The recent release of the non-farm payroll data in the United States has sent shockwaves through the financial marketsNot only did the number of new jobs added significantly surpass expectations, but the unemployment rate, which had been showing a minor upward trend, also took a surprising downturnThis unexpected development propelled the US dollar index to soar past 110, as market speculation about interest rate cuts by the Federal Reserve in 2025 plummeted to just one anticipated reduction.

According to the report published by the Bureau of Labor Statistics last Friday, the non-farm employment figures for December revealed an increase of 256,000 positions, wildly exceeding the predicted figure of 160,000 jobsAdjustments were made to the data for the previous two months, reflecting a stronger job market than initially reportedThe unemployment rate fell to 4.1%, with average hourly earnings seeing a 0.3% increase compared to November of the previous year.

Significantly, the job growth in December was chiefly driven by sectors such as healthcare and social assistance, retail trade, and the leisure and hospitality industries, with government employment also witnessing an uptick

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Conversely, the manufacturing and wholesale trade sectors experienced a declineThe report validates that despite high borrowing costs, inflation concerns, and political uncertainties, the American job market proved robust throughout the past yearWhile worker demand has shown signs of softening and unemployment is projected to rise in 2024, the economy still managed to create 2.2 million jobs in 2023, slightly lower than the 3 million from the previous year but exceeding the 2 million jobs created in 2019.

The non-farm employment index has been deemed exceptionally solid by Wall Street, despite a downward revision of 8,000 jobs in the data from the prior monthsThe average job growth over the last three months stands at 170,000. Notably, there was a rebound in employment in the retail sector (+43,000), which analysts believe is linked to a seasonal factor resulting from Thanksgiving being later in the year

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The healthcare sector added 70,000 jobs, the leisure and hospitality sector contributed +43,000, and government jobs rose by 33,000.

Following the release of this unexpectedly strong employment data, economists at major financial institutions such as Bank of America, Citigroup, and Goldman Sachs have revised their predictions for the Federal Reserve's interest rate cuts downwardCitigroup, which has been the most optimistic regarding rate cuts among major Wall Street banks, is now projecting five reductions of 25 basis points each starting in May, rather than the previously anticipated January timelineGoldman Sachs, in light of the latest data, expects the Fed to reduce rates by 25 basis points in both June and December of 2025, with an additional cut in June 2026, maintaining a terminal rate between 3.5% and 3.75%.

According to the CME Group's "FedWatch" tool, the likelihood of only a single rate cut this year has risen to over 60%. Data from the Group also indicates a shift in expectations for the timing of the first rate cut; the chances of a reduction in March have escalated from 56% prior to the data release to 70%. Nick Timiraos, often referred to as the "new Fed whisperer," commented on the diminished prospects for a rate cut this month, suggesting the employment report for December firmly eliminated that possibility

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Federal Open Market Committee member Musalem echoed these sentiments, noting that since September of last year, the economic landscape has strengthened and inflation has exceeded expectations, signaling the need for a more cautious approach to rate cuts.

The Michigan University Consumer Sentiment Index for early January declined, falling short of expectations, and inflation expectations for both the one-year and 5-10 year horizons have risenSome analysts are skeptical about the potential for rate cuts in 2025. Craig Erlam, the global research director at OANDA, stated, "If we continue seeing such strong data, I don’t believe the Fed has ample reason left to cut rates furtherTherefore, I expect only one cut in 2025, which may merely be to demonstrate the Fed is fulfilling its obligations, or they might not cut rates at all, which could further bolster the dollar."

The year 2024 has witnessed a remarkable rebound in both the S&P 500 and the Nasdaq, gaining over 20%. The forward price-to-earnings ratio has surged to 21 times, placing it at the 90th percentile historically, meaning it is valued higher than 90% of the time in history

• $31 Trillion Surge in Money Supply Fuels Inflation Fears
• Empowering Financial Services with Large Models
• U.S. December Employment Data Surpasses Expectations
• Global Market Rout: Investors Flee Record US Equities
• Fostering a Positive Cycle of Consumption and Investment

The sustainability of these high equity prices is now a cause for concern, particularly as a significant market correction in the US would likely have repercussions across Asian markets.

One key issue is whether rising US bond yields will impact the highly valued US stock markets, especially growth stocksErlam indicated a cautious stance on S&P 500 projections since the beginning of the year, attributing this outlook to high valuations and the hawkish repricing of US interest ratesHistorically, when stock yields lag behind bond yields, the stock market often faces risks—a phenomenon that was notably evident in the early 2000s.

Despite these warning signs, Wall Street remains unexpectedly optimistic about US stocksCurrent consensus forecasts suggest the S&P 500 may reach 6,600 points within the year, with some predictions even suggesting it could hit 7,000 points.

For instance, Tony Pasquariello, head of hedge fund research at Goldman Sachs, acknowledged that US stocks are currently trading at historical highs, whether viewed from an absolute or relative valuation standpoint

"However, based on the current macroeconomic environment and corporate fundamentals, our models suggest that the S&P 500 is trading roughly at fair valueMy market experience indicates that being excessively focused on valuations can be more detrimental than beneficial for investorsThere is a distinction between a market that is 'fairly valued' and one that is 'overvalued'; our models suggest that current US equities fall into the former category, rather than the latter," he noted.

Nevertheless, he stressed that research has shown that higher absolute valuations typically come with greater risks of significant market pullbacksGoldman Sachs predicts that the expansion potential for US stock valuations is limited, with price increases being more dependent on profit growthTraders and economists forecast a growth in US equity earnings of approximately 12% for the entirety of 2025.