The last thing stock traders want to see is anything to suggest they are underestimating the weakness in US corporate profits.
That might explain their reaction to Friday’s jobs report, which showed US employers added 126,000 workers to payrolls last month, the fewest in more than a year. June e-mini contracts on the Standard & Poor’s 500 Index dropped 1 percent, while Dow Jones Industrial Average futures slid 165 points.
While investors have been able to live with subpar economic data that might delay a rate hike by the US Federal Reserve, they have viewed threats to company earnings less charitably. Friday’s report showed that hiring slowed even as wage gains climbed. Either could be seen as pressuring profits that already are forecast to fall through September.
“I’m afraid of earnings coming in even weaker,” ICAP PLC Ron Anari senior vice president of trading said by telephone. “One thing that would be good is increased hiring but after today’s number, who knows... Companies have been able to show better earnings because of efficiency and higher productivity and I’m not sure how much longer that’s going to be able to go on.”
Investors already face the longest stretch of earnings declines since the 2008 financial crisis, according to analyst estimates compiled by Bloomberg. Profits are forecast to shrink 5.8 percent in the first quarter of this year and fall 4.2 percent and 1 percent over the following two quarters.
Friday’s report showed employers added the fewest workers last month since December 2013 and the jobless rate held at 5.5 percent as companies sought to bring US headcounts in line with an economy that throttled back at the start of the year.
The 126,000 increase was weaker than the most pessimistic forecast in a Bloomberg survey and followed a 264,000 gain a month earlier that was smaller than initially reported, the US Department of Labor said. The median forecast in a Bloomberg survey of economists predicted an increase of 245,000. Average hourly earnings rose 2.1 percent from a year earlier.
Companies tempered the pace of hiring as rough winter weather, tepid overseas markets and a slowdown in energy-related capital investment combined to depress the economy.
“Overall we would avoid making any strong conclusions regarding the state of the economy,” New York-based Marketfield Asset Management chief executive officer Michael Shaoul said. “But the fact that this weak report follows a number of other poor data points means that both bond and equity markets will be very sensitive to any signs of weakness in the upcoming earnings season.”
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