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At a glance

A healthy U.S. December jobs report underscores the exceptional U.S. economy. However, investors focused on a lower likelihood for 2025 Federal Reserve interest rate cuts and higher long-term bond yields, pressuring stocks.

Number of the week:

3.9%

The growth in average hourly earnings in December, down from 4.0% in November but ahead of inflation.

Term of the week:

Earnings

A company's profits in a given quarter or fiscal year. Earnings are a key figure used to determine a stock's value.

Quote of the week:

The U.S. labor market remains resilient, demonstrated by growing job openings, strengthening payrolls growth and solid earnings expansion. Job openings rebounded to 8.1 million in November from 7.8 million in October, the highest level in six months. Nonfarm payrolls grew by 256,000 jobs in December, for an average gain of 170,000 jobs a month over the past three months, and the unemployment rate ticked down 0.1% to 4.1%.

― Robert Haworth, CFA, Senior Vice President, Senior Investment Strategy Director, U.S. Bank

Global economy

Quick take: The U.S. economy remains exceptional, led by a strengthening labor market. Services businesses continue to lead the global economy.

Our view: The U.S. economy appears likely to achieve a soft landing in 2025, aided by slowing inflation and solid domestic demand growth. Tariffs pose some risks to slow but improving growth in developed markets, including the eurozone, the United Kingdom and Japan.

  • The U.S. labor market remains resilient, demonstrated by growing job openings, strengthening payrolls growth and solid earnings expansion. Job openings rebounded to 8.1 million in November from 7.8 million in October, the highest level in six months. Nonfarm payrolls grew by 256,000 jobs in December, for an average gain of 170,000 jobs a month over the past three months, and the unemployment rate ticked down 0.1% to 4.1%. Average hourly earnings rose 3.9% year-over-year, slower than the November growth of 4.0% but still well ahead of inflation; the Consumer Price Index gained 2.7% in November.
  • Preliminary January University of Michigan Consumer Sentiment Index data slipped to 73.2 from 74.0 to close December. The survey indicated slight deterioration in both short- and long-run economic outlooks for consumers and rising worries about inflation. Inflation expectations for the year ahead rose to 3.3% from 2.8% in December, the highest since May.
  • U.S. services business sentiment remains strong. The Institute of Supply Management Services Purchasing Manager Index rose to 54.1 in December from 52.1 in November. Improvements in new orders and production pushed the index higher along with rising prices.
  • Services continue to lead the global economy as well, according to December purchasing manager index surveys from S&P Global. Results for major foreign economies, including the United Kingdom, the eurozone, Japan and China, indicate expanding service sector activity, with month-over-month accelerations for all four. However, activity remains relatively soft for the eurozone, United Kingdom and China, with employment a particular challenge. Japan demonstrated improved employment.
  • Eurozone consumer prices accelerated to 2.4% for the year ending in December from 2.2% in November. Rising energy prices and ongoing growth in service costs were the primary drivers. While inflation moved back above the European Central Bank’s (ECB) target rate, recent comments from ECB officials indicate they believe inflation is consistent with their forecasts and they are still on a path for rate cuts this year, including at their next meeting on January 30.

Equity markets

Quick take: U.S. equities are in consolidation mode following a strong December jobs report, which could reduce the urgency for Fed interest rate cuts and presents a headwind for valuations. The fourth quarter 2024 earnings reporting period unofficially begins this week.

Our view: The fundamental backdrop remains supportive of an aggressive bias. On balance, broad-based inflation is waning, interest rate cuts are in motion and earnings are trending higher, all which provide support for elevated valuations while serving as a basis for stocks to trend higher in 2025.

  • The S&P 500 remains in a trading pattern of higher highs and higher lows, despite retreating nearly 1.0% in January as of Friday’s close. The S&P 500 ended Friday at 5,827, essentially at its 100-day moving average and 4.5% above its 200-day moving average, key levels of support.
  • Consensus S&P 500 earnings projections for 2025 reflect robust year-over-year growth. At present, analysts forecast S&P 500 earnings of approximately $240.50 per share for full-year 2024 and $272.30 in 2025, according to Bloomberg, FactSet and S&P Cap IQ, reflecting respective 8.7% and 13.2% year-over-year growth. We anticipate improved visibility on 2025 projections following fourth quarter releases.
  • Broad market valuations are justifiably elevated. At present, the S&P 500 trades at 24.2 times the 2024 earnings estimate and 21.3 times 2025 projections, at the high side of its 35-year historical average but below extremes levels of 30 times or higher. In our view, the changing demeanor of the S&P 500 helps support higher valuations. The index is more technology heavy today versus past decades; technology companies tend to have high growth rates and low debt levels. Many companies are generating more free cash flow, the result of capital-light business models. Also, the cost of capital is lower today relative to historical levels given the low-interest rate environment.
  • The fourth quarter earnings reporting period unofficially begins this week with the release from several money center banks; expectations are largely optimistic. JPMorgan Chase, Wells Fargo, Citigroup, Bank of America, Goldman Sachs and Morgan Stanley are among financial companies expected to release results this week. Consumer and business spending trends, loan demand, credit defaults, net interest income, capital markets activity and expense control are among items of interest. For the quarter, consensus expectations are for sales and earnings to advance 4.5% and 11.6% year-over-year, respectively, according to FactSet.

