The S&P 500 Index approaches historical highs, economists warn that employment data may become a turning point

Despite the chaotic tariff situation and the soaring U.S. federal deficit causing panic in the bond market, the U.S. stock market continues to rise strongly. The S&P 500 index has surged 6.3% over the past month, marking its best performance for May since 1990, just a step away from its historical high.

According to data from Bank of America, this round of rebound is mainly attributed to the impressive performance of tech giants. After experiencing numerous concerns over the past seven weeks, the S&P 500 index has turned positive year-to-date, rising 1.74% as of Tuesday's close, rebounding 19.8% from the low in early April.

Despite the bullish market sentiment, economists warn that this optimism may face a reality check, especially from potential weakness in the labor market. Consumer spending is the core driver of U.S. economic growth, and changes in the job market directly affect consumer confidence and spending levels.

The U.S. Department of Labor will release the employment report for May this Friday. Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, expects that the U.S. will add 125,000 non-farm jobs in May, in line with Wall Street consensus, but it will also be the lowest growth level in nearly a year, except for last October (due to hurricane impacts). The employment data in October was severely affected by the shutdowns caused by hurricanes "Leslie" and "Milton," as well as strikes by Boeing (BA.US) workers and port dock workers.

Tombs noted, "The May employment report is likely to show that labor demand is slowing, which will increase the pressure on the Federal Reserve to cut interest rates this year, even if it is still uncertain whether the new round of tariffs will only bring short-term inflation."

Torsten Sløk, chief economist at Apollo Global Management, believes that the monthly job additions will slow to 120,000 this quarter, potentially dropping to 64,000 and 66,000 in the second half of the year.

According to data from the St. Louis Federal Reserve, the "break-even rate" for the job market is about 153,000. If it remains below this level for several months, the unemployment rate could rise, currently at 4.2%.

Although the CME FedWatch tool still expects the Federal Reserve to cut rates for the first time this year in September, if the May employment report is significantly weak, the central bank may lower its economic growth and inflation expectations in the rate decision on June 18.

Market reactions could also be drastically different: if the rate cut is due to weak economic growth or rising unemployment, investors may turn to defensive strategies, contrasting sharply with the current stock market rise driven by rate cut expectations due to anti-inflation measures.

In fact, the strong rise of the S&P 500 in May, although led by tech stocks, was also accompanied by a shift of funds into defensive sectors such as consumer staples, utilities, and healthcare. This indicates that investors are preparing for potential uncertain risks, such as the expiration of the Trump administration's "Liberation Day" tariff suspension measures on July 9.

Additionally, the U.S. Court of Appeals is about to make a final ruling on the legality of Trump's "reciprocal tariffs," which will also bring more uncertainty to the market LPL Financial's Chief Equity Strategist Jeffery Buchbinder stated: "The stock market has currently priced in a lot of positive news, while the bond market is facing multiple headwinds. We believe that now is not the best time to increase portfolio risk, and investors should consider adding to stocks after waiting for a market correction."