NEW YORK, June 7 (Reuters) -

Investors will closely watch next week's inflation numbers

and Federal Reserve meeting for clues on whether the soft

landing hopes that drove stocks to record highs are still

justified.

This year's rally has lifted the S&P 500 up more than 12%

year-to-date, on expectations the Fed can cool inflation without

hurting growth. Yet recent economic data have sent conflicting

signals: U.S. employment numbers released Friday were far

stronger than expected, while earlier reports showed a slowdown

in manufacturing and a first-quarter growth rate revised lower.

May inflation data, due next Wednesday, must walk a

tightrope to satisfy expectations of a "Goldilocks economy":

satisfactory growth with prices under control. Later that day,

investors will look to the Fed for signals on the central bank's

rate cut plans.

"The market would like some clarity and not see the Fed have

to wait until December or January to begin cutting rates," said

Paul Christopher, head of global market strategy at the Wells

Fargo Investment Institute, adding a long period of elevated

borrowing costs could hurt the economy.

Nonfarm payrolls increased by 272,000 jobs last month, the

Labor Department's Bureau of Labor Statistics said on Friday,

exceeding 185,000 jobs forecast by economists in a Reuters poll.

After the data, futures markets showed investors trimming

expectations for rate cuts, with chances of a September cut

falling to about 55% from about 70% before the report.

Strong employment data countered earlier reports suggesting

the economy was cooling, including a June 3 release showing U.S.

manufacturing activity in May slowed for a second straight

month.

Despite the S&P 500's march to new records, some investors

worry the gains have concentrated in a few giant technology and

growth names such as Nvidia ( NVDA ), with the rest of the rest

of the market far more tepid.

U.S. stock valuations remain well above historic norms,

noted Ed Clissold, chief U.S. strategist at Ned Davis Research.

The median price to earnings ratio of the S&P 500 would need to

fall 31% to hit its long-term median, and 19% to reach its

20-year norm, he said.

"People are concerned about how far and how high this market

has risen and how narrow it has been," said Raul Diaz, senior

investment officer at Northern Trust Wealth Management.

Plenty of investors believe strong corporate results and a

relatively benign macroeconomic environment can keep supporting

stocks. First quarter earnings came in about 8.1% above analyst

expectations, according to LSEG data.

"We believe U.S. stocks are likely to remain supported by

favorable macro conditions, healthy earnings growth, AI

tailwinds, and the potential for a Fed pivot before year-end,"

wrote Solita Marcelli, chief investment officer Americas at UBS

Global Wealth Management, in a note this week.

The bank recently upgraded its year-end S&P 500 target to

5,500, up 3% from where the index trades today.

Others believe political uncertainty, not economic data,

will cause turbulence later this year. The first debate between

President Joe Biden, a Democrat, and Republican challenger and

former president Donald Trump will take place June 27, nearly

three months earlier than the Sept. 16 date suggested by the

nonpartisan Commission on Presidential Debates, which has

managed them since 1988.

That could turn the market's attention to the 2024

presidential election earlier in the year than usual, said Grace

Lee, senior portfolio manager at Columbia Threadneedle

Investments.

"The market still on the surface looks like everything is

fine, but I think there's a certain nervousness that may not

even be about the economic data," said Lee. "People want to

stick to what has been working and not go too far out on a limb

into other areas that might see political ramifications, whether

it's healthcare and drug prices or clean energy."