Wall Street is heading into a busy week. Investors will be watching how stocks react after a week of mixed signals in the market. The major stock indexes still ended the week higher. The Dow Jones Industrial Average and S&P 500 each gained about 0.5%, while the Nasdaq Composite rose 0.85% for the week.
But the weekly gains hide some weakness under the surface. Many sectors fell during the week, and several stocks made gains only to reverse lower soon after. This shows that investors are still facing a market where strong moves can lose momentum quickly, according to Investors Business Daily.
The Russell 2000 was a major weak spot. The small-cap index dropped 1.5% for the week, with almost all of the decline coming on Friday. It also fell below its 50-day moving average for the first time in about a month.
S&P 500 stocks to watch
The S&P 500's gains were helped mainly by big technology companies. Almost all of the so-called Magnificent Seven stocks rose during the week, with Microsoft leading the group. Tesla was the only exception. The broader market was not as strong as the S&P 500 suggested. The Invesco S&P 500 Equal Weight ETF, which gives similar weight to each S&P 500 company, fell 0.4% for the week and moved closer to its 21-day moving average.
Software stocks outlook
The big question for next week is whether software can keep rising. The sector has shown strong momentum, but investors will need to see whether these gains can continue instead of quickly fading, according to Investors Business Daily.
{{/usCountry}}The big question for next week is whether software can keep rising. The sector has shown strong momentum, but investors will need to see whether these gains can continue instead of quickly fading, according to Investors Business Daily.
{{/usCountry}}Also read: Is Wall Street’s calm about to end? What rising VIX means for S&P 500 stocks
Oil prices moved lower too. U.S. crude oil futures dropped 4.2% for the week to $83.40 a barrel. Treasury yields became a major market driver. The 10-year Treasury yield fell two basis points for the week to 4.72%, but jumped five basis points on Friday after Federal Reserve chief Kevin Warsh's speech at Jackson Hole.
Fed rate hike odds
Warsh's latest comments changed the Fed rate outlook. This time, his Jackson Hole speech strengthened his credibility on inflation but also increased concerns that the Fed could raise interest rates. The 30-year Treasury yield also moved higher on Friday. It ended the week at 5.21%, down seven basis points for the week but up nearly two basis points on Friday.
The two-year Treasury yield showed an even bigger move. The two-year yield, which is more closely linked to expectations for Fed policy, jumped nearly 12 basis points on Friday and for the week to 4.35%.
Markets are now pricing in a much higher chance of a Fed rate hike. The odds jumped to around 58% from about 35% on Thursday. That creates another risk for S&P 500 investors next week. Higher Treasury yields can put pressure on stock valuations, especially expensive growth and technology stocks. Investors will therefore be watching bond yields closely alongside the S&P 500.
Stock market rally
The biggest lesson for S&P 500 investors is that the market is not moving together. Some areas, especially software, are showing strong momentum, while small caps, healthcare, energy, metals and many AI hardware stocks are weakening. The overall market trend is still positive. Despite the weakness in several sectors, the major indexes remain close to their highs, and the broader stock market rally is still intact.
Also read: Why is SpaceX stock going up? AI growth, spending and starship explained
August jobs report
The key for next week is to stay selective. Instead of buying every stock that moves higher, investors should focus on companies showing strong price action, good earnings and clear buy points.
Earnings will be another major market test. Notable companies scheduled to report results include Dell Technologies, Hewlett Packard Enterprise, Snowflake, NetApp, Palo Alto Networks, Broadcom, Credo Technology and Five Below.
The August jobs report will be the week's biggest economic event. The report is due Friday and could have a major impact on expectations for the Federal Reserve's next interest-rate decision. For S&P 500 investors, the main things to watch are clear: Treasury yields after Warsh's Jackson Hole comments, the chances of a Fed rate hike, the August jobs report, upcoming earnings, and whether software can keep leading the market.
Investors should also watch whether market strength becomes broader. If more sectors and stocks start participating instead of only a small group of megacaps and software names, that would be a healthier signal for the S&P 500 rally. For now, caution is still important.
The market is near its highs, but Friday's selling showed that stocks can turn lower quickly. Investors Business Daily's overall message is to stay engaged, keep building watchlists and be ready to act rather than making aggressive new bets.