Wolfe Research sees tech leading narrow market rally ahead

Investing.com -- The S&P 500 ended its streak of weekly gains last week as strong employment data raised concerns about potential Federal Reserve interest rate increases later this year, according to Wolfe Research. Rising tensions between the U.S. and Iran also weighed on markets.

Alphabet's decision to raise equity capital, along with reports that Meta may follow suit, added pressure to stocks during the week.

Wolfe Research does not view last week's decline as a trend reversal. The firm noted that U.S. markets have become more sensitive to inflation and employment data as oil prices remain elevated and a new Fed Chair leads the central bank.

The research firm expects market sentiment to improve after this week's inflation data, assuming no negative surprises. Focus is likely to shift back to artificial intelligence developments and SpaceX's planned initial public offering.

Twenty-four of the top 25 performing stocks in the S&P 500 this year are related to AI, while data center spending continues at a strong pace. Wolfe Research maintains a positive outlook on the market, with technology and semiconductor stocks as preferred sectors.

The firm sees limited potential for market leadership to broaden beyond a few areas. Consumer discretionary stocks could benefit if an agreement is reached with Iran and oil prices decline, but any sector rotation would likely be temporary.

This week's Consumer Price Index report on Tuesday and Producer Price Index data on Wednesday will be important for market direction. Wolfe Research stated that higher-than-expected inflation readings could trigger a near-term selloff in the absence of a resolution to U.S.-Iran tensions.

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