NEW YORK (Reuters) - The stock market faces its first major 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 equity gains in 2025.

Stocks wobbled at the end of December and the start of January, cooling off after a torrid run. The benchmark S&P 500 closed 2024 with a 23% rise and posted its biggest two-year gain since 1997-1998.

Prospects for a third straight standout year hinge in part on the strength of the economy, with labor market data among the most important reads into the economy's health. The data could also help clarify the Federal Reserve's interest rate plans after the central bank last month rattled markets by reducing its projected rate cuts for 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.

"Any kind of data that suggests things are weakening a little bit more than expected I think could create volatility," Saglimbene said.

Investors enter the year generally upbeat about the U.S. economy. A Natixis Investment Managers survey conducted at the end of last year found 73% of institutional investors said the U.S. will avoid a recession in 2025. 

Labor market data has been volatile in recent months following aerospace industry strikes and hurricanes. November data showed growth of 227,000 jobs that rebounded from a tepid rise in October.

The three-month average gain of 138,000 "suggests that hiring continues to slow gradually," Capital Economics analysts said in a note.

The report for December, due out on Jan 10, is expected to show growth of 150,000 jobs with the unemployment rate at 4.2%, according to a Reuters poll of economists.

Following the prior two reports, "this is going to be probably the first clean read of what is the underlying trend in the labor market," said Angelo Kourkafas, senior investment strategist at Edward Jones.

Investors are also wary of the jobs report revealing an overly strong economy, with a revival of inflation seen as one of the key risks to markets early in the year.

The Fed at its December meeting lifted its forecast for expected inflation in 2025, paving the way for higher interest rates than it previously forecast.

After lowering its benchmark rate at three straight meetings, the Fed is expected to pause its easing cycle when it next meets at the end of January before making further cuts of 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 said.

OTHER EMPLOYMENT DATA

While the payrolls data will be the most closely followed release, the coming week brings other market-sensitive employment figures, as well as reports on factory orders and the services sector.

Despite a strong 2024, stocks were weak in December, with the S&P 500 falling 2.5%. December had only five days with more stocks in the index gaining as opposed to declining, the lowest share of such relatively positive days for any month going back to 1990, according to Bespoke Investment Group.

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.

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