May jobs report, tariffs will rise to top of mind next week after comeback rally

The stock market's recent rally, with the S&P 500 up nearly 6% and the Nasdaq Composite climbing almost 9% in May, hinges on upcoming employment data, particularly Friday's jobs report where economists anticipate 125,000 jobs added. While strong consumer spending has supported the market, concerns remain about elevated valuations (S&P 500 at a forward P/E of 21) and renewed trade tensions after President Trump revived trade war fears with China; a weaker-than-expected jobs report could spook investors, while in-line data may sustain the rally.

Analysis

The U.S. stock market has demonstrated significant resilience, evidenced by the S&P 500's nearly 6% rally and the Nasdaq Composite's almost 9% climb in May, largely fueled by strong consumer spending and a surge in technology stocks, particularly AI-related names like Nvidia, which saw its shares rise over 23% in May following robust earnings. However, this rally faces considerable headwinds. The S&P 500's forward price-to-earnings multiple stands at approximately 21, a level that previously raised concerns about overvaluation and potential pullbacks. Venu Krishna from Barclays highlights that despite moderated recession risks, equities may be exhibiting complacency, citing downward revisions in EPS estimates, high interest rates, rising jobless claims, and persistent tariff uncertainties. The revival of U.S.-China trade tensions, with President Trump indicating China reneged on a preliminary agreement, further clouds the outlook, challenging the market's recent optimism. The upcoming May jobs report is a critical inflection point; economists polled by FactSet anticipate a slowdown to 125,000 jobs added, down from 177,000 in April. While the labor market remains tight, as noted by Ameriprise Financial's Anthony Saglimbene, with employers hesitant to reduce staff, early signs of tariff impact are emerging. EY-Parthenon's Gregory Daco points to a fall in durable goods spending and a rise in the personal savings rate, suggesting households may become more cautious due to slowing employment growth, moderating income gains, and the building inflationary effects of tariffs. The legal battles over tariff implementation add another layer of uncertainty, potentially leading to further trade aggression.

Key Decisions for Investors

• Closely monitor the upcoming May employment report, as a significant deviation from the expected 125,000 jobs added could materially impact market sentiment and price action, given its direct link to consumer spending resilience.
• Exercise caution regarding current equity valuations, particularly the S&P 500's forward P/E of 21, considering the backdrop of potential EPS estimate downgrades, persistent high interest rates, and unresolved trade tensions.
• Stay vigilant on developments in U.S.-China trade relations and tariff policies, as renewed escalations or unexpected resolutions could introduce significant market volatility, challenging assumptions like the 'Trump Always Chickens Out' (TACO) trade thesis.
• Evaluate exposure to technology and AI-related stocks, acknowledging their recent strong performance exemplified by Nvidia, but also be prepared for broader market sensitivity to macroeconomic shifts and potential headwinds from consumer caution or tariff-induced inflation.