Equities pulled back from recent highs last week, as a sharp drop in technology names weighed on the broader market. Value stocks comfortably outperformed growth stocks across the board, widening the year-to-date lead of large-cap and mid-cap value over their growth counterparts. Mid-caps proved the most resilient during the downturn, while small-caps suffered the steepest losses, with the Russell 2000 dropping nearly 3% for the week. Defying the risk-off tone, seven of eleven S&P 500 sectors actually finished higher. Energy led all sectors, boosted by a rise in crude oil prices. Defensive and cyclical sectors like Health Care, Real Estate and Financials also posted solid gains. Conversely, Information Technology was the worst performer, as the heavy-hitting AI momentum paused. International equities fell as well but managed to outpace domestic markets.
Bonds sold off as yields rose across the curve. The 2-year Treasury yield increased 19 basis points to 4.17% (up from 3.98% at the end of May), while the 10-year Treasury yield rose 10 basis points to 4.55%. This flattened the 2-10 slope from 0.47% down to 0.38%. The week’s losses added pressure to what has already been a difficult year for fixed income. The Bloomberg US Aggregate Bond Index dropped 0.54% for the week, pushing its year-to-date return back into negative territory at -0.17%. Investment-grade and high-yield corporate yields ended the week at 5.26% and 7.43%, respectively.
Last week’s U.S. economic data painted a picture of an economy that remains surprisingly resilient despite ongoing inflation concerns, fueling expectations that the Federal Reserve will maintain a restrictive policy stance for longer. The biggest release was the May employment report, which showed nonfarm payrolls increasing by 172,000 jobs, well above expectations, while the unemployment rate held steady at 4.3%. Prior months’ job gains were also revised higher, suggesting the labor market remains stronger than many economists had anticipated. Wage growth moderated somewhat, rising 3.4% year-over-year, which may ease some concerns about a wage-price inflation spiral. Job openings also delivered a massive surprise as they skyrocketed to 7.618 million for April, shattering consensus analyst forecasts of roughly 6.866 million. The U.S. services sector remained in expansion territory in May, though the pace of growth varied considerably across surveys. ISM’s Services PMI rose to 54.5, indicating solid business activity and new orders growth, while S&P Global’s Services PMI registered a more modest 50.7, suggesting that demand remains soft and expansion is occurring at a much slower pace.