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As the holiday rush fades, another shortened trading week could still spark outsized moves, with housing data poised to confirm or reinforce resilience, pension rebalancing threatening fresh volatility in tech, and AI momentum racing toward 2025. Meanwhile, emerging trade conflicts and manufacturing slowdowns add geopolitical bite. Dive in to see how these converging forces could reshape portfolio strategies well before the New Year’s confetti settles.
Market Overview
The four major U.S. indices ended the abbreviated holiday week with modest gains—ranging roughly from 0.3% to 0.8%—although choppy midweek trading reflected wavering investor confidence. Early on, markets benefited from renewed enthusiasm for large-cap growth, with tech shares initially driving a brief upswing. That optimism faded as the week progressed, however, when several of the high-flying Magnificent Seven stocks reversed course, exposing how quickly sentiment can turn when valuations come under scrutiny.
Behind these moves lies a mix of underwhelming consumer confidence data, persistent inflation worries, and skepticism over the staying power of the so-called Santa Claus rally. Recent earnings projections for 2025 may look promising, but analysts caution that lofty stock multiples—particularly in tech—leave little room for disappointment. In essence, while the major benchmarks still eked out weekly wins, the turbulent finish underscored investors’ delicate balancing act between chasing next year’s potential upside and grappling with near-term economic and policy uncertainties.
Last Week’s Highlights\
- Slumping US Indicators: Consumer confidence fell to 104.7; jobless claims dipped to 219,000, but continuing claims hit 1.91 million.
- Manufacturing Slowdown: Durable goods orders dropped 1.1% in November—its fourth decline in six months, led by weak aircraft orders.
- Treasury Yields Creep Up: The 10-year yield touched 4.641%, stoking inflation worries during a period of light holiday trading.
- France Shuffles Cabinet: President Macron appointed a new government under Prime Minister Bayrou to tackle rising deficits.
- UK Growth Downgrade: Third-quarter GDP was revised to 0.0% from 0.1%, fueling recession concerns ahead of tax hikes.
- EU–US Trade Friction: President-elect Trump threatened tariffs unless Europe boosts its U.S. energy imports.
- Lagarde Eyes Services: The ECB President sees inflation nearing 2% but warns service-sector prices could disrupt progress.
- Japan’s Balanced Stance: BoJ Governor Ueda suggested rate hikes remain possible but emphasized a cautious, data-dependent approach.
- Tokyo Price Surge: December CPI rose 3% year-on-year, hinting that inflation may linger above targets.
- China’s Giant Bond Plan: Officials aim to issue RMB 3 trillion in special Treasuries, hoping to stimulate consumption and innovation.
- Industrial Profits Dip: Chinese factory earnings fell 7.3% in November, marking a fourth straight monthly decline.
- South Korea’s Unrest: Parliament removed acting President Han Duck-soo, compounding turmoil after President Yoon’s impeachment.
Week Ahead & Implications
U.S. Housing Data: Uncovering the Economic Pulse
This week’s pending home sales, Case-Shiller Index, and construction spending data are set to highlight the housing market’s resilience. Pending home sales rose 2% in October, while construction spending climbed 0.4%, led by private residential growth. The chart below, depicting the Goldman Sachs Housing Activity Index, reinforces this narrative by showing that housing activity, though 17% below its long-term average, has held steady and even ticked up 4% sequentially. These trends suggest the sector is stabilizing despite high mortgage rates, supported by steady job markets and rising inventory.
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We expect upcoming data to confirm this momentum, boosting homebuilder stocks and REITs tied to residential growth. Investors should consider quality names like D.R. Horton or Lennar, as steady improvements signal opportunities in a recovering housing market.
Rebalancing Volatility Meets Tech Resilience
U.S. pensions are set to rebalance an estimated $21 billion in equities by month-end, creating short-term downward pressure on high-performing sectors like technology. This selling coincides with a broader pullback in Big Tech, where investors are locking in gains after a year of exuberant valuations—some at 20-year highs. As shown in the chart below, growth sectors have significantly outperformed value and small-cap factors, underscoring their leadership throughout 2024.
