US stock market running out of steam

Since the end of August, the S&P 500 has fallen by about 2%. Although September’s US Employment Report was healthy, with the jobless rate falling below 6% for the first time in more than six years, a stronger labour market could be a mixed blessing for US equities if it becomes too tight. This is because a decline in the jobless rate to less than its “natural” level – something we expect to happen next year – would result in a cyclical increase in labour’s share of income, at least if history is any guide. The flipside would be a fall in the profit share, with the result that the value of the stock market would probably grow more slowly than the economy itself. This is a reason why we expect the S&P 500 to climb to just 2,000 by end-2015.