• The US added far more jobs than expected in December, and bond yields spiked.
• Markets now aren’t expecting interest rate cuts for the foreseeable future.
• Here’s what nine strategists say is next for rates and stocks.

A key stock-market catalyst for 2025 is in serious jeopardy less than two weeks into the year.

Interest rate cuts look like a long shot after an unexpectedly strong jobs report released on Friday. Job additions defied forecasts in December, rising 256,000 versus an estimate of 164,000. The unemployment rate fell to 4.1%; it was expected to stay at 4.2%.

Lower interest rates were the backbone of many bullish market forecasts this year. Conversely, strategists regularly cited higher-for-longer rates due to persistent inflation as a top risk.

The consensus in markets was that the easing cycle would continue throughout the new year, albeit at a slower pace. Rates had hit multi-decade highs after the largest inflation surge in 41 years before pausing as price growth slid. The Federal Reserve then rapidly cut rates last fall as worries about the US labor market mounted, even though growth stayed positive.

But the first big data drop of 2025 already sent some market pundits back to the drawing board.

This jaw-dropping jobs report “put a stake in the heart of more Fed rate cuts” for at least the next six months, Jack McIntyre, a portfolio manager at Brandywine Global, said in commentary.

The economic expansion is no longer in question since growth is even stronger than expected. Instead, surging bond yields suggest that inflation is top of mind again, especially since the tariffs President-elect Donald Trump has promised could spark trade wars that drive up prices.

“Investors seem to be shifting their concerns towards prolonged inflation or even worse, a rebound in inflation, away from a slowing economy,” Dominic Pappalardo, Morningstar Wealth’s chief multi-asset strategist, commented on Friday.

Higher, lower, or neither? It’s anyone’s guess

Rate cut expectations are disappearing as fast as many people’s New Year’s resolutions.

Markets are pricing in a 29% chance of no cuts in 2025, up from 5% a month ago and 13% a day before the December employment report, according to CME FedWatch data. One rate reduction is the most likely outcome, versus the prior consensus view of two to three cuts.

“When combined with the inflationary concerns mentioned in the most recent FOMC minutes, it’s difficult to see how they can justify cuts in the near term,” Steve Sosnick, the chief strategist at Interactive Brokers, wrote in a message to Business Insider. However, he added that disappointing data could cause the narrative to flip once again.

But some strategists aren’t ready to admit defeat — at least not this early in January.

“The December jobs report probably strengthens the case for a pause in January but does little to change the outlook for Fed policy this year,” said Jason Pride, the chief of investment strategy and research at Glenmede, in commentary.

Paul Stanley, the chief investment officer at Granite Bay Wealth Management, also said in written commentary that he still expects to see two rate cuts in 2025, though likely not until later in the year. Of course, that prediction is dependent on inflation staying stable.

Others have a decidedly more hawkish tone. In fact, a pair of pundits think the Fed’s next move could be a rate hike, which would have been utterly unthinkable a few months ago.

“We can’t rule out a hike as the Fed’s next move,” said Peter Graf, the chief investment officer at Nikko Asset Management’s Americas division, in commentary. But even if not, he also said that “today’s unemployment report likely sounds the death knell for this easing cycle from the Fed.”

McIntyre from Brandywine argued that the US central bank made a mistake by cutting rates as they did. A long pause is warranted, he added, and that delay could make a hike more likely.

Still, some say it’s way too early to talk about rate hikes. Brian Rose, the senior US economist at UBS Global Wealth Management, remarked in commentary that interest rates likely won’t move higher or lower in the near future, though his firm still sees cuts coming in June and September.

Either way, US stocks are still the place to be

Regardless of where interest rates are headed, equity investors ultimately want to know what will happen to their portfolios.

Although some strategists are changing their rate-cut calls, they’re not ready to slash their year-end price targets for the S&P 500. In fact, some were emboldened by the hot jobs report.

“While bond yields jumped and equities sold off on the release, longer-term this should be a positive development for financial markets,” Josh Jamner, an investment strategy analyst at ClearBridge Investments, said in commentary after the release. He acknowledged that rate cuts are likely a long shot in the first half, but he’s pleased with how healthy the labor market looks.

Even more bullish is Lara Castleton, who’s the US head of portfolio construction and strategy at Janus Henderson Investors — at least when it comes to domestic equities.

“The first big dataprint for the year confirms that the labor market is still strong and the US economy is solid, encouraging the US exceptionalism narrative and discouraging optimism outside the US,” Castleton said in commentary.

Although history suggests that US stocks can’t lap their international counterparts indefinitely, there’s a strong sense in markets that the trend could continue in the wake of Trump’s win. Large technology-oriented stocks that have dominated in recent years might also stay hot.

“So long as earnings continue to come in strong, these companies will have no reason to lose dominance,” Castleton remarked. “But there are many quality companies outside of mega-cap that have already been pricing in negative sentiment and have potential for upside from here.”

Investors interested in high-quality growth stocks across sectors should consider this recent list of 58 top picks highlighted by Morgan Stanley.