Market Rally: Record Closes Driven by Tariff Ruling Anticipation and Policy News

Markets closed at all-time highs on Friday, capping a winning week for all three major averages. The S&P 500 and Dow Jones Industrial Average both notched new record closes, while the Nasdaq Composite also climbed to a fresh peak. This rally was a direct reaction to two specific catalysts that shifted the near-term risk-on setup.

The first catalyst was the December jobs report, which showed the US added 50,000 jobs. That figure missed expectations and reinforced the narrative of a cooling labor market. The unemployment rate ticked lower to 4.4%, but the weak payroll growth sealed bets that the Federal Reserve will stand pat on interest rates. For markets, that means no immediate tightening pressure, a clear dovish signal.

The second, and more potent, catalyst was the heightened anticipation for a Supreme Court ruling on the legality of Trump's sweeping tariffs. Traders were on alert for a decision that could carry huge implications for US economic strategy. As a Wells Fargo strategist noted, there's a wait-and-see approach from the companies before they start restocking. A favorable ruling could restart manufacturing cycles; an adverse one would likely trigger a policy rethink. With the court indicating its next opinion day was Wednesday, Jan. 14, the market was pricing in potential policy clarity just days away.

In essence, the record closes were driven by a tactical risk-on environment. The dovish Fed signal from the jobs data provided a stable floor, while the tariff ruling created a binary catalyst with massive upside potential for trade-dependent sectors. The setup was clear: wait for the court's decision, which could be the next major market mover.

Sector Winners: Defense and Homebuilding on Policy News

The market's record close was not a broad-based advance. It was a targeted rally, with two sectors leading the charge on specific policy news. Defense stocks surged on Thursday after President Trump called for a $1.5 trillion military budget for 2027, a massive jump from the current ~$901 billion. The move was a direct reaction to a Truth Social post, not earnings. The sector had actually fallen the day before on Trump's threat to ban dividends and buybacks from defense firms. This policy flip-flop created a volatile, event-driven setup. The top gainers included Kratos Defense, Northrop Grumman, and Lockheed Martin, with shares of the latter two jumping over 4% on the news.

At the same time, the homebuilding sector saw a coordinated pop. This was driven by a government directive to buy $200 billion in mortgage bonds, a move aimed at lowering mortgage rates and supporting the housing market. The broader sector benefited from this macro catalyst, not from individual company earnings. The reaction was immediate and widespread, with stocks like KB Home, D.R. Horton, and Lennar Corp. all seeing their shares rise. The move was particularly notable for its sensitivity to regulatory news. Taylor Morrison Home, for instance, jumped 4.4% in the morning session after a new analyst initiation, but the broader sector's advance was a clear function of the bond-buying directive.

The key takeaway is that these were policy-driven rallies, not fundamental revaluations. For defense, the catalyst was a sudden shift in budgetary rhetoric. For homebuilders, it was a government action to ease a key cost of capital. Both moves highlight how these cyclical sectors remain highly reactive to macro and regulatory catalysts, often overshadowing their underlying business performance in the short term.

Immediate Risk/Reward: What to Watch Next

The market's record close sets up a clear, binary next move. For event-driven traders, the immediate risk/reward hinges on three key items.

First, the Supreme Court's tariff ruling remains the primary catalyst. The court has indicated its next opinion day is Wednesday, Jan. 14. As Wells Fargo strategist Ohsung Kwon noted, there's a wait-and-see approach from the companies before they start restocking on what happens to tariffs. A favorable ruling could restart manufacturing cycles and boost trade-dependent sectors. An adverse one would likely trigger a policy rethink and create immediate volatility. This is the single biggest near-term event to watch.

Second, the market's reaction to a potential shift in the Fed's dovish pivot will be tested with the January jobs report. The December data, which showed the US added 50,000 jobs, sealed bets that the Fed will stand pat. The next report will show if that dovish narrative holds. If the January print shows a significant rebound in payroll growth, it could challenge the "no-hire, no-fire" economy thesis and pressure the market's risk-on stance. The setup is for a data point that could either confirm stability or introduce new uncertainty.

Third, a key risk to the rally's sustainability is the fundamental driver behind recent sector moves. The homebuilding pop, for instance, was driven by a government directive to buy mortgage bonds, not by earnings momentum. As the evidence notes, homebuilders are one of the most cyclical subsectors within industrials, heavily reliant on interest rates and macro conditions. Policy-driven rallies can be fleeting if they lack underlying business strength. The same sensitivity applies to other sectors reacting to regulatory news. Traders must watch for whether these moves can transition from policy optimism to tangible earnings acceleration.

The bottom line is a setup defined by catalysts and cyclicality. The tariff ruling offers a high-impact binary event. The upcoming jobs report tests the Fed's dovish floor. And the rally's durability depends on whether policy news can translate into sustained earnings momentum, or if it's just a temporary re-rating.