Economic & Earnings Commentary
Pre-markets are in red as Wall Street is set to close the last week of 2024. This truncated week (Wednesday was a holiday to celebrate Christmas Day) saw the start of the Santa Claus rally in U.S. stock markets. Trading volumes remained muted, as usual, since most of the major institutional investors stayed side-tracked during this period, and retail investors took the driver’s seat.
Market participants are not expecting any trigger in either direction in the last three trading days of this year. However, once Wall Street resumes activities on Jan. 2, 2025, several major factors will start playing their roles.
Q4 2024 Earnings Results
The fourth-quarter 2024 earnings results will flood Wall Street starting from the third week of January. This earnings season is likely to have strong implications on U.S. markets. Strong overall earnings results and guidance will support thecurrent stock marketvaluation, as a section of economists and financial experts have characterized it as overvalued.
Trump’s Policies
President-elect Donal Trump will finally take the oath as the 47th President of the United States on Jan. 20. Market participants are uncertain regarding Trump’s economic policies. Trump’s popular policies like the reduction of corporate tax, deregulation and imposition of tariffs on foreign products are expected to boost economic growth, especially for the domestic industries. At the same time, these policies may lead to a higher inflation rate, making it harder for the Fed’s goal of a soft landing of the economy.
Fed’s Interest Rate Cut
Market participants remained uncertain regarding the Fed’s interest rate cut in 2025. The central bank has reduced the benchmark lending rate by 1% in the last three FOMC meetings of this year. The Fed fund rate is currently in the range of 4.25-4.5%. In December, the Fed’s latest “dot-plot” showed just two rate cuts of 25 basis points in 2025 instead of four indicated in September.
The CME Fedwatch interest rate derivative tool currently shows that market participants are not meaningfully (probability > 50%) expecting any rate cut by the central bank before May 2025. The ongoing volatility of U.S. stock markets in the second half of December is the result of investors’ uncertainty about the Fed’s interest rate trajectory for 2025.
AI Frenzy
It remains to be seen if generative artificial intelligence (AI) frenzy continues to dominate Wall Street like the past two years and whether Trump’s tariffs or policies related to China affect the much-hyped “magnificent 7” stocks. Market participants will closely monitor how quick the big techs can monetize their enormous expenditures related to generative AI.
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