Bond markets

Quick take: Treasury yields rose last week in reaction to strong labor market data that delayed investor expectations for additional Federal Reserve (Fed) rate cuts. The increase in Treasury yields weighed on prices across the bond market, but strong demand continues to support valuations on riskier bonds.

Our view: While expectations for slower Fed interest rate cuts and uncertain fiscal policy changes can cause bond price swings, incremental allocations to higher yielding bonds can improve return potential over time. Bond yields now offer reasonably compelling income opportunities.

  • The healthy labor market likely reduces the Fed’s urgency to deliver additional rate cuts. Labor market resilience allows the Fed more time to maintain its policy rate while gauging progress in slowing inflation with reduced risk of adversely impacting economic growth. Minutes from the Fed’s December meeting released last week mentioned upside inflation risk as reason to hold rates steady. Treasury yields rose on Friday, reflecting investor expectations for the Fed to proceed more carefully with additional rate cuts. Entering 2025, bond yields indicated a roughly 50% chance the Fed will cut rates in March. Now, rates price in a roughly 80% chance the Fed will hold rates steady through March and may wait until the second half of the year to cut rates. Expectations for slower rate cuts weighed on bond prices, but higher yields improve income opportunities in bonds going forward.
  • High yield bonds were relatively unaffected by stock market volatility. The extra yields on high yield corporate bonds over Treasuries remain low, suggesting investors expect favorable credit conditions with infrequent corporate bond defaults ahead. With strong demand continuing to support valuations, the extra yield on high yield corporate and municipal bonds can improve returns over time.
  • Devastating Los Angeles area wildfires have had limited impact on reinsurance thus far. Our thoughts are with those impacted by the wildfires that have devastated areas in and around Los Angeles. The wildfires have caused tragic loss of life and historic destruction. Despite the severe property damage, the impact on reinsurance (insurance-linked) securities is limited thus far. Wildfire perils account for a small portion of the reinsurance market. Reinsurance also currently generates double-digit income annually that helps offset insured losses.

Real assets

Quick take: Publicly traded real estate prices fell last week, facing headwinds from rising Treasury yields and a pullback in equity prices. Commodity prices rose in response to additional sanctions on Russian oil markets paired with Friday’s strong labor market data.

Our view: While Treasury yield changes can influence near-term publicly traded real estate price fluctuations, longer-term opportunities tied to growth and inflation trends make real estate an integral component of diversified portfolios.

  • Publicly traded real estate investment trusts (REITs) fell more than 4% last week. Headwinds from rising Treasury yields and wavering investor sentiment combined to weigh on real estate last week. The opportunity to generate around 4.5% annual income from Treasuries can draw investor demand away from real estate. Higher Treasury yields also raise borrowing costs for real estate operating companies, which can eat into the rental income returned to investors. Tepid investor sentiment dragging on REIT prices was also evident in divergent performance across real estate categories. Categories with weaker fundamentals such as office real estate performed worst, with prices falling more than 9%. Importantly, office real estate accounts for less than 4% of broad REIT exposures, with exposures larger in stronger categories like industrial real estate, where prices fell just 2.5%.
  • Surprising strong labor market data benefited commodities last week. Oil prices rose to their highest levels since October after the U.S. placed sanctions on Russian oil marks and as job gains outpaced economists’ expectations Friday. Prices also rose on similar economic growth-sensitive commodities like copper and other industrial metals, pushing broad commodity exposures to return nearly 5% last week. Commodities can add beneficial inflation-sensitivity to portfolios, but commodity returns have historically lagged other income-producing real assets like real estate.
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Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is one of the most frequently used statistics for identifying periods of inflation or deflation. The S&P Global Purchasing Managers' Index data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies. The Institute of Supply Management Manufacturing Index, also called the Purchasing Manager's Index, measures manufacturing activity based on a monthly survey, conducted by the Institute for Supply Management, of purchasing managers at more than 300 manufacturing firms. The Michigan Consumer Sentiment Index is a monthly survey of consumer confidence levels in the United States conducted by the University of Michigan. The survey is based on telephone interviews that gather information on consumer expectations for the economy.

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This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio.

Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. 

Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Investments in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in fixed income securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities.

Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer’s ability to make principal and interest payments.

The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes.

There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

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The information provided represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation.

U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.