Still hoping for signs of an improving U.S. labour market, even as initial jobless claims remain stubbornly high? Be careful what you wish for.
According to a strategy note from Barclays, a meaningful turnaround in the labour market, along with a boost in the outlook for economic growth, will shift the market's focus away from an economic recovery and toward the consequences of a return to good times: higher interest rates. In the short term, that's likely to be bad news for bond and stock markets.
"Uncertainty around the implications of policy normalization is likely to be the catalyst for a correction in global bond markets, which should prompt a correction in equities in the second quarter," said Barry Knapp and Edmund Shing. As a result, they are currently cautious on U.S. and European stocks.
The way they see things, though, the correction won't last too long. Indeed, the growth outlook in the United States actually looks better than it did, and so they've raised their earnings expectations for companies within the S&P 500 to $71 (U.S.) a share.
If the index trades at a steady 17 times earnings, it should end the year at 1210. That's up from the strategists' earlier target of 1120, and it implies that the index should more than fully recovered from a second-quarter correction.
"We are raising our target ahead of what we expect to be a significant correction; in other words, we would treat any major pullback in share prices as a buying opportunity," the strategists said. "We favour defensive over cyclical sectors because of a turn in leading indicators, a reversal of analyst earnings estimate revisions, and compelling valuations."