Stocks stumbled to end a positive month of May as investors appeared to be stalling on AI enthusiasm and the prospect of the Federal Reserve holding interest rates higher for longer.
Over the past five trading sessions, the Nasdaq Composite (^IXIC) was near flat, and the S&P 500 (^GSPC) rose less than 0.2%. The Dow Jones Industrial Average (^DJI) fell nearly 1%.
In the week ahead, updates on the labor market will be front and center to kick off the new month of trading. The May jobs report is set to be released on Friday morning while updates on job vacancies and personal wage growth are also on the schedule. Readings on activity in the service and manufacturing sectors are also expected.
In corporate news, quarterly results from CrowdStrike ( CRWD ), Lululemon ( LULU ), and Dollar Tree ( DLTR ) highlighted a quiet week for corporate earnings releases.
A step in the right direction
The month of May ended with a fairly promising update on the inflation front. The April reading of the Personal Consumption Expenditure (PCE) index showed prices rose 0.2% from the previous month, the lowest monthly increase of 2024.
While economists described this as “better news on inflation than we saw in the first quarter,” it did little to change investors’ interest rate cut expectations. Investors are pricing in less than two rate cuts this year, according to Bloomberg data, unchanged from the previous week.
This follows recent rhetoric from Federal officials that “greater confidence” will be needed in the decline in inflation before starting to cut rates.
The labor market looks promising
A shutdown of data on the labor market will test investor sentiment on the path of the Fed next week.
The May jobs report is set to be released on Friday, and economists expect a similar story to last month’s report with the labor market cooling from a warm start to 2024 but not experiencing a slowdown.
The report will show that 185,000 nonfarm payroll jobs were added to the U.S. economy last month, with unemployment remaining at 3.9%, according to data from Bloomberg. In April, the US economy added 175,000 jobs, while the unemployment rate rose to 3.9%.
Read more: How does the labor market affect inflation?
A team of Wells Fargo economists led by Jay Bryson wrote in a weekly note that strong job growth and a surprise rise in inflation to start the year led the Fed to “lay out plans to cut rates for at least half a year.”
But Wells Fargo expects the labor market to continue to cool from now on
“Job growth is coming back down to Earth to start Q2. … We think the pace of job growth over the next few months will look more like April’s pace,” Bryson’s team wrote.
A pause in AI euphoria
Nvidia’s ( NVDA ) explosive earnings helped propel the Nasdaq Composite to its best May since 2003. But that mood has eased over the past week as earnings from Dell ( DELL ), Salesforce ( CRM ), and MongoDB ( MDB ), which have all part of the AI ​​trade throughout the past year, failed to impress investors.
“This week’s off-cycle report highlights fundamental pressures and guidance for pricing conditions,” Citi US equity strategist Scott Chronert wrote in a note, broadly reflecting market action over the past week. “Pockets of the market may rely on a consistent beat and dynamic uplift throughout the year to justify current prices.”
Enthusiasm for AI, or the lack thereof, will be a trend to watch in the weeks leading up to Apple’s Worldwide Developers Conference on June 10.
Bad width
The so-called “broadening” of the stock market rally, where various sectors rise, is a feature of the stock market surge at the end of 2023 and, most recently, in March 2024. But it has not been shown in the latest market climb to record highs.
Bank of America investment strategist Michael Hartnett noted the breadth was at its worst level since 2009 when he assessed how close the equity-weighted S&P 500 (^SPXEW) is to the market-weighted S&P 500. 500 rose more than 4%, while the same-weighted index rose less than 2%.
Head of research at Ned Davis, US strategist Ed Clissold, wrote in a note to clients that “some broad market indicators” have yet to follow a new rally higher, which could be a problem if the narrow leadership of megacap technology over the past month falls. . This sometimes happens during market rally peaks, per Clissold.
“The bottom line is that while some deviations have been developing all year, most have only shown up in the last few weeks,” Clissold wrote. “If the market is in the process of topping up, it should be in the initial phase. Not enough evidence has changed to warrant setting an overweight recommendation for US stocks.”
There is potential upside for lack of width as well. Bespoke Investment Group highlights that current low depth readings are often bullish for the market. With breadth at current levels, stocks typically outperform other broad readings over three months, six months, and a full year.
The key, of course, remains whether the broadening out actually takes place.
“If we don’t get any more participation, then we could retest the (S&P 500) low that we saw on April 19,” Sam Stovall, investment strategist at CFRA Research, told Yahoo Finance.
Weekly calendar
Monday
Economic data: US S&P Global Manufacturing, end of May (50.9 previously); Monthly 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 vacancies, April (8.3 million expected, 8.48 million previously); Factory orders, April (0.7% expected, 1.6% previously); Durable goods orders, end of April (expected 0.7%, previously 0.7%)
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 personal payrolls, May (+174,000 expected, +192,000 previous); S&P global US Services PMI, final May (54.8 previously), S&P Global US composite PMI, final May (54.5 previously); ISM services index, May (50.9 expected, 49.4 previously); ISM service price paid, May (59.2)
earnings: Campbell’s (CPB), ChargePoint (CHPT), Dollar Tree (DLTR), Five Below (LIMA) Lululemon (LULU), Victoria’s Secret (VSCO)
Thursday
Economic data: Challenger job cuts, year-over-year, May (-3.3% previously); Unit labor costs, first quarter (+4.7 expected, +4.7% previously); Nonfarm productivity, first quarter (+0.3% expected, +0.3% previously); Initial jobless 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: Nonfarm payrolls, May (+185,000 expected, +175,000 previously); Unemployment rate, May (3.9% expected, 3.9% previously); Average hourly earnings, monthly, May (+0.3% expected, +0.2% previously); Average hourly earnings, year-over-year, May (+3.9% expected, +3.9% previously); Average weekly working hours, May (34.3 expected, 34.3 previously); Labor force participation rate, May (62.7% previously)
earnings: No earnings recorded.
Josh Schafer is a Yahoo Finance reporter. Follow him in X @_joshschafer.
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