According to an update by T. Rowe Price on Sept 13, profit margins for smaller US companies are a reason for concern. “Small companies typically carry higher debt burdens than larger firms, so higher interest rates have taken a proportionally larger bite out of their profits. When profit margins shrink to low or even negative levels, companies are often forced to lay off workers,” T. Rowe Price explains. Profit margins for smaller companies, as measured by the S&P 600 Index, have been deteriorating for more than two years the report adds.
(The S&P 600 Index is a stock market index that measures the performance of 600 small-cap companies in the US. It is part of the S&P Dow Jones Indices and is designed to provide a benchmark for the small-cap segment of the US equity market. The index includes companies with a market capitalisation typically ranging from about US$300 million to US$2 billion.)
T. Rowe Price says this is potentially bad news for the labour market because small businesses account for the majority of US jobs. It is also why there is an urgent need for Fed policymakers to cut rates even though inflation hasn’t yet returned to their 2% target.
Overall though, profit margins for large US publicly listed companies appear healthy and stable, based on 1H2024 earnings.
Christian Scherrmann, US Economist, DWS, sounds a more sanguine tone on the state of the US labour market. “Closer examination of the July data revealed a relatively benign picture. Job creation has slowed over the past three years, but only toward a growth rate that is more in line with the longer-term average. The pace of this slowdown also appears to be flattening out,” he says.
Weekly unemployment claims paint a similar picture. Claims have increased steadily in 2024 but are still low relative to longer-term history. “This supports the case that U.S. labour markets are simply normalising, rather than flashing a recession warning,” Scherrmann says.
See also: STI steadies despite overbought US markets and rising US risk-free rates
At the September FOMC meeting, the Fed governors will be asked to publish their own economic projections, including the most likely path of policy rates going forward.
“We expect a somewhat more moderate path than the markets are currently pricing in, as we believe central bankers will want to avoid a dovish race to the bottom that could prove counterproductive,” Scherrmann says adding that he ancitpates a 25 basis point cut at every FOMC meeting for the remainder of this year.
The remaining FOMC meetings are on Sept 17-18, Nov 6-7 and Dec 17-18. The September and December meetings will have a summary of economic projections.
See also: Trumpian future of higher deficits, tariffs, point to inflation and higher interest rates
Outlook for the STI
The Straits Times Index closed at 3,562, the highest level in five years. In the very short term, a minor shooting start has formed on the candlestick chart which could cause a pause. Quarterly momentum continues to rise. This, coupled with an upturn in ADX and accompanied by positively placed DIs, could cause prices to move higher from current levels once the consolidation is over.
Based on a measured move objective following the breakout above 3,499 on Sept 10, the STI’s target is at around 3,800. Its all-time high in 2008, before the Lehman crisis hit markets, was 3,870. As important highs are likely to provide resistance, the STI is unlikely to better 3,870 in the near to medium term.
The FTSE REIT Index continues to make headway following a break above 640 almost a month ago, indicating an upside of 721. The REIT Index’s uptrend is likely to be punctuated by temporary retreats.
