Stocks stumbled to end a positive month of May as investors appeared to temporarily tap into AI enthusiasm and the prospect of the Fed keeping interest rates higher for longer remained top of mind.
Over the past five trading sessions, the Nasdaq Composite (^IXIC) has been close to flat, and the S&P 500 (^GSPC) has risen less than 0.2%. The Dow Jones Industrial Average (^DJI) fell nearly 1%.
Next week, updates in the labor market will be at the forefront to start a new month of trading. The May jobs report is scheduled to be released on Friday morning, while updates on job openings and private wage growth will also be released on the schedule. Readings on activity in the services and manufacturing sectors are also expected.
In corporate news, quarterly results for CrowdStrike (CRWD), Lululemon (LULU), and Dollar Tree (DLTR) highlight a quiet week for corporate earnings releases.
A step in the right direction
May ended with a rather promising update on the inflation front. The April reading of the personal consumption expenditures index showed prices rising 0.2% from the previous month, the lowest monthly increase of 2024.
While economists described this news as “better news on inflation than we saw in the first quarter,” it did little to change investors’ expectations of interest rate cuts. Investors were pricing in less than two interest rate cuts this year, according to Bloomberg data, little changed from the previous week.
This follows recent comments by federal officials that “greater confidence” in falling inflation is needed before starting to cut interest rates.
Future outlook for the labor market
A series of labor market data will test investor sentiment on the Fed’s path next week.
The May jobs report is scheduled to be released on Friday, and economists expect it to tell a similar story to last month’s report with the labor market slowing from its hot start through 2024 but without entering a full downturn.
The report is expected to show 185,000 jobs were added to the US economy last month, with the unemployment rate holding steady at 3.9%, according to data from Bloomberg. In April, the US economy added 175,000 jobs while the unemployment rate rose slightly to 3.9%.
Read more: How does the labor market affect inflation?
Strong job growth and bullish inflation surprises at the start of the year prompted the Fed to “suspend its plans to cut interest rates until at least the second half of the year,” Wells Fargo’s team of economists led by Jay Bryson wrote in a weekly note.
But Wells Fargo expects the job market to continue to slow going forward
“Job growth has come back down to earth to start the second quarter,” Bryson’s team wrote. “We believe the pace of job growth over the next few months will look more like April’s pace.”
Pause in the euphoria of artificial intelligence
Nvidia’s (NVDA) massive earnings helped spark a rally in the Nasdaq Composite, which had its best May performance since 2003. But that mood soured over the past week as earnings from Dell (DELL), Salesforce (CRM), and MongoDB (MDB) came in. , which have all been part of the AI trade at times throughout the past year, have failed to impress investors.
“This week’s off-session reports highlight the pressure being placed on fundamentals and guidance to execute given valuation conditions,” Scott Krohnert, US-based equity strategist at Citi, wrote in a note, speaking broadly about the market action over the past week. “Pockets of the market may rely on a steady rhythm and high dynamism throughout the year to justify current prices.”
Enthusiasm for AI, or lack thereof, will be a trend to watch over the next two weeks leading up to Apple’s Worldwide Developers Conference on June 10.
Bad breadth
So-called “breadth” of a stock market rally, in which a wide range of sectors rise, has been a feature of the stock market rallies in late 2023, and more recently in March 2024. But that is not on display in 2024. The most recent market rally to record highs .
Michael Hartnett, investment strategist at Bank of America, noted that breadth is at its worst levels since 2009 when assessing how closely the S&P 500 Index (^SPXEW) moves with the market-cap S&P 500 Index. Since the beginning of May, the S&P 500 has risen more than 4%, while the equal-weighted index has risen less than 2%.
Ed Clissold, chief research strategist at US Ned Davis, wrote in a note to clients that “several market breadth indicators” have not followed the recent rally higher, which could be a point of concern if the tight lead from Megacap Tech over the past month abates. This sometimes happens when market rallies peak, according to Clissold.
“The bottom line is that while some differences have been developing throughout the year, most have only emerged in recent weeks,” Clissold wrote. “If the market is at a peak, it is likely in the early stages. Not enough evidence has changed to justify adjusting our overweight recommendation for US stocks.”
There’s a potential upside to the lack of breadth, too. Bespoke Investment Group highlighted that the current low range reading is often bullish for the market. With breadth at its current levels, stocks will typically perform better than any other breadth reading over the next three months, six months, and the full year.
The key, of course, remains whether the expansion will actually happen.
“If we cannot expand participation again, we may retest,” he added [S&P 500] “We saw the low on April 19,” Sam Stovall, chief investment strategist at CFRA Research, told Yahoo Finance.
Weekly calendar
Monday
Economic data: S&P Global US Manufacturing Index, last May (previously 50.9); Construction Spending MoM, April (0.2% expected, -0.2% previously); ISM Manufacturing, May (49.7 expected, 49.2 previous); ISM Paid Prices, May (expected 60.9);
Earnings: Getlab (GTLB)
Tuesday:
Economic data: Job openings, April (8.3 million expected, 8.48 million previous); Factory Orders, April (0.7% expected, 1.6% previous); Durable Goods Orders, Final, April (0.7% expected, 0.7% previous)
Earnings: 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 Sector Payrolls, 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 previous); Paid ISM services prices for May (59.2)
Earnings: Campbell’s (CPB), Charge Point (CHPT), Dollar Tree (DLTR), Five Below (FIVE), Lululemon (LULU), Victoria’s Secret (VSCO)
Thursday
Economic data: Challenger job cuts, year-over-year, in May (previously -3.3%); Unit labor costs, Q1 (+4.7 expected, +4.7% previously); Nonfarm Productivity, Q1 (+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), JM Smucker Company (SJM), Vail Resorts (MTN)
Friday
Economic calendar: Nonfarm Payrolls Report, May (+185,000 expected, +175,000 previously); Unemployment Rate, May (3.9% expected, 3.9% previously); Average hourly earnings, month-on-month, May (+0.3% expected, +0.2% previously); Average hourly earnings, year-over-year, May (+3.9% expected, +3.9% previously); Average weekly hours worked, May (34.3 expected, 34.3 previous); Labor force participation rate, May (previously 62.7%)
Earnings: No noticeable profits.
Josh Schaeffer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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