The stock market will face its first significant test of the year in the next week, with investors expecting the U.S. jobs report to indicate a healthy but not overheated economy, which will support hopes for equities gains in 2025.
Stocks wobbled at the end of December and the beginning of January, dropping after a hot streak. The benchmark S&P 500 concluded 2024 up 23%, its largest two-year gain since 1997-1998.
Prospects for a third consecutive remarkable year are dependent in part on the strength of the economy, with labour market data among the most crucial indicators of the economy’s health. The data could also help clarify the Federal Reserve’s interest rate expectation after the central body spooked markets last month by lowering its expected rate cuts for 2025.
“Investors are going to want to see confirmation that labour trends remain solid, which means the economic outlook probably remains firm,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial.
“Any kind of data that suggests things are weakening a little bit more than expected I think could create volatility,” Saglimbene said.
Investors are generally optimistic about the state of the American economy as the year begins. A Natixis Investment Managers study conducted at the end of last year revealed that 73% of institutional investors believe the United States would escape a recession in 2025.
In the aftermath of aerospace industry strikes and hurricanes, labour market data has been erratic. November figures indicated a 227,000 job increase, up from a modest rise in October.
The three-month average increase of 138,000 “suggests that hiring continues to slow gradually,” Capital Economics analysts wrote in a note.
According to a Reuters survey of analysts, the December data, which is coming on January 10, is predicted to show 150,000 job gains and an unemployment rate of 4.2%.
After the previous two reports, “this is probably going to be the first clean read of what is the underlying trend in the labour market,” said Angelo Kourkafas, senior investment strategist at Edward Jones.
Investors are particularly concerned about the jobs report, which showed an abnormally strong economy, with a resurgence of inflation considered one of the biggest dangers to markets early this year.
At its December meeting, the Fed raised its prediction for projected inflation in 2025, clearing the door for higher interest rates than previously expected.
After decreasing its benchmark rate in three consecutive sessions, the Fed is likely to pause its easing cycle when it meets again at the end of January before making additional cuts of approximately 50 basis points throughout the year.
For the jobs report, the market is “looking for that Goldilocks number — neither too hot nor too cold,” according to Kourkafas.
While payroll data will be the most highly watched publication, the coming week will also include market-sensitive employment figures, as well as news on factory orders and the services sector.
Despite a promising 2024, markets were poor in December, with the S&P 500 dropping 2.5%. According to Bespoke Investment Group, December featured only five days in which more stocks in the index gained than declined, the lowest share of such moderately positive days for any month since 1990.
Following the end-of-year holiday period, “next week probably ushers in more robust volumes, which would certainly be a better indication of directionality for the market,” said Art Hogan, chief market strategist at B. Riley Wealth.
“A solid jobs report would certainly help turn things around in this market that has otherwise been pretty soft to end the year and start the new year,” Hogan said.
