Investing.com -- Stocks declined sharply on Friday as a stronger-than-expected jobs report dampened hopes for additional Federal Reserve rate cuts this year.
The Dow Jones Industrial Average dropped 696.75 points, or 1.63%, to 41,938.45. The S&P 500 and Nasdaq Composite fell 1.54% and 1.63%, closing at 5,827.04 and 19,161.63, respectively. The losses pushed all major indexes into negative territory for 2025.
The labor market showed unexpected strength in December, with payrolls increasing by 256,000 compared to the 155,000 projected in a Dow Jones survey. The unemployment rate also edged lower, dropping to 4.1% from the anticipated 4.2%. Following the report, the 10-year Treasury yield surged to its highest point since late 2023.
Following the jobs data, market expectations for a Federal Reserve rate cut in March fell significantly, with the CME FedWatch Tool placing the odds at 25%, down from 41% just a day earlier. The central bank had previously reduced rates by a quarter point in December.
For the week, all three major indexes posted consecutive losses. The S&P 500 and the Dow both declined by 1.9%, while the Nasdaq Composite lost 2.3%.
Looking ahead to this week, it is filled with key economic updates, including inflation, consumer, and manufacturing indicators. Highlights include the Consumer Price Index (CPI) report on Wednesday and retail sales data on Thursday.
If concerns about persistent inflation grow, long-term Treasury yields could rise even further, potentially approaching the 5.00% threshold.
Combined with December’s jobs report, this week’s inflation figures may highlight reduced risks to the labor market alongside slower progress in curbing inflation. There is also potential for tariffs to keep core PCE inflation at or above 2.5%
“Alongside our expectations for a 0.3%m/m rise in the US December core CPI report next week and another strong retail sales report (0.6% control), the Fed now looks likely to enter an extended pause to assess the state of the expansion and the policies delivered by the Trump administration,” JPMorgan strategists led by Michael Feroli said in a note.
“Although the Fed is unlikely to ease anytime soon, it maintains an asymmetric reaction function, making the debate about policy tightening unlikely for now,” they added.
Q4 2024 earnings season kicks off this week
In addition to key economic releases, investor attention will also turn to the Q4 2024 earnings season, set to begin with reports from several large-cap financial companies.
Wall Street analysts project an 8% year-over-year increase in earnings per share (EPS) for the S&P 500 as a whole in Q4, with a 6% growth forecast for the median company.
According to Goldman Sachs, consensus estimates for Q4 earnings growth are among the highest since Q4 2021, surpassed only by the anticipated 9% year-over-year EPS growth projected ahead of the Q2 2024 earnings season. Over the past 11 quarters, actual S&P 500 EPS growth has, on average, exceeded consensus forecasts by 4 percentage points per quarter.
“We expect that corporates will continue to report solid earnings growth this quarter but that the magnitude of beats will likely be smaller than in recent quarters given the higher bar,” Goldman strategists said.
What analysts are saying about US stocks
Goldman Sachs: “We expect the S&P 500 will rise by 12% through year-end 2025 to our target of 6500. Earnings growth will be the primary driver of the S&P 500 gain.”
“We will reevaluate our S&P 500 earnings forecast after the season. Our current 2025 S&P 500 EPS growth forecast is +11% ($268), roughly in line with the top-down strategist consensus. We currently view risks around our earnings forecast as balanced.”
Wedbush: “With worries about the 10-year heading towards the dangerous 5% threshold and the Fed now appearing to be on a less dovish path for 2025, the Street has seen a clear risk-off environment for tech stocks to kick off the year.”
“We ultimately view pullbacks like these as golden buying opportunities to own the winners in the AI Revolution as more IT budget dollars heads towards this technology wave with the 2nd/3rd derivatives of AI now set to benefit.”
RBC Capital Markets: “We’ve been running stress tests on our valuation model for what fair value for the S&P 500 in 2025 might be without Fed cuts baked in or with some hikes added.
We’ve updated those stress tests to reflect our Rates Strategy team’s new view of no January cut. It continues to suggest that further P/E expansion is unlikely in 2025 and the S&P 500 could end the year around 6,200, the most conservative of the 5 models that we’ve been using to come up with our 6,600 YE 2025 price target on the S&P 500.”
Bank of America: “All eyes are on PPI and CPI this week as the market’s focus shifted from growth to inflation. While hotter prints could put further pressure on equities, we believe the blowout NFP increases how much inflation equities can withstand, especially after last week’s selloff. Retail sales are also key to confirm the strength of the economy during the holidays. Moreover, 4Q earnings kick off this week, which we believe will be crucial. We expect a 2% beat, an upbeat tone from companies, and a good environment for stock pickers.”