US equities: Service sector optimism clashes with manufacturing weakness – London Business News | Londonlovesbusiness.com

The U.S. equity market responded positively after two prior sessions of bearish tone, driven by data showing remarkable dynamism in the service sector.

This rebound, which pushed the S&P 500 up by 0.5%, led by consumer discretionary (+1.1%), technology (+0.9%), and communication services (+0.7%), comes amid a context of intriguing economic contrasts.

The S&P 500 remains slightly below its recent all-time high, near 6,100 points, a level that acted as a key resistance.

This stock market recovery is underpinned by recent data from the Purchasing Managers’ Index (PMI), indicating private sector improvement since the first quarter of 2022.

The preliminary S&P Global composite PMI climbed to 56.6 in December 2024, a significant jump from 54.9 in November. This better-than-expected data reflects a notable strengthening of economic activity.

However, not all parts of the economic landscape are equally bright. While the service sector experienced a remarkable expansion, reaching a PMI of 58.5, its highest level since October 2021, manufacturing continues to show signs of weakness. The manufacturing PMI fell to 48.3 in December, deepening its decline from 49.7 in November and marking the sixth consecutive month in contraction territory. This disparity between services and manufacturing raises intriguing questions about structural economic themes.

The contrast between the dynamism in the service sector and the ongoing contraction in manufacturing paints a complex economic picture. While optimism driven by expectations surrounding the incoming administration is evident, particularly regarding a potential reduction in regulations, the persistent weakness in U.S. and global manufacturing demands constant monitoring.

The data also reveals that new orders in the service sector grew at the fastest pace since March 2022, also driving a recovery in employment within this sector. However, in manufacturing, new orders continued to contract, pushing production to lows unseen since the financial crisis, excluding the brief pandemic impact.

It is crucial not to be swayed solely by the stock market enthusiasm. The divergence between services and manufacturing, coupled with moderate but persistent inflationary pressures, compels a relative degree of caution and a deep analysis of the economic data in the coming months.

This sectoral contrast, combined with expectations driven by political changes, creates an economic scenario that, while showing signs of strength in certain areas, requires careful observation to anticipate potential risks and opportunities in the equity market. The key will be to monitor whether the momentum in the service sector can spill over to manufacturing and foster a more robust and balanced recovery.

Finally, markets will closely watch the final FOMC meeting, which starts tomorrow, as it is expected to provide clarity on what to expect from monetary policy from the U.S. central bank for 2025. This meeting will offer valuable insights into the direction of interest rates and other key measures, directly impacting economic outlooks and the behavior of financial markets.