The stock market is gearing up for its first significant challenge of 2025 as investors look to the upcoming U.S. jobs report to provide a clearer picture of economic stability. The report, due January 10, is expected to reveal a labor market that supports continued equity gains without stoking fears of overheating.
A Crucial Test for Markets
After the S&P 500 closed 2024 with a 23% gain—its best two-year performance since 1997-1998—investors are cautious about sustaining this momentum. The strength of the labor market will play a critical role in shaping expectations for the economy and Federal Reserve policy in 2025.
“Investors are going to want to see confirmation that labor trends remain solid, which means the economic outlook probably remains firm,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial.
However, any signs of weakness or excessive strength in the jobs data could create volatility, potentially undermining the market’s optimistic outlook.
Jobs Report Expectations
According to a Reuters poll, economists expect the December jobs report to show an increase of 150,000 jobs, with the unemployment rate holding steady at 4.2%. This would mark a modest improvement following November’s 227,000 job gains and a three-month average gain of 138,000, which suggests a gradual slowdown in hiring.
Angelo Kourkafas, senior investment strategist at Edward Jones, emphasized the importance of this report:
“This is going to be probably the first clean read of what is the underlying trend in the labor market.”
The Risk of Overheating
While a strong labor market is generally a positive sign, investors are wary of a report that indicates an economy running too hot. A revival of inflation remains one of the key risks for markets early in the year.
The Federal Reserve raised its inflation forecast for 2025 during its December meeting and signaled the possibility of higher-than-anticipated interest rates. After three consecutive rate cuts, the Fed is expected to pause its easing cycle at the end of January before potentially cutting rates by about 50 basis points over the rest of the year.
“For the jobs report, the market is looking for that Goldilocks number—neither too hot, nor too cold,” Kourkafas noted.
Additional Economic Indicators
The December payrolls data isn’t the only critical report this week. Investors will also be watching other employment figures, factory orders, and services sector reports for further insights into the economy.
Despite a strong 2024 overall, December was a weak month for stocks, with the S&P 500 falling 2.5%. Bespoke Investment Group highlighted the month’s low number of positive trading days, suggesting market softness heading into the new year.
“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.
Conclusion: A Make-or-Break Moment
The December jobs report will be a pivotal test for markets, providing crucial clues about the economy’s trajectory in 2025. A balanced report showing steady growth without signs of overheating could help stabilize markets and boost investor confidence after a rocky start to the year.
“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 added.