Bank of America lays out the perfect scenario for stocks to rally after the May jobs report

• The stock market faces a big test this week with the release of the May jobs report on Friday. 

• BofA said the Goldilocks range for the report is 125,000-175,000 new jobs added last month. 

• Fewer than 125,000 jobs added would suggest that bad news for the economy may finally be bad news for stocks. 

The stock market faces a big test this week with the Friday release of the nonfarm payroll report for May

Estimates suggest 178,000 new jobs were added to the economy in May, which is about in line with the April jobs report.

According to a Monday note from Bank of America, the report needs to print within the “Goldilocks range” of 125,000-175,000 new jobs added in the month. If that happens, then the stock market should rally.

That’s because a reading within that range would likely give the Federal Reserve more flexibility to cut interest rates sooner rather than later. This dynamic has been in play in recent months, with weaker-than-expected economic data points being cheered by stock market investors in hopes that interest rate cuts would be imminent.

The bank also said that such a reading should result in an unchanged unemployment rate of 3.9%.

To the downside, Bank of America said a May jobs report below 125,000 would be bad news for the stock market and could lead to a sell-off.

“Bad news has been good news, but below +125K, bad news could become bad news,” Bank of America strategist Ohsung Kwon said, adding that such a reading would suggest economic growth is deteriorating.

“Sub- 125K gains in NFP could increase the risk of triggering the Sahm Rule, reviving recession fears in the market,” Kwon said.

The Sahm Rule tracks the three-month moving average of the unemployment rate and suggests a recession is imminent when the moving average rises 50 basis points.

Finally, a May jobs report to the upside of Bank of America’s Goldilocks range should also be a positive for stock prices, as it would signal stronger economic growth than expected.

Bank of America expects the May jobs report to come in at 200,000 jobs added during the month.

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