Stocks stumbled to end an otherwise positive May, as investors appeared to take pause amid enthusiasm for AI and the prospect of the Federal Reserve keeping interest rates higher for longer remained a priority.
Over the past five trading sessions, the Nasdaq Composite (^IXIC) was almost flat and the S&P 500 (^GSPC) was up less than 0.2%. The Dow Jones Industrial Average (^DJI) was down almost 1%.
Over the coming week, labor market updates will be front and center to kick off a new month of trading. The May jobs report is scheduled to be released Friday morning, while updates on job openings and private sector wage growth are also on the schedule. Figures on activity in the services and manufacturing sectors are also expected.
In corporate news, quarterly results from CrowdStrike (CRWD), Lululemon (LULU) and Dollar Tree (DLTR) highlight an otherwise quiet week for corporate earnings releases.
A step in the right direction
The month of May ended on a moderately promising note on the inflation front. April’s reading of the Personal Consumption Expenditure (PCE) index showed prices rose 0.2% from the previous month, the smallest monthly increase in 2024.
Although economists described this as “better inflation news than the first quarter,” it did little to change investors’ expectations for interest rate cuts. Investors expected fewer than two rate cuts this year, according to Bloomberg data, which was little changed from the previous week.
This follows recent rhetoric from federal officials that “greater confidence” will be needed in declining inflation before they begin cutting rates.
Labor Market Outlook
A host of labor market data will test investor sentiment about the Fed’s direction in the week ahead.
The May jobs report is scheduled to be released Friday, and economists expect it to tell a similar story to last month, with the job market cooling from its hot start through 2024, but without entering into a real slowdown.
The report is expected to show that 185,000 nonfarm payroll jobs were added to the U.S. economy last month, with unemployment steady at 3.9%, according to Bloomberg data. In April, the US economy added 175,000 jobs while the unemployment rate increased slightly to 3.9%.
Learn more: How does the labor market affect inflation?
Wells Fargo’s team of economists, led by Jay Bryson, wrote in a weekly note that strong job growth and upward surprises in inflation early in the year led the Fed to “put its rate cut plans on hold at least until the second half of the year”.
But Wells Fargo expects the job market to continue to calm from here on out.
“Employment growth came back to Earth at the start of the second quarter. (…) We believe that the pace of employment growth over the next few months will more closely resemble that of April,” wrote l Bryson’s team.
A break from the AI euphoria
Skyrocketing earnings from Nvidia (NVDA) helped spark a rally in the Nasdaq Composite which had its best May since 2003. But that mood soured over the past week as earnings from Dell (DELL) , Salesforce (CRM) and MongoDB (MDB), all of which have been part of the AI business at times over the past year, have failed to impress investors.
“This week’s off-cycle reports highlight the pressure on fundamentals and forecasts given valuation circumstances,” Scott Chronert, Citi’s U.S. equity strategist, wrote in a note, speaking generally about the market developments over the past week. “Pockets of the market may depend on consistent up-and-down momentum throughout the year to justify current prices.”
Enthusiasm for AI, or lack thereof, will be a trend to watch over the coming weeks as we approach Apple’s Worldwide Developers Conference on June 10.
Wrong width
The so-called “broadening” of the stock market rally, in which a wide variety of sectors advance, has been a feature of the stock market rallies of late 2023 and, more recently, of March 2024. But this has not been in evidence in the market’s latest rise to record highs.
Bank of America investment strategist Michael Hartnett noted that breadth was at its worst level since 2009 when he assessed how well the Equal-Weighted S&P 500 Index (^SPXEW) moves with the Weighted S&P 500 Index. based on market capitalization. 500 is up more than about 4%, while the equal-weighted index is up less than 2%.
Ed Clissold, chief U.S. research strategist at Ned Davis, wrote in a note to clients that “several market breadth indicators” have not tracked the recent upward rally, which could be a cause for concern if megacap tech’s narrow leadership over the past month fades. . This sometimes happens when market rallies peak, according to Clissold.
“Ultimately, while some discrepancies developed throughout the year, most only surfaced in recent weeks,” Clissold wrote. “If the market is in an overshooting process, it is likely that it is only just beginning. The evidence has not changed enough to warrant an adjustment to our overweight recommendation for U.S. stocks. “
Lack of scope also has a potential advantage. Bespoke Investment Group pointed out that the current reading, which is low in magnitude, is in fact often bullish for the market. With breadth at its current levels, stocks generally perform better than with any other measure of breadth over the next three months, next six months, and the full year.
The key, of course, remains whether enlargement actually takes place.
“If we don’t get broadening participation again, then we could retest the (S&P 500) low we saw on April 19,” said Sam Stovall, chief investment strategist at CFRA Research, at Yahoo Finance.
Weekly calendar
Monday
Economic data : S&P Global US Manufacturing, May final (previously 50.9); Month-to-month construction spending, April (0.2% expected, -0.2% previously); ISM Manufacturing, May (49.7 expected, 49.2 previously); ISM prices paid, May (60.9 expected);
Earnings: Gitlab (GTLB)
Tuesday:
Economic data : Job offers, April (8.3 million expected, 8.48 million previously); Factory orders, April (0.7% expected, 1.6% previously); Durable goods orders, end of April (0.7% expected, 0.7% previously)
Earnings: Bath & Body Works (BBWI), CrowdStrike (CRWD), Hewlett Packard Enterprise (HPE), PVH (PVH), Stitch Fix (SFIX)
Wednesday
Economic data : MBA mortgage applications, week ended May 31 (-5.7%); ADP private payroll, May (+174,000 expected, +192,000 previously); S&P Global US Services PMI, May final (previously 54.8), S&P Global US composite PMI, May final (previously 54.5); ISM services index, May (50.9 expected, 49.4 previously); Prices for paid ISM services, May (59.2)
Earnings: Campbell’s (CPB), ChargePoint (CHPT), Dollar Tree (DLTR), Five Below (FIVE) Lululemon (LULU), Victoria’s Secret (VSCO)
THURSDAY
Economic data : Job cuts at Challenger, year-over-year, May (-3.3% previously); Unit labor costs, first quarter (+4.7 expected, +4.7% previously); Non-agricultural productivity, first quarter (+0.3% expected, +0.3% previously); Initial unemployment claims, week ending June 1 (previously 219,000)
Earnings: Big Lots (BIG), DocuSign (DOCU), Nio (NIO), Rent the Runway (RENT), The JM Smucker Company (SJM), Vail Resorts (MTN)
Friday
Economic calendar: Non-agricultural jobs, May (+185,000 expected, +175,000 previously); Unemployment rate, May (3.9% expected, 3.9% previously); Average hourly wage, month-over-month, May (+0.3% expected, +0.2% previously); Average hourly wage, over one year, May (+3.9% expected, +3.9% previously); Average weekly hours worked, May (34.3 expected, 34.3 previously); Activity rate, May (62.7% previously)
Earnings: No notable gains.
Josh Schafer is a reporter for Yahoo Finance. Follow him on @_joshschafer.
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