While this rebalancing creates temporary volatility, the fundamentals driving tech—particularly generative AI and software innovation—remain intact. Tactical investors can capitalize on dips caused by forced selling, while long-term players should see this as an opportunity to accumulate quality names in AI infrastructure and applications. Once rebalancing subsides, growth sectors like technology are poised to rebound strongly, reinforcing their dominance heading into 2025.
AI Momentum: Building an Early 2025 Tailwind
Goldman’s TMT specialist Peter Callahan highlights the tech sector’s wire-to-wire rally in 2024, driven by generative AI at both the infrastructure and application layers. The chart below illustrates this outperformance, showing how earnings in U.S. tech stocks have surged far beyond their non-tech counterparts over the last few decades.
This momentum will remain intact, despite short-term jitters, as business spending on AI projects accelerates—Gartner projects a near 9.3% jump in global IT outlays next year. With no signs of corporate appetite for AI solutions diminishing, fresh capital is likely to flow into subsectors like advanced semiconductors, cloud platforms, and specialized software. As a result, any market pullback should be viewed as a buying window, favoring leaders in GPU hardware, AI-driven analytics, and large-scale cloud computing.
ISM Manufacturing Index: Confirming a Slow Burn
All signs point to the ISM Manufacturing Index staying around 48.5, underscoring a continued contraction after December’s lackluster regional survey results. Such stagnation crystallizes the uneven nature of the U.S. economy, where Big Tech’s AI-driven growth sizzles while traditional manufacturing struggles. We anticipate a measured market response: cyclical sectors like metals and machinery may see selling pressure, but not a wholesale retreat.
Portfolios balanced with technology or consumer-focused equities can weather the drag, especially as year-end trends in generative AI investment still buoy broader indices. We favor adding high-quality industrial names whose valuations have dipped but which stand to rebound once manufacturing sentiment lifts—indicating potential bargains for forward-looking investors.
Geopolitical Ripples: Washington and Europe in Flux
While official economic data dominate headlines, political undercurrents in the U.S. and Europe will shape market sentiment in the coming week. The reaffirmation of Trump’s policy stances, including renewed tariff warnings, could weigh on Europe’s export-sensitive industries. As illustrated in the chart below, full implementation of U.S. tariffs could significantly dent EU GDP levels, particularly in Germany, where the impact could exceed 1%.
Despite these risks, we anticipate only a modest market reaction as the EU leans toward ramping up U.S. energy imports to avert a trade war. Meanwhile, political reshuffling in France and lingering uncertainties in Germany continue to dampen growth prospects but keep the ECB firmly on a cautious path.
Investors should remain watchful of currency moves—particularly euro and dollar pairs—and position accordingly with selective hedges in foreign exchange or by favoring multinational firms with balanced global exposure.
Asian Manufacturing PMIs: Diverging Growth Paths
China and Indonesia’s upcoming PMI readings highlight contrasting economic narratives in Asia. China’s PMI is expected to stabilize at 50.3, signaling cautious expansion as Beijing’s stimulus efforts sustain domestic demand, though foreign orders and employment remain weak. This steady growth supports opportunities in industrials and materials, particularly linked to exports and infrastructure.
Indonesia, however, remains below 50, reflecting ongoing struggles with high interest rates and weak global demand. While sentiment has improved slightly, persistent foreign demand weakness weighs on its recovery. Short-term caution on Indonesian equities is warranted, but long-term investors may find value in resilient sectors like consumer staples and infrastructure as easing eventually supports growth.
These PMIs underline China’s steady state-driven growth and Indonesia’s fragility, offering a strategic edge for those balancing near-term caution with selective, growth-oriented investments.
Most Impactful Events to Watch Next Week
