Market watchers will focus on crucial employment data next week as they assess whether rising inflation concerns and possible interest rate increases might halt the current surge in U.S. stock markets.
The upcoming earnings announcement from Broadcom will also serve as a crucial test for the artificial intelligence trading trend that has been driving market gains. During this week, U.S. stock indices extended their upward momentum, with the S&P 500 achieving its ninth consecutive weekly increase. The benchmark index has risen over 10% this year, while the Nasdaq has surged 16%.
Technology companies have spearheaded the market recovery based on strong earnings forecasts fueled by artificial intelligence growth, following significant losses in March that affected tech and other major companies.
“That group really had a significant correction,” said Chuck Carlson, CEO at Horizon Investment Services. “What has really been a fuel for this market was investors going in looking at the values that had been restored in that group, seeing that earnings were still growing at pretty rapid rates, and going to buy them.”
Market sentiment has also improved recently due to expectations for resolution of the Iran conflict, which has continued for three months. Financial markets remain vulnerable to developments in this situation as next week approaches.
The monthly jobs data, scheduled for release on June 5, arrives amid growing investor concerns about persistent inflation and the possibility of rate increases that could negatively impact stock performance.
Thursday’s data revealed that the Personal Consumption Expenditures Price Index increased 3.8% over the 12-month period ending in April, marking the highest increase since May 2023, attributed to elevated energy costs related to the Iran conflict. The Federal Reserve uses PCE inflation measurements to guide its 2% target.
“If you were to get a hot employment report alongside still-rising inflation numbers, I think it continues to change the outlook for Fed policy,” said Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research. “If it were to be a weaker-than-expected report, then maybe it calms fears that the Fed is going to have to shift to a tightening stance.”
Forecasters anticipate May’s employment report will show a 4.3% unemployment rate and 85,000 new jobs, based on a Reuters survey conducted through Friday.
Job growth exceeding 150,000 positions could create problems for stock markets if it raises concerns about an overheated economy that also pushes Treasury yields upward, according to Angelo Kourkafas, senior global investment strategist at Edward Jones.
“We have enough indications that economic activity remains solid,” Kourkafas noted, pointing to the Atlanta Federal Reserve’s GDPNow model projecting 3.8% second-quarter growth, following exceptional first-quarter corporate earnings.
He suggested markets should focus less on recession possibilities and more on whether “we talking about a potentially overheating economy.”
Wednesday’s quarterly earnings from semiconductor company Broadcom, ranked as the sixth-largest U.S. corporation by market value, could create significant market movements. Semiconductor stocks have soared recently on expectations of increased chipmaker earnings driven by massive AI infrastructure development.
From the March 30 yearly market bottom, the Philadelphia SE Semiconductor Index has climbed approximately 80%, while Broadcom stock has gained over 50%. The S&P 500 has increased more than 19% during the same period.
Additional U.S. economic reports next week will cover manufacturing and services sector performance. Another significant inflation report the following week will provide final data before the first Fed meeting under chair leadership on June 16-17.
Futures markets suggest higher probability of rate increases this year rather than cuts, contrary to expectations for Federal Reserve policy easing.
The possibility of rate hikes combined with increasing inflation has contributed to recent bond yield increases.
While benchmark Treasury yields have retreated somewhat, with the 10-year yield near 4.45%, rising yields pose risks for stock markets, Carlson explained. Elevated bond yields typically result in higher borrowing costs for consumers and businesses while creating additional investment alternatives to stocks.
“If you saw a real spike in interest rates that was maintained … that would be the thing that I think would be most disconcerting for investors,” Carlson stated.
