Investing.com – As we head into 2025, markets are navigating a delicate balance between optimism and caution.
Last year saw notable gains, recording its best two-year performance since the late 1990s.
The Fed's interest rate cuts, the economy's soft landing, and the continued momentum of AI-driven growth have created a backdrop of economic stability and investor confidence.
But as the analysts in the Sevens report point out, the year ahead begins with high expectations, and the risks are higher than ever.
A set of critical events in January will determine whether the optimism of 2024 persists or gives way to disillusionment.
The first major test comes almost immediately with the election of the Speaker of the House of Representatives on January 3.
This event, although political in nature, has economic and market implications. It will serve as a test of Republican unity and their ability to pass pro-growth measures.
President-elect Donald Trump's endorsement of House Speaker Johnson has raised the stakes, with investors watching closely for signs of a cohesive Republican majority.
Quick, drama-free elections could strengthen market confidence in legislative competence. On the other hand, a prolonged or controversial process may indicate divisions within the party, raising doubts about its ability to implement its agenda.
The job market will take center stage in just one week with the release of the January jobs report on January 10. Labor market data has consistently shaped investor sentiment, and this report is no exception.
Markets are walking a fine line: A weak report could raise fears of an economic slowdown, reminiscent of the growth fears that rocked markets last August.
Conversely, an unexpectedly strong job count could reduce expectations for further interest rate cuts by the Fed, pushing Treasury yields higher and potentially weighing on stocks.
The ideal outcome for markets would be a “Goldilocks” scenario – moderate job growth that buffers growth concerns and inflationary pressures.
Corporate earnings season begins on January 13, and it could be the most important earnings period in years. After a huge success in 2024 fueled by technology and artificial intelligence companies, the market is counting on continued earnings strength to justify higher valuations.
The consensus estimate for 2025 earnings growth is ambitious, at around 15%, more than double the historical average. This optimism has set a high bar for companies to exceed, especially for major technology companies such as the so-called “Mag 7”.
If corporate earnings fall short of expectations or if guidance points to a slowdown, markets could face renewed volatility as concerns about valuation sustainability resurface.
Inflation data will follow closely, with the Consumer Price Index (CPI) released on January 15. Inflation, which had largely subsided in 2024, showed signs of rebounding slightly, prompting the Fed to ease its guidance on further interest rate cuts in 2025.
The January CPI report will be pivotal in shaping inflation expectations for next year. A lower-than-expected reading is likely to revive hopes for further monetary easing, providing a tailwind to markets.
However, a hotter-than-expected report would reinforce concerns about persistent inflation, pushing Treasury yields higher and potentially derailing the rally in stocks.
Finally, the month will culminate with the Fed's policy meeting on January 29. While interest rates are not expected to be cut this time, the tone of the meeting will be decisive. Market optimism depends on the Federal Reserve maintaining its accommodative stance, even if gradually.
Any sign that the Fed might pause its rate-cutting cycle would be viewed as a major negative, potentially undermining the foundation of a bull market.
Investors will closely analyze the Fed's language for clues about its commitment to supporting economic growth through 2025.
As January begins, markets are at a crossroads. The foundation of strong earnings, moderate inflation, and Fed support remains sound, but expectations are high, leaving little room for error.
Analysts in the Sevens report suggest that early events of 2025 will set the trend for the rest of the year.
A smooth start could revive the rally in 2024, while mistakes could amplify the pullback seen in late December.
