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Investors seek stable economy to support 2025 equity gains

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Labor market data crucial for Fed's interest rate plans

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December jobs report expected to show 150,000 job growth

By Lewis Krauskopf

NEW YORK, Jan 3 (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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