High valuations raise the stakes for U.S. jobs data to come in just right, according to Sevens Report Research.
Around the world, markets have been off to a strong start in 2026. But investors could face their first real test on Friday with the release of December's U.S. jobs report and, potentially, a Supreme Court decision on the legality of most of President Trump's tariffs.
Stocks and bonds have kept pretty calm to kick off January, despite the Trump administration's abrupt move to quickly control Venezuela's oil and an ongoing rotation that has seen a shift in stock-market leadership.
"There have been a number of headlines where things feel a little too quiet, a little too calm," said Michael Arone, chief investment strategist at State Street Investment Management, in an interview Thursday.
But that could change soon. Options traders are bracing for potentially the most volatile session so far this year, with the S&P 500 index SPX expected to swing 0.9% in either direction based on pricing of at-the-money contracts due to expire on Friday, according to Steve Sosnick, chief market strategist at Interactive Brokers.
Reading the tea leaves in the options market shows investors are expecting a bit of volatility. The Cboe Volatility Index VIX has crept up so far this year even as the S&P 500 has moved higher, with Wall Street's "fear gauge" standing at 15.5 on Thursday, according to FactSet data.
Sosnick questioned whether investors were being careful enough. "A relatively complacent options market implies that there is a bit of room for surprises," he said in commentary shared with MarketWatch.
Jobs report
On Friday, investors will receive the Labor Department's first jobs report of 2026, which covers the month of December. There are potential risks for investors whether the data comes in stronger, or weaker, than expected, said Tom Essaye, founder and president of Sevens Report Research.
As of Thursday, the S&P 500 was trading at more than 22 times the expected earnings of its member companies over the next 12 months, FactSet data showed. This shows the index is expensive relative to history, and almost as richly valued as it was at the peak of the market in early January 2022. That marked the beginning of a nine-month-long bear market.
That leaves very little room for error, Essaye said. Economists polled by The Wall Street Journal expected the report to show 73,000 new jobs were created last month. That would be an improvement from just 64,000 in the initial reading for November. The unemployment rate also was expected to drop from 4.6% to 4.5%.
A too-strong number could cause investors to see a couple of interest-rate cuts from the Federal Reserve this year as less likely, which could interrupt the market's upward momentum. At the same time, a too-weak reading could revive concerns about the trajectory of the economy and labor market, which could cause investors to second-guess lofty valuations in some corners of the market.
"As was the case for the last two jobs reports, a Goldilocks number that shows solidly positive jobs growth and stable unemployment is the best-case scenario for stocks and the number that can keep this rally going," Essaye said.
There is reason for optimism. On Wednesday, the latest Challenger, Gray & Christmas December jobs report showed job cuts fell to their lowest level in 17 months in December, with employers announcing just 35,553 reductions. Meanwhile, hiring plans showed the busiest December in three years.
Tariff ruling
It is possible the Supreme Court could release its ruling on the legality of most of President Trump's tariffs on Friday. The Court has said on its website that Friday is an opinion day, meaning a ruling could be handed down after the Justices take the bench at 10 a.m. Eastern Time.
On Polymarket, the crypto-fueled prediction market, traders saw just a 24% chance of the Supreme Court ruling in favor of Trump's tariffs. Many on Wall Street have been bracing for a decision that goes against the Trump administration, based on the tone of the questions from the arguments late last year. Polymarket has a data partnership with Dow Jones, the publisher of MarketWatch
Several market strategists who spoke with MarketWatch also said a ruling striking down at least some tariffs could be taken in stride. That outcome already may be priced in, said Manish Singh, chief investment officer at Crossbridge Capital Group. Should tariffs imposed by invoking emergency powers be deemed illegal, the White House is expected to find another way to apply them. Whether that involves demanding action from Congress, or substituting them with targeted tariffs under a different executive authority would be less clear.
While the broader market might not see too much of an impact from tariffs being overturned, investors should keep an eye on shares of retailers like Wal-Mart, Dollar General and Costco, Singh said. More than 1,000 companies, including Costco and Goodyear, already sued to recover collected tariffs.
"People are going to be watching Costco and Walmart as well because people will be watching to see if they're going to get their money back," Singh said.
U.S. customs officials have collected approximately $133 billion in levies from tariffs imposed under Trump's emergency powers as of mid-December, a government report showed.
If the tariffs are struck down, as expected, Singh thinks investors could see some immediate weakness in the U.S. dollar DXY, while the Treasury yield curve BX:TMUBMUSD10Y could continue to steepen as short-term rates fall. The ruling also could influence the Fed.
"If the tariffs get struck down, then what basis would the Fed have for not cutting rates," Singh said.
On the other hand, if the ruling keeps Trump's tariffs intact, stocks could rally, said Hardika Singh, an economic strategist at Fundstrat Global Advisors. While inflation remains above the Fed's 2% yearly target, economic growth hasn't stumble since new tariffs took hold. Yet the levies have provided the U.S. government with a new revenue source at a time when investors remain concerned with the large U.S. deficit.
"The funniest thing out of all this is that tariffs at first were this god-awful thing that marked the end of capitalism," Singh said. "And now both stock and bond investors are praying that tariffs get to stick around by whatever means possible. Goes to show how quick market sentiment changes these days."
U.S. stocks were mixed on Thursday, with the Dow Jones Industrial Average DJIA climbing, while the S&P 500 and Nasdaq Composite COMP retreated, FactSet data showed.
