US stocks (^DJI,^GSPC, ^IXIC) are trading near record highs to close out the third quarter, with the market waiting for the highly anticipated jobs report coming on Friday. Matt Stucky, Northwestern Mutual Wealth Management's chief portfolio manager for equities, joins Seana Smith and Madison Mills on Catalysts to discuss what investors should be watching for as the next driver of market movement.

Stucky tells Yahoo Finance, "The health of the labor market on a go-forward basis is really what we're focusing in on here for the rest of 2024," explaining "since the beginning part of this year, you've seen employment start to gradually deteriorate, and the question is, is whether or not we've kind of crossed that path of no return where a little bit of weakening becomes a lot of weakening."

"We just got off the back of a really good earnings season in Q2, that was reported in Q3. What was really a standout point for me was just the increasing breadth of earnings growth. Within the second quarter, there were only two sectors in the S&P 500 where you saw negative earnings growth. You saw positive earnings growth north of around 10% for five of the different sectors, which was a big improvement in terms of breadth versus Q1. We need to see that continue to broaden out. As you look at Q3 earnings season, which should be on the docket here in the next few weeks for reporting purposes, that is really kind of where we need to see the fundamentals pull through for the market to continue to move higher," the portfolio manager says.

Looking toward the upcoming earnings season, Stucky says his "base case is that maybe we're a little bit over our skis in terms of expectations, earnings growth for 2024. Looks like it's going to be kind of right around 9% or 10% for the entirety of this year. But if you look at next year, those earnings are expected to reaccelerate up to around 14% [or] 15% growth. To me, that's a pretty rosy expectation," especially given concerns around the state of the labor market.

He says "I would best classify the current economic environment as being late-cycle. And in late-cycle environments, investors tend to gravitate towards quality. They tend to gravitate towards defensive. And you tend to see that kind of over-index in the US large-cap asset class. You mentioned utilities, [which] is the classic defensive area of the S&P 500, albeit with maybe an AI sweetener in here in 2024, but as you look to kind of 2025 and beyond, what investors are going to be looking for is consistent, high-margin earnings growth."

The portfolio manager notes that investors have found consistent, high-margin earnings growth in "the mega-cap tech trade for some time," but he says "there are much more attractive areas to invest from purely a valuation standpoint," adding "Think small caps that trade 14 times earnings that are more sensitive to the economy if the economy were to re-accelerate next year. So things like that are other areas to look [at] if the macro case were to pivot into kind of more of a soft landing environment."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Naomi Buchanan.