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Last Week on Wall Street – January 4th, 2025

  S&P 500: -0.48%      DOW:  -0.60%       NASDAQ:  -0.52%      10-YR Yield: 4.60%

What Happened?

The major U.S. indexes ended the first holiday-shortened trading week of 2025 with slight declines, reflecting cautious sentiment despite a broad rally on Friday. A broad rally on Friday, led by gains in tech stocks such as Nvidia (+4.7%) and Super Micro Computer (+10.9%), helped mitigate earlier losses but couldn’t fully reverse the week’s downward trend. The energy sector emerged as a top performer, climbing 3.3% for the week, while crude oil prices rose more than 4% to $74 per barrel, the highest since mid-October. Despite these gains, the “Santa Claus rally,” which typically spans the final five trading days of one year and the first two of the next, failed to materialize. Market sentiment was further dampened by continued pressure on mega-cap stocks like Tesla and Apple, alongside a high percentage of companies issuing negative Q4 earnings guidance.

Looking at the bigger picture, the S&P 500 capped a stellar 2024 with a 25% total return, marking its second consecutive year of gains exceeding 20%—a feat last achieved in 1997–1998. However, last year’s rally was narrowly driven by just seven tech-heavy stocks that accounted for over 53% of the index’s gains. Communication services and information technology were the standout sectors, with annual returns of 40.2% and 36.6%, respectively, while materials posted a slight decline. Meanwhile, bond markets experienced moderate 2024 gains but with significant volatility, as Treasury yields fluctuated between 3.61% and 4.73%, ending the year at 4.57%. 

As investors turn their focus to 2025, analysts anticipate S&P 500 Q4 earnings growth of 11.9% year-over-year, driven by strong fundamentals in sectors like energy and technology. The December jobs report, expected next week, will provide further insight into the labor market’s resilience following November’s robust addition of 227,000 jobs. Market participants remain cautiously optimistic, with January’s performance historically serving as a bellwether for the rest of the year.

US Manufacturing PMI Rises To Nine-Month High, But Challenges Loom

  • ISM PMI rises to nine-month high of 49.3 in December
  • Production rebounds as new order continue to grow
  • Threat of tariffs raises inventory and import levels 

The key takeaway – U.S. manufacturing edged closer to recovery in December, with the ISM Manufacturing PMI rising to 49.3, its highest in nine months, though still below the 50 threshold indicating contraction. Production rebounded, and new orders expanded for the first time since March, driven by growth in industries like electrical equipment, appliances, and primary metals. However, declines persisted in sectors such as textile mills, machinery, and transportation equipment. Trade policy uncertainty and inflationary pressures weighed on manufacturers, prompting increased imports and inventory stockpiling, while factory employment continued to decline.

Optimism in certain sectors, including electrical equipment and miscellaneous goods, highlights potential for growth in 2025, with new orders driving full production capacity in some plants. This could boost industrial output and related industries, including logistics and retail, while supporting job creation and consumer confidence. However, trade uncertainties, inflation, and global demand fluctuations may temper these gains, requiring careful navigation to sustain manufacturing growth.

U.S. Pending Home Sales Rose in November

  • Pending home sales rose 2.2% in November, marking the fourth consecutive monthly increase and the highest level since February 2023.
  • Month-over-month, sales grew in the Midwest (+0.4%), South (+5.2%), and West (+0.5%) but declined in the Northeast (-1.3%).
  • Year-over-year, all regions experienced growth, with the West leading at +11.8%, as buyers adjusted to higher mortgage rates and took advantage of increased inventory. 

The key takeaway – Pending home sales in the U.S. rose for the fourth consecutive month in November, climbing 2.2% to reach a Pending Home Sales Index (PHSI) level of 79, the highest since February 2023, according to the National Association of Realtors (NAR). This increase significantly outpaced economists’ expectations of a 0.7% rise, reflecting stronger-than-anticipated demand. Regionally, the South led the gains with a 5.2% increase, followed by the West (+0.5%) and Midwest (+0.4%), while the Northeast experienced a 1.3% decline. Despite Federal Reserve rate cuts since September, mortgage rates have remained elevated due to climbing U.S. Treasury yields, prompting buyers to recalibrate their expectations and take advantage of improved inventory levels.

NAR Chief Economist Lawrence Yun noted that prospective buyers are adjusting to the reality of sustained higher mortgage rates and are beginning to reenter the housing market. This shift indicates growing consumer confidence in a market that has moved away from the seller’s dominance of recent years. The steady rise in pending sales points to a stronger housing market heading into 2025, supported by job growth and new inventory in key regions. However, continued challenges in financing and affordability remain critical factors shaping the trajectory of the housing market in the months ahead.  

US Weekly Jobless Claims Hit Eight-Month Low As Labor Market Remains Resilient

  • Weekly jobless claims drop 9,000 to 211,000
  • Continuing claims decline 52,000 to 1.844 million
  • Construction spending unchanged in November 

The key takeaway – The U.S. labor market remained strong at the end of 2024, with initial jobless claims dropping to an eight-month low of 211,000 for the week ending December 28. This marked a decrease of 9,000 claims from the prior week, reflecting minimal layoffs and a stable labor market. The four-week moving average of claims, which smooths out seasonal fluctuations, also declined to 223,250. Despite some regional volatility, these figures highlight the labor market’s resilience, supporting economic expansion and aligning with the Federal Reserve’s reduced rate-cut projections for 2025. However, employers remain cautious about hiring after significant post-pandemic recruitment, contributing to persistent elevated continuing claims in certain regions.

Meanwhile, U.S. construction spending was flat in November, with gains in single-family homebuilding offset by declines in multi-family projects and public construction. Residential construction edged up slightly, but higher mortgage rates and potential tariffs under the incoming administration pose challenges to future growth. Despite these headwinds, home renovation spending continues to rise, reflecting ongoing consumer demand. The stability in construction and the labor market suggests a steady, if cautious, economic trajectory heading into 2025, as businesses and policymakers navigate inflationary pressures and uncertainties in fiscal policy. 

From Around the Watercooler