U.S. equity markets have kept climbing as investors focus on fresh labor market data and corporate results that could clarify whether persistent inflation and higher borrowing costs threaten the market's advance. The S&P 500 notched its ninth consecutive weekly rise and is more than 10% higher year to date, while the Nasdaq Composite has gained about 16% so far this year. Technology names have been at the forefront of the rebound, lifting returns with earnings outlooks tied to the AI boom after a sharp correction in March.
Market participants will zero in on next week's monthly employment report, due on June 5, to judge whether inflation staying elevated will force the Federal Reserve to move rates higher - a development that could weigh on equities. At the same time, Broadcom's quarterly results will provide a major test of investor appetite for semiconductor and AI-related stocks.
Recent market backdrop
Technology-led gains have powered the resurgent market. The sector's recovery followed a sizeable pullback earlier in the year that, according to market observers, left several large-cap technology stocks trading at valuations that attracted buyers once earnings growth remained robust. "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."
Geopolitical developments have also played a part. Investors have been encouraged recently by hopes for an end to the Iran war, which has now extended into a third month. Asset prices, however, remain vulnerable to shifts in that conflict as markets approach the jobs report.
Inflation readings and the Fed's outlook
Data released this week showed the Personal Consumption Expenditures Price Index rose 3.8% in the 12 months through April, the largest annual increase since May 2023. The jump was driven in part by higher energy prices, a trend linked to the Iran war. The PCE measures are the Federal Reserve's preferred inflation gauge and are assessed against the central bank's 2% target. If employment data is strong while inflation remains elevated, it could reshape expectations about future Fed policy.
"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. Conversely, a weaker-than-expected jobs print might ease concerns that the Fed will have to tighten further, she added.
What the payrolls report may show
According to a Reuters poll conducted as of Friday, May's payrolls report is forecast to show the unemployment rate at 4.3% and payrolls rising by 85,000 jobs. Market watchers warn that a surprise jump in hiring - for example, an increase of more than 150,000 jobs - could be seen as evidence of an overheating economy and push U.S. Treasury yields higher, which would be unwelcome for equities.
"We have enough indications that economic activity remains solid," said Angelo Kourkafas, senior global investment strategist at Edward Jones, citing models such as the Atlanta Federal Reserve's GDPNow, which is tracking 3.8% second-quarter growth following strong corporate profits in the first quarter. That backdrop reduces the odds of a recessionary outcome, but it raises the question of whether the economy could be overheating.
Broadcom earnings and the semiconductor rally
Investors will be watching quarterly results from Broadcom on Wednesday. Broadcom is the sixth-largest U.S. company by market capitalization, and its performance could trigger market moves given the recent surge in chip stocks amid expectations of rising chipmaker profits tied to the AI infrastructure buildout.
Since the market low on March 30, the Philadelphia SE Semiconductor Index has climbed roughly 80%, Broadcom shares have increased more than 50%, and the S&P 500 has risen by over 19%. Those gains highlight how concentrated strength in semiconductors and large-cap technology names has driven much of the recent market advance.
Bond yields, rate expectations and risks to equities
Market pricing in futures currently points to a greater chance of a rate hike this year than a cut, despite political pressure for easier policy. Rising inflation and the prospect of additional tightening are contributing to an uptick in bond yields. The 10-year U.S. Treasury yield, after retreating from recent highs, sits around 4.45%.
Higher yields can have a negative impact on equities in two ways: by raising borrowing costs for consumers and businesses and by offering investors an alternative 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 said.
Other data and the policy calendar
In addition to the payrolls report, next week will bring releases on manufacturing and services sector activity. Another notable inflation reading the following week will arrive shortly before the Federal Reserve's June 16-17 meeting, the first under Chair Kevin Warsh. Those data points are among the last major indicators before that policy meeting.
With markets having been lifted by technology earnings optimism and geopolitical hopes, the interplay between the incoming economic data, corporate earnings - notably Broadcom's report - and the bond market will shape investor sentiment as policymakers and market participants assess whether the strength seen so far this year can be sustained.