Nvidia and Microsoft Will Need to Drive Stocks’ Rally as Job Market Stumbles

A cooling job market is now looking more frigid. That makes the stock market even more reliant on big tech. (Spencer Platt/Getty Images))

A weakening labor market is likely to quickly erode Wall Street’s projections for stock performance, putting increasing pressure on the biggest tech companies to deliver the earnings growth needed to drive indexes higher.

While U.S. stocks have powered ahead this year, reaching record highs last month despite uncertainty over tariffs and rate cuts from the Federal Reserve, that may not last. Data from Morningstar suggest Wall Street sees the S&P 500 holding steady over the final months of the year, with the average price target pegged at 6400 points, a touch below Wednesday’s closing level of 6448.26.

Much of this year’s gain, both for the index and in terms of earnings, has been tied to the performance of the biggest tech stocks. And signs that the labor market has just turned a worrying corner suggest the megacap cohort will likely need to do even more heavy lifting.

The Bureau of Labor Statistics’ job openings and labor turnover report for the month of July, published Wednesday, showed the number of available positions fell below the number of unemployed Americans for the first time in four years.

ADP’s reading of private-sector job creation slowed to just 54,000 last month. Chief economist Nela Richardson indicated momentum in hiring has been “whipsawed by uncertainty [and] AI disruptions.”

Challenger Gray & Christmas’s monthly report of layoffs from U.S.-based companies, meanwhile, showed the highest August total since 2020. Stripping out the pandemic, the 85,979 job cuts were the most for the month of August since 2008.

“Tomorrow’s jobs report will be the deciding factor, but so far this week the data is confirming a slowdown in the labor market,” said Chris Larkin, managing director for trading and investing at E*Trade from Morgan Stanley.

“In the short term, markets may embrace that data because it should increase the odds of Fed rate cuts,” he said. “But if the numbers deteriorate too much, it could raise concerns about the health of the economy.”

Economists expect the Bureau of Labor Statistics report will show net new hiring of around 75,000, with headline unemployment edging a tenth of a percentage point higher to 4.3%.

The links between a weakening job market, consumer spending, and corporate earnings are easy to see. A sharp change in their employment prospects could force even Americans who don’t lose their jobs to tighten their belts.

That, in turn, could quickly change current forecasts for U.S. corporate earnings growth, which underpin the market’s bull thesis. LSEG data currently point to collective S&P 500 profits rising by around 10.5% this year and 13.4% in 2026.

Federal Reserve rate cuts are likely to soften the blow of a slumping labor market, but they often take several months to affect the real economy. Fortunately for investors, they are likely to lift stocks higher as lower interest rates boost the value of future earnings. It is particularly true for tech stocks, which can leverage cheaper borrowing costs to stoke innovation.

For the S&P 500, that will be crucial. The benchmark’s six biggest tech stocks comprise around 35% of its entire market value.

Nvidia and Microsoft alone are 8% of the S&P 500’s value. They contributed around 3.7 percentage points of the index’s 10.8% gain from the start of the year to the end of August. But while both stocks have risen around 8% since the start of the third quarter, they have each retreated around 5.5% over the past month.

Those two stocks are also the biggest companies in the S&P 500’s Information Technology sector, which is forecast to contribute around a quarter of the $569 billion in collective S&P 500 profits over the current quarter.

The market is forecasting 8.4% growth in earnings for the S&P 500 for the third quarter and 7.5% for the fourth. Big tech can’t stumble if those calls are to prove true.

Even if the labor market already has.

Write to Martin Baccardax at martin.baccardax@barrons.com