The stock market is set to face its first major test of the year in the upcoming week, as investors anticipate the U.S. jobs report to confirm a stable yet not overheated economy—key to supporting expectations for equity gains in 2025.
Stocks stumbled at the end of December and early January, cooling off after a strong rally. The benchmark S&P 500 closed 2024 with a 23% gain, marking its largest two-year increase since 1997-1998.
The prospects for a third consecutive standout year largely depend on economic strength, with labor market data serving as a critical indicator of the economy’s health. The report may also provide clarity on the Federal Reserve’s interest rate strategy after the central bank surprised markets last month by reducing its projected rate cuts for 2025.
“Investors will want to see confirmation that labor trends remain solid, which indicates the economic outlook is likely stable,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial. “Any data suggesting a sharper-than-expected slowdown could trigger market volatility,” he added.
Despite recent uncertainties, investors remain generally optimistic about the U.S. economy. A survey by Natixis Investment Managers at the end of last year revealed that 73% of institutional investors believe the U.S. will avoid a recession in 2025.
Labor market data has been volatile in recent months due to factors like aerospace industry strikes and hurricanes. November’s jobs report showed an increase of 227,000 jobs, rebounding from October’s modest gains. However, the three-month average growth of 138,000 suggests hiring is slowing gradually, according to a note from Capital Economics analysts.
The December jobs report, due on January 10, is expected to show an increase of 150,000 jobs, with the unemployment rate holding steady at 4.2%.
“This report will likely be the first clean reading of the underlying labor market trends following the previous two reports,” said Angelo Kourkafas, senior investment strategist at Edward Jones.
Investors are also cautious about the jobs report signaling an overly robust economy, as a resurgence in inflation is seen as a key risk for markets early in the year. At its December meeting, the Federal Reserve raised its inflation forecast for 2025, suggesting higher interest rates than previously anticipated.
After three consecutive rate cuts, the Fed is expected to pause its easing cycle at its January meeting, before reducing rates by another 50 basis points over the course of the year. For the jobs report, the market is seeking a “Goldilocks” outcome—neither too strong nor too weak, Kourkafas said.
While the payroll data will be the week’s most closely watched release, other significant reports include employment figures, factory orders, and services sector performance.
Despite a strong showing in 2024, the stock market faltered in December, with the S&P 500 falling 2.5%. December saw only five days when more stocks in the index gained than declined—the lowest number of relatively positive days for any month since 1990, according to Bespoke Investment Group.
As the holiday season winds down, “next week is likely to bring higher trading volumes, offering a clearer sense of market direction,” said Art Hogan, chief market strategist at B. Riley Wealth. “A solid jobs report could help reverse the market’s recent softness,” he added.
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