Bad Jobs News Is Good News? Analysts Predict S&P 500 Could Reach 8,500 Points

According to Marketwatch, the U.S. labor market is cooling—a development that might normally signal economic trouble. However, Wall Street strategists argue that as long as economic activity remains robust and wage inflation continues to ease, a weaker labor market could create room for the Federal Reserve to cut interest rates, thereby supporting U.S. equity valuations.

22V Research even forecasts that, driven by factors such as artificial intelligence (AI) boosting corporate profitability, the S&P 500 index could reach 8,500 points within the next 12 months.

U.S. nonfarm payrolls unexpectedly declined by 23,000 in July, far below the market’s expectation of an 83,000 increase, signaling a continued cooling in the labor market. The employment-to-population ratio also fell, and nominal wage growth has gradually slowed, though overall economic activity remains resilient.

Following the release of this employment data, markets reduced expectations for further Federal Reserve rate hikes. Strong corporate earnings also contributed, pushing the S&P 500 index closer to its all-time highs. Citi Research described the current market phase as one where 'bad news is good news.'

Dennis DeBusschere, Chief Market Strategist at 22V Research, stated that the U.S. economy is undergoing a 'benign slowdown.' As labor market supply-demand pressures ease, even relatively strong economic growth may not immediately trigger wage-driven inflation. This could raise the sustainable non-inflationary growth rate of the U.S. economy above 2%.

In other words, if labor market slack increases and wage pressures continue to ease, the U.S. economy could expand at a faster pace than previously expected without forcing the Fed to raise rates to suppress demand. Should a demand shock occur later, the Fed would also have more room to cut rates.

However, DeBusschere noted that this environment does not necessarily mean U.S. Treasury yields will fall significantly. With a higher sustainable growth rate, the equilibrium interest rate—also known as the natural rate (R*)—could rise. He therefore expects the 10-year Treasury yield to remain around 4.5%, reflecting the market’s more optimistic long-term outlook for the U.S. economy.

For equities, stronger sustainable growth, moderate inflation, and the Fed’s ability to cut rates form a relatively favorable combination. If the economic expansion cycle is prolonged, the equity risk premium demanded by investors could decline, supporting higher stock valuations.

Beyond macro improvements, efficiency gains from AI could also become a key driver of corporate earnings. Based on preliminary estimates from corporate-reported AI benefits, DeBusschere believes AI could improve corporate profit margins by approximately 150 basis points, or 1.5 percentage points, on average.

He predicts that, driven by higher corporate profit margins and a lower equity risk premium, the S&P 500 could reach 8,500 points within the next 12 months. Given his optimistic view of the U.S. economy, he favors cyclical stocks over defensive ones in his investment portfolio.

The next key market focus will be the release of the U.S. July Consumer Price Index (CPI) on Wednesday. If the data shows inflation pressures remain moderate, it would further support the view that a cooling labor market enables Fed policy easing rather than signaling an imminent recession.