By Martin Baccardax

Stocks keep powering ahead in one of the more impressive rallies of the past two decades, taking the S&P 500 within touching distance of its all-time high.

And that's despite tariff chaos to the bond market's phobia about the rocketing federal deficit to the war in Ukraine.

The resilience of Wall Street has been nothing short of remarkable, considering today's headlines would ordinarily derail most comebacks.

The S&P 500's 6.3% advance last month, for example, was its best May performance since 1990 -- powered in part by huge returns for megacap tech stocks, according to data from Bank of America.

After a lot of hand-wringing in the past seven weeks, the benchmark is in positive territory for the year. It also has outperformed its global peers, not to mention gold, cash, and corporate bonds.

Outside of Covid-month distortions, the S&P 500's 28-day rally, which peaked on May 19 at nearly 20%, was the fastest since 2009.

And yet, all this optimism could be tested by a sudden -- and unexpected -- hallowing out of the labor market, which remains a linchpin for the key driver for growth -- consumer spending.

Economists are bracing for the bad jobs numbers to come as early as Friday, when the Labor Department puts out its monthly report.

Samuel Tombs, of Pantheon Macroeconomics, is looking for a headline gain of around 125,000 new jobs, which matches Wall Street's forecast and would mark the slowest growth rate in nearly a year outside of October's reading. Those numbers were dragged down by the impact of two hurricanes, Leslie and Milton, as well as strikes by Boeing employees and dockworkers at ports nationwide.

"May's employment report likely will bring clear signs that growth in labor demand is slowing, putting renewed pressure on the (Federal Reserve) to ease policy later this year even before it is sure the new tariffs will boost inflation only temporarily," said Tombs, Pantheon's chief U.S. economist.

Torsten Sløk, chief economist at Apollo Global Management, thinks the pace of job growth will slow to 120,000 a month in the current quarter, with tallies of 64,000 and 66,000 over the back half of the year.

The St. Louis Fed puts the so-called "break-even" rate for job growth at about 153,000. A series of reading below that figure could raise headline unemployment, which sits at 4.2%.

The CME Group's FedWatch tool still projects the Fed's first rate cut this year will come in September, but a weak May payroll reading could prompt the central bank to change its quarterly growth and inflation forecasts, which will come with its next rate decision on June 18.

And faster-than-expected rate cuts tied to lagging growth, or a jump in headline unemployment, could trigger a market reaction that is quite different to cuts linked to rising inflation pressures.

The S&P 500's May rally, while lead by gains in tech, was also paired with investor rotations into defensive sectors such as consumer staples, utilities, and healthcare.

That suggests the market could be moving toward safter stocks heading into a riskier time tied to the expiration of President Donald Trump's "Liberation Day" tariff pause on July 9, and the August deadline set for China and the U.S. to agree on trade terms.

A final ruling from the U.S. Court of Appeals for the Federal Circuit on the legality of Trump's so-called reciprocal tariffs is coming.

"Stocks are pricing in a lot of good news, and bonds face some significant headwinds," said Jeffery Buchbinder, chief equity strategist for LPL Financial.

"We don't believe now is the time for investors to increase portfolio risk levels and continue to wait for a pullback before considering adding equities," he added.

Write to Martin Baccardax at martin.baccardax@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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June 03, 2025 12:57 ET (16:57 GMT)

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