After five consecutive days of declines, the US stock market staged a significant rebound on Friday. The Nasdaq 100 led the recovery with a 1.7% gain, while the S&P 500 rose 1.3%, partially offsetting losses incurred earlier in the week.
AI Hype Powers Market Optimism
Despite ongoing concerns about slowing earnings growth for major tech companies, investor enthusiasm for Artificial Intelligence remained a driving force behind the rally.Nvidia, a leading player in the AI space, continued to benefit from strong retail inflows into AI-focused ETFs. JPMorgan strategists noted, “As long as retail investors continue to pour money into the AI theme, the AI-led boom in stock markets is likely to continue.”
Political Stability and Economic Indicators Boost Sentiment
The re-election of Mike Johnson as House Speaker provided a further boost to market sentiment. His leadership is seen as paving the way for the incoming administration’s pro-business agenda.
In addition, US manufacturing data showed modest growth in DecemberThe ISM manufacturing index came in above expectations, although it remainedbelow the 50-mark threshold that signifies expansion.
Treasury Yields and Fed Policy
The 10-year Treasury yield climbed above 4.6% after Richmond Fed President Tom Barkin reiterated his preference for more restrictive monetary policy. This suggests the Federal Reserve may maintain a cautious stance despite the improving economic outlook.
Weekly Market Performance
For the week, all three major indices posted declines:
- S&P 500: -0.5%
- Dow Jones: -0.6%
- Nasdaq Composite: -0.5%
Friday’s Closing Levels
| Index | Close | Change | % Change |
|---|---|---|---|
| Dow Jones | 42,732.13 | +339.86 | +0.80% |
| S&P 500 | 5,942.47 | +73.92 | +1.26% |
| Nasdaq Composite | 19,621.68 | +340.89 | +1.77% |
| US 10-Year Treasury Yield | 4.598% | – | – |
| VIX | 16.13 | -1.80 | -10.04% |
Is the Rally Sustainable?
The market’s strong rebound on Friday provided a welcome relief, especially after 2 sessions where earlyrallies ended in losses. However, questions remain about the sustainability of this upward move.
Some analysts caution that low trading volumes during the holiday period may have distorted market dynamics. To confirm a shift in the short-term trend, we’ll need to see consistent higher closes in the coming sessions. Otherwise, this could turn out to be a bull trap, leaving new longs vulnerable to potential sell-offs.
2025 Outlook: Possibilities and Caution
We have witness recently how vulnerable the market can be and if we trigger downside puts, there is a chance it could cause cascade and go into negative gamma, which could develop into a nasty selloff.
As we kick off the new year, the market presents a range of possibilities, including the potential for new highs. However, many analysts are predicting a pullback in the first quarter before the broader uptrend resumes. Given the weak finish to 2024, this scenario cannot be ruled out.
A New Year’s Wish
Happy New Year to all! May you and your families enjoy a healthy and prosperous 2025.
Source: CBOE, Bloomberg
This commentary was written by James Gomes, a seasoned finance professional with over 30 years of industry experience, including a tenure exceeding 20 years at a prominent US bank.
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