of the bull market. However, significant near-term risks remain. The firm anticipates market choppiness through the seasonally weak September-October period, stemming from uncertainty over whether the Fed's easing will be aggressive enough, given its persistent focus on inflation. While a strong finish to the year and into 2026 is forecast, the timing of a rotation into more cyclical assets like small-caps—which have been upgraded to neutral—is viewed as contingent on a more dovish Fed pivot, which may require several more months of weakening economic data to materialize.

Key Decisions for Investors

• Investors should anticipate near-term market volatility and consider using potential weakness in the seasonally challenging September-October period to position for a projected strong year-end rally.
• For defensive positioning, consider overweighting large-cap healthcare stocks, where earnings revisions are reportedly strengthening, providing a hedge against near-term chop.
• While small-caps have been upgraded to neutral, a full rotation may be premature; monitor subsequent labor reports, as a more aggressive Fed easing cycle is the key catalyst needed for the Russell 2000 to outperform.
• The primary variable to watch is the Federal Reserve's policy response, as a slower-than-expected easing cycle presents the main risk to this early-cycle recovery thesis.