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US nonfarm payrolls report for Nov due on Dec 6

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Market bets for Dec Fed meeting lean to 25 bp cut

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S&P 500 hovers at records, P/E ratio at over 3-yr highs

By Lewis Krauskopf

NEW YORK, Nov 29 (Reuters) - The coming week will give

investors a fresh view into the health of the U.S. economy with

the release of a closely watched employment report that could

help determine the trajectory of interest rates in the months

ahead.

Stocks are heading into December with the benchmark S&P 500

near record highs following an over 25% year-to-date gain. Part

of that performance has been fueled by expectations that the

Federal Reserve will continue cutting interest rates into next

year, after reducing borrowing costs by 75 basis points in

2024.

But uncertainty over the Fed's rate trajectory has increased

in recent months as a spate of robust economic data - including

a blowout jobs report for September - stirs concerns that

inflation could rebound if the central bank lowers rates too

far, undoing two years of progress in tamping down prices.

While investors have largely welcomed evidence of economic

strength, another round of strong jobs data on Dec. 6 could

further erode expectations for Fed cuts and fuel wariness over

inflation, investors said.

The jobs data "is going to provide a more clear picture of

the underlying trend, which is important as there's a lot of

debate and uncertainty around the path for interest rates by the

Fed," said Angelo Kourkafas, senior investment strategist at

Edward Jones.

Wall Street has already tempered expectations for cuts over

the coming year. Fed funds futures show investors betting the

rate will fall to 3.8% by the end of next year, from its current

4.5% to 4.75% range. That is more than 100 points higher than

what they had priced in September.

Fed Chair Jerome Powell said earlier this month that the

central bank does not need to rush to lower rates, citing a

solid job market and inflation that remains above its 2% target.

The Fed is "starting to question out loud how much more

easing the economy, especially the labor market, really needs,"

said Sameer Samana, senior global market strategist at Wells

Fargo Investment Institute.

Futures late on Wednesday were pricing a roughly 70% chance

that the central bank will cut rates by 25 basis points at its

Dec 17-18 meeting, according to CME Fedwatch.

Economists polled by Reuters expect payrolls to have climbed

by 183,000 jobs in November, and a report that far exceeds those

forecasts could shake confidence in a December move and bruise

stocks, said Anthony Saglimbene, chief market strategist at

Ameriprise Financial.

"There might be a little bit of a sell off here if you see

the jobs report come in stronger than expected," he said.

Equities have gotten a boost from the view that President-elect

Donald Trump's policies such as tax cuts and deregulation could

spur growth despite their inflationary potential.

Stocks in recent days largely shrugged off Trump's pledge to

impose big tariffs on Canada, Mexico and China, America's three

largest trading partners. More optimism was reflected in the

Conference Board's survey released on Tuesday, which showed a

record 56.4% of consumers expect stock prices to increase over

the next year.

Meanwhile, the S&P 500 is trading at more than 22 times

earnings estimates for the next 12 months, its highest P/E

valuation in more than three years, according to LSEG

Datastream.

To strategists at Yardeni Research, the mounting optimism

could be a worrisome signal.

"A more immediate risk to the stock market rally than

tariffs is that investors are getting too bullish," Yardeni

Research said in a note on Thursday. "From a contrarian

perspective, this suggests that a pullback is likely."

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