Stocks stumbled to end an otherwise positive month of May as investors appeared to press pause on AI enthusiasm and the prospect of the Federal Reserve holding interest rates higher for longer remained top of mind.
Over the past five trading sessions, the Nasdaq Composite (^IXIC) was near flat, and the S&P 500 (^GSPC) rose less than 0.2%. The Dow Jones Industrial Average (^DJI) was down nearly 1%.
In the week ahead, updates on the labor market will be front and center to start a fresh month of trading. The May jobs report is set for release on Friday morning while updates on job openings and private wage growth are also on the schedule. Readings on activity in the services and manufacturing sector are also expected.
In corporate news, quarterly results from CrowdStrike (CRWD), Lululemon (LULU), and Dollar Tree (DLTR) highlight an otherwise quiet week for company earnings releases.
A step in the right direction
The month of May ended with a moderately promising update on the inflation front. The April reading of the Personal Consumption Expenditures (PCE) index showed prices increased 0.2% from the month prior, the lowest monthly increase of 2024.
While economists described this as “better news on inflation than we saw in the first quarter,” it didn’t do much to shift investors’ interest rate cut expectations. Investors were pricing in less than two rate cuts this year, per Bloomberg data, little changed from the week prior.
This follows recent rhetoric from Federal officials that “greater confidence” will be needed in inflation’s decline before starting to cut rates.
Labor market lookahead
A slew of data on the labor market will test investor sentiment on the Fed’s path in the week ahead.
The May jobs report is set for release on Friday, and economists expect it to tell a similar story to last month’s report with the labor market cooling from its hot start to 2024 but not entering a downright slowdown.
The report is expected to show that 185,000 nonfarm payroll jobs were added to the US economy last month, with unemployment holding steady at 3.9%, according to data from Bloomberg. In April, the US economy added 175,000 jobs while the unemployment rate ticked up slightly to 3.9%.
Wells Fargo’s team of economists led by Jay Bryson wrote in a weekly note that strong job growth and upside inflation surprises to start the year led the Fed to “put its plans for rate cuts on hold until at least the second half of the year.”
But Wells Fargo expects the labor market to continue cooling from here on out
“Job growth came back down to Earth to start Q2. … We think the pace of job growth over the next few months will look more like the April pace,” Bryson’s team wrote.
A pause in AI euphoria
Nvidia’s (NVDA) blowout earnings helped spark a rise in the Nasdaq Composite had its best May since 2003. But that mood soured over the past week as earnings from Dell (DELL), Salesforce (CRM), and MongoDB (MDB), which have all been parts of the AI trade at times throughout the past year, failed to impress investors.
“Off cycle reports this week highlight the pressure put on fundamentals and guidance to deliver given the valuation circumstance,” Citi US equity strategist Scott Chronert wrote in a note, speaking broadly about the market action over the past week. “Pockets of the market may be reliant on a consistent beat and raise dynamic through the year to justify current prices.”
Enthusiasm for AI, or lack thereof, will be a trend to watch over the next couple of weeks heading into Apple’s Worldwide Developers Conference on June 10.
Bad breadth
The so-called “broadening” of the stock market rally, in which a wide variety of sectors rise, was a feature of stock market surges in late 2023 and, most recently, in March 2024. But it hasn’t been on display in the market’s latest climb to record highs.
Bank of America investment strategist Michael Hartnett noted breadth is at its worst levels since 2009 when evaluating how closely the equal-weighted S&P 500 (^SPXEW) is moving with the market-cap-weighted S&P 500. Since the start of May, the S&P 500 is up more about 4%, while the equal-weighted index is up less than 2%.
Ned Davis research chief US strategist Ed Clissold wrote in a note to clients that “several market breadth indicators” haven’t followed the recent rally higher, which could be a point of concern if the narrow leadership from megacap tech over the last month falls off. This sometimes happens when market rallies peak, per Clissold.
“The bottom line is that while some divergences have been developing all year, most only presented themselves in recent weeks,” Clissold wrote. “If the market is in a topping process, it is likely in the beginning phases. Not enough evidence has changed to warrant adjusting our overweight recommendation to U.S. stocks.”
There is a potential upside to the lack of breadth too. Bespoke Investment Group highlighted that the current low breadth reading is actually often bullish for the market. With breadth at its current levels, stocks usually perform better than with any other breadth reading over the next three months, six months, and the full year.
The key, of course, remains whether a broadening out actually taking place.
“If we don’t get a broadening of participation once again, then we could be retesting the [S&P 500] low that we saw on April 19,” Sam Stovall, CFRA Research chief investment strategist, told Yahoo Finance.
