Stock markets struggled to end an otherwise positive month of May as investors appeared to pause enthusiasm for AI and the prospect of the Federal Reserve keeping interest rates higher for longer remained high on their minds.
Over the past five trading sessions, the Nasdaq Composite (^IXIC) is essentially flat and the S&P 500 (^GSPC) is up less than 0.2%. The Dow Jones Industrial Average (^DJI) fell almost 1%.
The coming week will focus on labor market updates to kick off a new trading month. The May jobs report will be released on Friday morning, with updates on vacancies and private wage growth also planned. Figures on activity in the services and manufacturing sectors are also expected.
In business 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 with a moderately promising update on the inflation front. Analysis of the Personal Consumption Expenditures (PCE) index in April showed prices rose 0.2% from the previous month, the lowest monthly increase in 2024.
While economists described this as “better news on inflation than we saw in the first quarter,” it did little to change investors’ expectations for rate cuts. Investors had priced in fewer than two rate cuts this year, little changed from the previous week, according to Bloomberg data.
This follows recent rhetoric from federal officials that “greater confidence” in the decline in inflation will be needed before initiating rate cuts.
Outlook on the labor market
A slew of labor market data will test investor sentiment on the Fed’s stance in the coming week.
The May jobs report will be released Friday and economists expect it will tell a similar story to last month’s report, with the labor market cooling from a hot start through 2024 but not entering an outright slowdown.
The report is expected to show that 185,000 nonfarm payroll jobs were added to the U.S. economy last month, with the unemployment rate holding steady at 3.9%, according to Bloomberg data. In April, the US economy added 175,000 jobs, while the unemployment rate rose slightly to 3.9%.
Read more: What influence does the labor market have on inflation?
Wells Fargo’s team of economists led by Jay Bryson wrote in a weekly note that strong job growth and upside inflation surprises at the start of the year led the Fed to “delay its rate cut plans until at least the second half of the year ‘.
But Wells Fargo expects the labor market to cool further from here on out
“Job growth came back to earth at the start of the second quarter. We believe the pace of job growth will become more similar to April’s pace in the coming months,” Bryson’s team wrote.
A pause in AI euphoria
Nvidia’s (NVDA) huge gains helped lift the Nasdaq Composite, which posted its best May since 2003. But that mood soured last week as gains from Dell (DELL), Salesforce (CRM) and MongoDB (MDB), all of which were part of the AI business over the past year, failed to impress investors.
“Off-cycle reports this week highlight the pressure being placed on fundamentals and guidance to deliver given valuation conditions,” Citi U.S. equity strategist Scott Chronert wrote in a note, speaking broadly about the market action of the past week. “The market segments may depend on a consistent path and increase momentum throughout the year to justify current prices.”
Enthusiasm for AI, or lack thereof, will be a trend to watch in the coming weeks at Apple’s Worldwide Developers Conference on June 10.
Bad width
The so-called ‘broadening’ of the stock market rally, in which a wide variety of sectors are rising, was a feature of the stock market gains in late 2023 and, most recently, in March 2024. But it has not been visible in recent years . the market’s latest climb to record highs.
Bank of America investment strategist Michael Hartnett noted that breadth is at its worst level since 2009 when evaluating how closely the equal-weighted S&P 500 (^SPXEW) moves against the market-cap-weighted S&P 500. Since early May, the S&P 500 is up more than 4%, while the equal-weighted index is up less than 2%.
Ned Davis’ chief research strategist Ed Clissold wrote in a note to clients that “several market breadth indicators” have not tracked the recent rise, which could be a concern if limited megacap tech leadership falls away over the past month. . According to Clissold, this sometimes happens when market rallies reach their peak.
“The bottom line is that while some disagreements have developed throughout the year, most have only occurred in the past few weeks,” Clissold wrote. “If the market is in a topping process, it is likely in the early stages. Not enough evidence has changed to warrant an adjustment to our overweight recommendation on US equities.”
There’s also a potential upside to the lack of width. Bespoke Investment Group highlighted that the current low latitude is actually often bullish for the market. With breadth at current levels, stocks tend to outperform any other breadth measure over the next three months, six months and the entire year.
The key, of course, remains whether there is actually a broadening.
“If we don’t get a broadening of participation again, we can test the new version again [S&P 500] low we saw on April 19,” Sam Stovall, chief investment strategist at CFRA Research, told Yahoo Finance.
Weekly calendar
Monday
Economic data: S&P Global US manufacturing, May final (50.9 earlier); Construction spending month-on-month, April (0.2% expected, -0.2% prior); ISM Manufacturing, May (49.7 expected, 49.2 prior); ISM prices paid, May (60.9 expected);
Income: Gitlab (GTLB)
Tuesday:
Economic data: Vacancies, April (8.3 million expected, 8.48 million previously); Factory orders, April (0.7% expected, 1.6% earlier); Durable goods orders, April final (0.7% expected, 0.7% earlier)
Income: Bath & Body Works (BBWI), CrowdStrike (CRWD), Hewlett Packard Enterprise (HPE), PVH (PVH), Stitch Fix (SFIX)
Wednesday
Economic data: MBA mortgage applications, week ending May 31 (-5.7%); ADP private payrolls, May (+174,000 expected, +192,000 earlier); S&P Global US Services PMI, May final (54.8 prior), S&P Global US composite PMI, May final (54.5 prior); ISM services index, May (50.9 expected, 49.4 earlier); Paid ISM services prices, May (59.2)
Income: Campbell’s (CPB), ChargePoint (CHPT), Dollar Tree (DLTR), Five Below (FIVE) Lululemon (LULU), Victoria’s Secret (VSCO)
Thursday
Economic data: Challenger job cuts, year-on-year, May (-3.3% prior); Unit labor costs, first quarter (+4.7 expected, +4.7% prior); Non-farm productivity, first quarter (+0.3% expected, +0.3% earlier); Initial unemployment claims, week ending June 1 (219,000 previously)
Income: 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 prior); Unemployment rate, May (3.9% expected, 3.9% earlier); Average hourly wage, month-on-month, May (+0.3% expected, +0.2% earlier); Average hourly earnings, year-over-year, May (+3.9% expected, +3.9% prior); Average hours worked per week, May (34.3 expected, 34.3 previously); Labor participation rate, May (previously 62.7%)
Income: No significant merits.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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