Stocks could build on gains in the coming week as investors await Friday’s jobs report

Stocks could carry the momentum from this latest rally into next week as investors look ahead to Friday’s jobs report.

All three major indices scored big gains in the past week, each up more than 6%. Both the S&P 500 and the Nasdaq Composite broke seven-week losing streaks, while the Dow Jones Industrial Average had lost eight weeks.

“I think this is the start of that much-anticipated aid rally,” said Sam Stovall, chief investment strategist at CFRA Research.

In the next four-day week, there’s only a handful of earnings, with reports from Salesforce.com, Hewlett Packard Enterprise and online pet retailer Chewy.

Friday’s May employment report is key data on a calendar that also includes ISM production, job openings, monthly auto sales and the Federal Reserve’s beige book, all on Wednesday.

“I think the 325,000 consensus [nonfarm payrolls] number, we could easily beat. But it’s just math,” said Alex Chaloff, co-head of investment strategies at Bernstein Private Wealth Management. He noted that there could be positive revisions to last month’s data, as noted in recent reports.

Economists have expected the pace of job creation to slow from 428,000 jobs in April. “You can’t keep growing at that pace, especially with Covid spiking. That’s a bit of air coverage for the 325,000 number,” Chaloff said.

A recovery after the Fed minutes

Share prices were shaky last week but soared sharply higher, especially after the Federal Reserve released minutes from its last meeting.

The S&P 500 gained 6.5% to 4,158, the best week since November 2020. The Dow rose 6.2%, while the Nasdaq was the outperformer, up 6.8%.

“It was waiting for some kind of catalyst, and I think it got it from the Fed. Not only was it not more aggressive, but it said it would accelerate rate tightening,” Stovall said.

“So I think a lot of investors thought they were leading the cycle of rate hikes, meaning they could stop sometime in the third quarter,” he added. “I think that was what drove the rally. The market had just been oversold from a broad and sentiment perspective and was ripe for some kind of good news and the Fed delivered it.”

Chaloff said the market expects the Federal Reserve to raise interest rates by 50 basis points, or half a percentage point, at each of its next two meetings. That could mean choppy trading during that period, but he added that the market should see strong gains the first time the Fed returns to a quarter-point gain.

“I think this is the start of an uptick, but we have a Fed meeting in June. We have a Fed meeting in July,” he said. “It will impact the markets. It will itch if the Fed recognizes they have work to do. We’re not saying this is the floor… But it’s great to see the markets respond appropriately to solid macro data .”

For now, though, shares could go even higher. “I’d say it hasn’t been a really crazy volume week, so it’s fun, it’s fun, it’s great to go into the long weekend and kick off the summer with some power, but the breadth and depth hasn’t been there” said Chaloff. “I want to say ‘Okay, everyone, we’re not dancing. We’re not there yet’… We think we’ve had the worst, but not everything.”

Looking for catalytic converters

Chaloff said he will look to see if hedge funds, which had emptied their positions, start buying in the coming week, a potential positive catalyst for the market.

“Weeks like this help build themselves, so while it’s not a breakthrough week, it’s an important week,” he said.

Any developments over the weekend can be important, but weekends are also a time for investors to reflect. “If you’re having a really bad week and people can’t touch their money for 48 or 72 hours, you’re going to have a really bad start to the week,” Chaloff said.

Bond yields were lower and more stable over the past week. The 10-year yield stood at about 2.74% on Friday.

“I think it’s positive for stocks and of course bonds,” Chaloff said. “After seven or eight weeks of outflows, you start to have inflows in all kinds of fixed income instruments, and that’s limiting returns.”

This is also positive for growth companies that have been hit hardest by rising interest rates.

The markets close the month of May on Tuesday. On Friday, the Dow and S&P 500 were both flat for the month, but negative for the Nasdaq.

Stovall said June is generally positive for the S&P 500. “June generally has few swoons. Performance is a bit mediocre,” he said.

Week ahead calendar

Monday

Memorial Day Holiday

Markets closed

Tuesday

Income: Salesforce.com, HP, Ambarella, Victoria’s Secret, ChargePoint

9:00 am S&P/Case-Shiller house prices

9.00 am FHFA house prices

9:45 a.m. Chicago PMI

10:00 am Consumer Confidence

Wednesday

Income: Chewy, Hewlett Packard Enterprises, Michael Kors, Capri Holdings, PVH, Pure Storage

Monthly car sales

9:45 AM Production PMI

10:00 am ISM production

10:00 a.m. Construction Expenses

10:00 a.m. JOLTS

14:00 Beige Book

Thursday

Income: Broadcom, Ciena, Hormel Foods, Asana, CrowdStrike, PagerDuty, Cooper Cos, Okta

8:15 a.m. ADP payroll data

8:30am Unemployed Claims

8:30 am Productivity and Cost

10:00am Factory Orders

Friday

8:30 am Employment

9.45 am Services PMI

10:00 am ISM services

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