NEW YORK: Investors will turn to an important labor market update this week as they weigh whether simmering inflation and the potential for interest rate hikes could derail the rally in US stocks.
Broadcom’s results also pose a test in the coming week for the red-hot AI trade. This week, US equity indexes continued their charge higher, with the benchmark S&P 500 up more than 10 percent on the year.
Technology stocks have led a resurgent market on the back of strong profit outlooks driven by the AI boom, after tech and other influential megacap stocks were hit hard in March.
“That group really had a significant correction,” said Chuck Carlson, chief executive officer 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.”
Markets have also been buoyed in recent weeks by hopes for an end to the Iran war, which has now stretched to three months. Asset prices remain susceptible to developments in the conflict heading into this week.
The monthly employment report, due on June 5, comes as investors are increasingly worried about persistently high inflation, and the potential that this will lead to rate hikes that would be unwelcome for stocks.
Data on Thursday showed that the Personal Consumption Expenditures Price Index (PCE) rose 3.8 percent in the 12 months through April, the largest rise since May 2023, driven by higher energy prices amid the Iran war. The Federal Reserve tracks the PCE inflation measures for its 2 percent 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.”
May’s payrolls report is expected to show an unemployment rate of 4.3 percent and an increase of 96,000 jobs, according to a Reuters poll as of Thursday.
An increase of more than 150,000 jobs might be problematic for equities if it fuels fears about an “overheating” economy that also drives US Treasury yields higher, said Angelo Kourkafas, senior global investment strategist at Edward Jones. “We have enough indications that economic activity remains solid,” Kourkafas said, including the Atlanta Federal Reserve’s GDPNow model tracking to 3.8 percent second-quarter growth, following a blowout first quarter for US corporate profits.
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