U.S. Stocks Rebound as Investors Eye Rate Cuts and Policy Changes in 2025

U.S. stocks staged a strong rally on Friday, marking a positive end to a holiday-shortened week and a new year filled with optimism surrounding potential Federal Reserve rate cuts and regulatory changes under the incoming administration. A broad market rebound lifted all three major stock indexes, with megacap tech stocks like Tesla (TSLA) and Nvidia (NVDA) providing much of the momentum, helping push the Nasdaq to the forefront.

Despite the gains on Friday, the week ended on a sour note for the broader market, with all three indexes posting modest weekly declines. The S&P 500 recorded its third weekly loss in the past four weeks, as a multi-session selloff capped what had otherwise been a banner year for equities, driven by the rise of artificial intelligence technology and the first policy rate cuts from the U.S. Federal Reserve in over three years.

Market Sentiment: A Mixed Outlook

“After a late-year weakness and an oversold market, we finally saw some buyers step in,” said Ryan Detrick, Chief Market Strategist at Carson Group. “Although the past week and a half have been disappointing for the bulls, volume has been light, and there hasn’t been much news. We’ll see if the bullish trend can continue as more big money managers return to the desks next week.”

Economic Data: Mixed Signals for Future Rate Cuts

On the economic front, the Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) surprised to the upside, rising 0.9 points to 49.3—its highest reading since March. This nudges it closer to the expansion territory, signaling stronger economic activity. However, robust economic data raises questions about the need for further rate cuts by the Fed, as inflationary pressures could be reignited.

Richmond Fed President Thomas Barkin provided an optimistic view on the 2025 economic outlook despite the uncertainty surrounding trade policies and the incoming administration under President-elect Donald Trump. Trump’s proposed policies, including corporate tax cuts, regulatory easing, and tariffs, are expected to boost corporate profits and economic activity but could also drive inflation higher.

Major Market Movements

The Dow Jones Industrial Average surged 339.86 points (0.80%) to 42,732.13, while the S&P 500 gained 73.92 points (1.26%), closing at 5,942.47. The Nasdaq Composite added 340.88 points (1.77%) to reach 19,621.68. All 11 sectors of the S&P 500 closed higher, with consumer discretionary stocks leading the charge after Thursday’s selloff.

Looking ahead, analysts expect strong earnings growth for the S&P 500 in Q4, with aggregate year-on-year earnings growth projected at 9.6%, according to LSEG data.

Notable Corporate Moves

On the corporate front, U.S. President Joe Biden blocked the proposed sale of U.S. Steel to Japan’s Nippon Steel for $14.9 billion, citing national security concerns, causing U.S. Steel shares to drop by 6.5%. Meanwhile, Microsoft shares gained 1.1% following the announcement of an $80 billion investment in AI-enabled data centers for fiscal 2025.

Alcohol stocks were hit after U.S. Surgeon General Vivek Murthy recommended that alcoholic beverages carry cancer risk warnings. Molson Coors and Brown-Forman shares fell by 3.4% and 2.5%, respectively.

Market Statistics

Advancing issues outnumbered decliners on the NYSE by a 3.03-to-1 ratio, with 86 new highs and 89 new lows. On the Nasdaq, 3,179 stocks rose while 1,181 fell, showing a 2.69-to-1 advance-to-decline ratio. Volume on U.S. exchanges totaled 14.09 billion shares, slightly below the 14.91 billion average for the past 20 sessions.

The rally on Friday helped boost investor sentiment, but with a mixed outlook for the year ahead, much will depend on upcoming economic data, corporate earnings, and potential policy changes from the new administration.

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