Wall Street awaits payrolls data as rate hike risks return to focus

Investors are preparing for a crucial week as fresh labor market data and earnings from Broadcom could influence the direction of US stocks.

Market participants are weighing whether persistent inflation and the possibility of higher interest rates could threaten the strong rally in equities.

US stock indexes continued their upward momentum this week.

The benchmark S&P 500 gained more than 10% this year, supported largely by technology shares and optimism surrounding artificial intelligence-related growth.

Technology stocks have led the market recovery after suffering a significant pullback in March.

Strong earnings expectations tied to the AI boom have encouraged investors to return to the sector.

Markets have also received support from hopes that the Iran war could eventually come to an end.

However, the conflict, which has now lasted three months, remains a source of uncertainty.

Asset prices could remain sensitive to any developments in the region.

Employment report in focus

Investor attention will be firmly on the monthly employment report due on June 5.

The report arrives as concerns grow that inflation may remain elevated for longer than expected.

Higher inflation could force the Federal Reserve to consider interest rate hikes, a scenario that would likely pressure equities.

Data released on Thursday showed the Personal Consumption Expenditures (PCE) Price Index rose 3.8% in the 12 months through April.

The increase was the largest since May 2023 and was driven by higher energy prices linked to the Iran war.

The Federal Reserve uses PCE inflation data to monitor progress toward its 2% inflation target.

Broadcom earnings could test AI trade

Broadcom's quarterly results, scheduled for Wednesday, are expected to attract significant market attention.

The semiconductor company is the sixth-largest US firm by market capitalization.

Its earnings report could influence sentiment toward the broader AI-driven rally that has fueled semiconductor stocks.

Chipmakers have benefited from expectations of rising demand linked to large-scale AI infrastructure spending.

Since the market's March 30 low, the Philadelphia Semiconductor Index has surged about 80%.

During the same period, Broadcom shares have gained roughly 45%, while the S&P 500 has advanced 19%.

Investors will closely watch Broadcom's results for signs that the strong growth outlook for the sector remains intact.

Bond yields remain a key risk

Next week will also bring reports on manufacturing and services sector activity. Another inflation report due the following week will be among the final pieces of economic data before Federal Reserve Chair Kevin Warsh's first policy meeting on June 16-17.

Market pricing currently suggests a greater likelihood of a rate hike this year than a rate cut.

This remains the case despite President Donald Trump's repeated calls for easier monetary policy.

The prospect of higher rates, combined with rising inflation, has contributed to recent increases in Treasury yields.

Although the benchmark 10-year Treasury yield has eased somewhat and is currently around 4.46%, Carlson said rising yields remain a significant risk for stocks.

Higher yields can increase borrowing costs for consumers and businesses.

They can also make bonds more attractive relative to equities.