Stocks extended their record-setting run last week with the S&P 500 and the Dow closing Friday at record highs as a blockbuster jobs report bolstered the outlook for corporate profits. Additionally, tech stocks rallied higher on robust quarterly reports from big tech companies as Meta's strong earnings report and announcement of its first-ever quarterly dividend propelled shares higher by more than 20%, and Amazon jumped 8% on significantly higher than expected operating income. For the week, the S&P 500 and the Dow each rose 1.4% while the Nasdaq increased 1.1%. Meanwhile, bond yields surged higher on the hot jobs report, which could put some pressure on the equity market rally if the push higher in interest rates is sustained.

The U.S. employment report came in well above consensus expectations on Friday, delivering a strong positive signal on labor market conditions in January. The 353,000 increase in nonfarm payroll employment beat expectations of a slowdown to 185,000. The improvement was broad-based across industries, with professional & business services, health care, manufacturing, retail trade, and transportation & warehousing all experiencing an acceleration in job gains last month. Moreover, the increase in the prior two months was revised up by 126,000, bringing the December increase to 333,000. Meanwhile, the unemployment rate was unchanged at 3.7% while average hourly earnings accelerated on both a month-over-month basis (0.4% m/m to 0.6% m/m) and a year-over-year basis (4.3% y/y to 4.5% y/y). The strong result further dispels near-term recessionary fears, but it also complicates the inflation outlook and the ability of the Fed to ease rates lower.

Treasury yields jumped in response to the stronger-than-anticipated report as investors reduced the odds of an early start to the Fed’s easing cycle. The 10-year Treasury yield pushed back above 4% after dipping to 3.85% on Thursday. According to the CME FedWatch Tool, the market-implied probability of a rate cut in March has fallen from almost an 80% likelihood at the start of the year to less than 18% today. The market now prices in rate reductions totaling 1.05% in 2024 (or just about 4 rate cuts) compared to the peak expectations earlier in January of rate cuts 1.75%, which implied a 0.25% rate cut at every meeting starting in March.

Jerome Powell, the Fed chairman, also said last week that a March rate cut was probably not on the cards, but he told “60 Minutes” last night that three moves were still expected in 2024. The “danger of moving too soon is that the job’s not quite done,” he said, reaffirming his view that the central bank needs more evidence that inflation is under control before making a decision.

In the week ahead, inflation data and earnings will continue to be in the spotlight. Another 20% of the constituents of the S&P 500 are on tap to report quarterly results this week, including blue chip companies like Coca-Cola, Cisco, and Disney. With almost half of the index results in the book, the S&P 500 is on track for slightly better than expected earnings growth of 1.6% year-over-year in the fourth quarter. It will be a light week for economic data but the Commerce Department is scheduled to publish revisions to the 2023 full-year Consumer Price Index on Friday.