US Jobs Report Poses First Big Stocks Test of 2025

By Lewis (JO:) Krauskopf

NEW YORK (Reuters) - The stock market is gearing up for its first significant challenge of the year in the upcoming week. Investors are looking forward to the U.S. jobs report, hoping to find evidence of a stable but not overheated economy that will support positive expectations for stock performance in 2025.

Stock prices experienced fluctuations at the end of December and the beginning of January, as they cooled off from a vigorous rally. The benchmark index wrapped up 2024 with a remarkable 23% increase and recorded its largest two-year gain since 1997-1998.

The possibility of achieving a third consecutive successful year is partially dependent on the economy's strength, with labor market data being one of the critical indicators of economic health. This data could also provide insights into the Federal Reserve's plans regarding interest rates after the central bank recently surprised the markets by lowering its anticipated rate cuts for 2025.

"Investors want confirmation that labor trends are remaining solid, indicating that the economic outlook remains robust," said Anthony Saglimbene, chief market strategist at Ameriprise Financial.

He added, "Any data suggesting a more significant downturn than expected could lead to market volatility."

Entering the year, investors are generally optimistic about the U.S. economy. A survey by Natixis Investment Managers carried out at the end of last year revealed that 73% of institutional investors believe the U.S. will avoid a recession in 2025.

However, labor market data has been fluctuating in recent months due to strikes in the aerospace sector and the impact of hurricanes. The employment data for November indicated a growth of 227,000 jobs, bouncing back from a slower increase in October.

The average increase over the past three months stands at 138,000, suggesting a gradual slowdown in hiring, according to analysts from Capital Economics. They highlighted this observation in a recent note.

Anticipated results for December, which will be released on January 10, are expected to show an increase of 150,000 jobs, with the unemployment rate projected to be 4.2%, as per a Reuters poll of economists.

Given the previous two job reports, "this upcoming report is likely the first clear perspective on the underlying labor market trends," stated Angelo Kourkafas, senior investment strategist at Edward Jones.

Moreover, investors are cautious about the jobs report potentially indicating an overly strong economy, as a resurgence of inflation represents a critical risk to the markets at the start of the year.

During its December meeting, the Federal Reserve increased its inflation forecast for 2025, which could lead to higher interest rates than previously projected.

After three consecutive rate cuts, the Fed is expected to pause its easing strategies when it meets again at the end of January, with additional cuts of about 50 basis points anticipated throughout the year.

As for the jobs report, there is a market expectation for a "Goldilocks number" - one that is not too robust and not too weak, according to Kourkafas.

Other Employment Data

While the payrolls report will be the focal point, the upcoming week will also feature other employment-related data, in addition to reports on factory orders and the services sector.

Despite a strong performance in 2024, stocks faced challenges in December, with the S&P 500 index falling by 2.5%. Notably, December registered only five days where the number of gaining stocks in the index outperformed those that declined, marking the lowest positive ratio of such days for any month since 1990, according to Bespoke Investment Group.

Following the holiday season, "next week is likely to bring more substantial trading volumes, which could give clearer direction for the market," remarked Art Hogan, chief market strategist at B. Riley Wealth.

"A strong jobs report would undoubtedly help to reverse trends in a market that has been relatively weak at the end of the previous year and the start of the new one," Hogan added.

jobs, stocks, economy