Stocks Drop After Friday’s Nonfarm Payrolls: What’s Next for the Market?

TradingKey - The U.S. stock market tumbled on Friday following the release of nonfarm payroll data. December saw the addition of 256,000 jobs, indicating a labor market that looks even stronger than it did last summer and may continue to strengthen in the new year. In 2024, the U.S. economy added an average of 186,000 jobs per month. In fact, a monthly increase of around 180,000 jobs is sufficient to sustain low unemployment and economic growth in the U.S.

The resilience of the U.S. economy and labor market has been a major driver of stock market gains. So, why did the markets take such a hit on Friday?

A key factor was the rise in U.S. Treasury yields. Strong employment and economic data have fueled inflation concerns, leading to the Wall Street adage “good news is bad news,” where positive economic signs are viewed negatively by markets. Investors seek economic growth but fear it may trigger inflation and prompt the Fed to resume rate hikes.

Aditya Bhave, Senior U.S. Economists at Bank of America Global Research, went so far as to say that the Fed’s rate-cutting cycle may already be over following December’s “strong” jobs report.

The term premium, which explains how much extra yield bond investors demand to compensate for the risk of interest rate changes over the investment period, has been rising. Inflation is a key factor driving the increase in the term premium. Additionally, fiscal policy uncertainty has risen as a new administration takes office.

According to Federal Reserve data, the term premium on 10-year Treasuries stood just below 0.5% at the end of December, marking its highest level since 2014.

However, investors still have reasons to remain optimistic as The S&P 500's fourth-quarter earnings growth is expected to reach its highest level in three years. According to the latest FactSet forecasts, S&P 500 earnings are projected to grow by 11.7% in the fourth quarter. Historically, actual earnings growth for the S&P 500 has exceeded end-of-quarter estimates in 37 of the past 40 quarters. Using the most conservative average improvement, the index could report year-over-year growth of 14.1% for the fourth quarter.

Source: Factset