U.S. stock markets resume trading Monday after the Juneteenth holiday, with the S&P 500 and Nasdaq Composite hovering near record levels. The rally, fueled by artificial intelligence leaders, faces a critical test this week as investors await the May Personal Consumption Expenditures (PCE) inflation report on Thursday and Micron Technology's earnings on Wednesday. Both events have the potential to directly influence Federal Reserve rate expectations and the sustainability of the AI-driven market surge.
Last week, the S&P 500 rose 0.93%, the Nasdaq added 2.43%, and the Dow gained 0.71%. The gains were driven by a strong rebound in technology and semiconductor stocks, particularly after the Philadelphia semiconductor index surged 6.4% on Thursday. Intel jumped 10.6% following news of a potential partnership with Apple for U.S. chip design and manufacturing. The AI trade remains a dominant force, with Micron stock up 298% in 2024, as investors look to the memory-chip maker's results as a barometer for AI demand.
The May PCE price index, the Fed's preferred inflation gauge, is the week's most important macroeconomic release. In April, the PCE price index rose 3.8% year-over-year, while core PCE, which excludes food and energy, climbed 3.3%. A hotter-than-expected reading could reinforce expectations that the Fed will maintain higher rates for longer, potentially dampening the rally. The central bank held its target rate at 3.50%-3.75% at its June meeting and reiterated that inflation remains elevated, signaling that rate cuts are still some time away.
Micron's earnings, due on Wednesday, will be closely watched as a test of AI demand. The company's high-bandwidth memory is integral to Nvidia-based systems used in AI applications. Analysts expect strong results, but any disappointment could shake investor confidence in the AI trade. Andy Pratt, director of investment strategy at Burney Company, noted that the AI trade still has "a lot of juice," while Steve Kolano, chief investment officer at Integrated Partners, called it a "classic positive feedback loop."
Beyond the data and earnings, market dynamics are also in focus. Scott Rubner, managing director at Citadel Securities, highlighted that the end of June is "one of the most technically important periods of the year," citing retail trading, index reshuffling, and pension fund adjustments. Options expirations could amplify market moves as large positions roll off or are rebuilt. Additionally, labor market conditions remain supportive for bulls, with initial jobless claims falling by 4,000 to 226,000 for the week ended June 13, suggesting a stable but not overheating job market.
However, risks persist. Escalating tensions near the Strait of Hormuz, following reports of U.S.-Iran talks, could drive oil prices higher, adding to inflationary pressures. While U.S. officials denied claims that the strait was closed, the situation remains volatile. A hotter PCE print or a disappointing Micron report could expose the recent rally as a short squeeze rather than a sustainable advance. Conversely, softer inflation and strong Micron results could propel stocks higher into the end of the quarter.
As the last full week of June unfolds, the market is picking its spots. AI, chips, and a handful of large-cap growth stocks continue to lead, while policy uncertainties and oil risks linger. The upcoming data and earnings will determine whether the rally has further room to run or if the margin for error has narrowed too much.
