News of moderate improvement of the labor market pushed U.S. equity indexes closer to new highs on Friday. The S&P 500 closed at 4,229.87, up 0.88% for the day, while the Dow Jones was at 34,756.39, up 0.52% for the day. Both indexes were trading near all-time highs. The small cap-heavy Russell 2000 was at 2,286.42, up 0.31% for the day. But the bigger winner was the tech-heavy Nasdaq Composite, which was at 13,814.49, up 1.47% for the day.
Total nonfarm payroll employment rose by a moderate number of 559,000 in May, according to a report published by the Bureau of Labor Statistics. That's twice the revised gains seen in April, but half as much as the March gains and below analysts' estimate of 650,000.
As expected, the sectors that experienced most of the job gains are those that are benefiting from the opening of the economy as the pandemic eases, like leisure and hospitality (292,000), public (103,000) and private education (41,000) and health care and social assistance (46,000). But the pace of hiring in these sectors has been slow due to government subsidies that may discourage some workers from finding a job, leaving overall employment about 7.6 million jobs below its peak in February 2020.
Still, moderate job growth is bullish for equities. It boosts household income and spending, which eventually translates to the higher top and corporate bottom lines and higher valuations.
Meanwhile, moderate job growth eases inflation fears, helping push long-term interest rates lower and equity valuations higher, especially in the higher-risk sectors like technology.
What's next for equity prices in this case? Will Wall Street continue to reach new highs, or is it prime for a correction? It depends mainly on how a couple of inflation numbers will come out at the end of the week.
On Thursday, May inflation was released, with the consensus estimate standing at 4.7%. That's up from 4.2% in April and 2.6% in March.
Then there is the inflation expectations component of the June University of Michigan consumer sentiment scheduled for release on Friday. The May numbers indicated that inflation expectations for the year ahead are running high among consumers (4.6% versus 3.4%) for the next year and the next five years (3% versus 2.7%).
While it's unclear how these numbers will come out, one thing is clear: any upside surprise could take Wall Street for a rough ride.