Wolfe Research lays out some of the key trends currently driving stock markets

Investing.com - Expectations for spending on artificial intelligence and initial jobless claims are set to be key near-term drivers of both the economy and stock markets, according to analysts at Wolfe Research.

In a note, the analysts argued that AI capital expenditures, which have surged in recent years as mega-cap technology firms aim to develop and monetize their AI offerings, are tipped to be the "most important" swayer of sentiment for equities heading into the end of 2025.

Stocks are hovering around elevated levels thanks in large part to enthusiasm around the AI boom, which has helped to offset worries over tariff-fueled inflation and a weakening labor market.

For that reason, initial claims of unemployment benefits are seen as the "best real-time indicator" of the state of the U.S. job market and the wider economy, the Wolfe analysts said.

Crucially, softness in the American employment picture has been a major factor behind the Federal Reserve’s decision earlier this month to restart a policy easing cycle. A "large sustainable spike" in first-time jobless claims "would likely sour investor sentiment, and markets would view the Fed" as having moved too late to begin slashing interest rates, the analysts flagged.

Despite fears over the U.S. labor market, the world’s largest economy has remained resilient, a trend that -- coupled with lower borrowing costs -- has bolstered some hopes for a reacceleration in growth.

Should this come to pass, the Wolfe analysts predicted that financial sector names -- particularly banks -- are "poised to outperform" thanks to an increase in lending, deregulation passed by the Trump administration, and capital markets "opening back up."

A revived economy may provide a boost as well to analog semiconductor companies, which provide chips to traditional sectors like industrials and autos, they added.

However, traders have expressed worries around whether ongoing momentum in stocks will hold or reverse. The Wolfe strategists highlighted that, given frothy asset prices and stretched valuations, cratering employment, a spike in 10-year Treasury yields, and a crack in AI spending could "derail" the equity market’s recent rally.

Against this backdrop, the Wolfe analysts recommended that investors "stick with winners as performance chasing intensifies into year-end." They singled out some of the benchmark S&P 500 index’s best-performing names so far in 2025, such as Robinhood Markets, Seagate Technology, Western Digital, and Palantir.

Elsewhere, the Wolfe analysts noted that company earnings estimates, which are typically revised lower during the course of a quarter, have instead been raised. They added that Facebook-owner Meta Platforms, software giant Microsoft, bank Citigroup, and healthcare firm Johnson & Johnson are among a host of businesses anticipated to see "outsized returns if they can continue their positive fundamental momentum."