By Lewis Krauskopf
NEW YORK (Reuters) – The stock market faces its first big test of the year in the coming week, with investors counting on the U.S. jobs report to show a stable but not overheated economy that underpins expectations for stock gains in 2025.
Stocks fluctuated in late December and early January, cooling off after a torrid run. The benchmark S&P 500 ended 2024 up 23%, posting its biggest two-year gain since 1997-1998.
The outlook for a third year in a row depends in part on the strength of the economy, with labor market data among the most important indicators of the health of the economy. The data could also help clarify the Federal Reserve’s interest rate plans, after the central bank roiled markets last month by cutting interest rate cuts expected through 2025.
“Investors will want confirmation that labor market trends remain solid, meaning the economic outlook is likely to remain solid,” 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 cause volatility,” Saglimbene said.
Investors generally enter the year optimistic about the US economy. A Natixis Investment Managers survey conducted late last year found that 73% of institutional investors said the US will avoid a recession by 2025.
Labor market data has been volatile in recent months due to strikes and hurricanes in the aerospace industry. November data showed a gain of 227,000 jobs, recovering from a tepid increase in October.
The three-month average gain of 138,000 “suggests that hiring continues to gradually decline,” Capital Economics analysts said in a note.
According to a Reuters poll of economists, the December report, due on January 10, is expected to show a growth of 150,000 jobs with an unemployment rate of 4.2%.
After the previous two reports, “this will probably be the first clear reading of what the underlying trend in the labor market is,” said Angelo Kourkafas, senior investment strategist at Edward Jones.
Investors are also wary of the jobs report showing the economy is too strong, with a pick-up in inflation at the start of the year seen as one of the key risks for markets.
At its December meeting, the Fed raised its forecast for expected inflation in 2025, paving the way for higher interest rates than it had previously predicted.
After cutting the Fed at three consecutive meetings, the Fed is expected to pause the easing cycle at its next meeting in late January before making further cuts of around 50 basis points over the rest of the year.