* May nonfarm payrolls report due on June 5

* Job growth of 85,000 expected as investors wary of hot

number

* Broadcom ( AVGO ) results pose test for AI trade, soaring semi

shares

By Lewis Krauskopf

NEW YORK, May 29 (Reuters) - Investors will turn to an

important labor market update next week as they weigh whether

simmering inflation and the potential for interest rate hikes

could derail the rally in U.S. stocks.

Broadcom's ( AVGO ) results also pose a test in the coming

week for the red-hot AI trade. This week, U.S. equity indexes

continued their charge higher, with the benchmark S&P 500

posting a gain for a ninth straight week. The index is up more

than 10% on the year, while the Nasdaq Composite has

climbed 16%.

Technology stocks have led a resurgent market on the back of

strong profit outlooks driven by the AI boom, after tech and

other influential megacap stocks were hit hard in March.

"That group really had a significant correction," said Chuck

Carlson, CEO at Horizon Investment Services. "What has really

been a fuel for this market was investors going in looking at

the values that had been restored in that group, seeing that

earnings were still growing at pretty rapid rates, and going to

buy them."

Markets have also been buoyed in recent weeks by hopes for an

end to the Iran war, which has now stretched to three months.

Asset prices remain susceptible to developments in the conflict

heading into next week.

JOBS REPORT TO JOLT MARKETS?

The monthly employment report, due on June 5, comes as

investors are increasingly worried about persistently high

inflation, and the potential that this will lead to rate hikes

that would be unwelcome for stocks.

Data on Thursday showed that the Personal Consumption

Expenditures Price Index rose 3.8% in the 12 months through

April, the largest rise since May 2023, driven by higher energy

prices amid the Iran war. The Federal Reserve tracks the PCE

inflation measures for its 2% target.

"If you were to get a hot employment report alongside

still-rising inflation numbers, I think it continues to change

the outlook for Fed policy," said Liz Ann Sonders, chief

investment strategist at the Schwab Center for Financial

Research. "If it were to be a weaker-than-expected report, then

maybe it calms fears that the Fed is going to have to shift to a

tightening stance."

May's payrolls report is expected to show an unemployment

rate of 4.3% and an increase of 85,000 jobs, according to a

Reuters poll as of Friday.

An increase of more than 150,000 jobs might be problematic

for equities if it fuels fears about an "overheating" economy

that also drives U.S. Treasury yields higher, said Angelo

Kourkafas, senior global investment strategist at Edward Jones.

"We have enough indications that economic activity remains

solid," Kourkafas said, including the Atlanta Federal Reserve's

GDPNow model tracking to 3.8% second-quarter growth, following a

blowout first quarter for U.S. corporate profits.

He said that suggests markets should be "less concerned

about that recessionary outcome ... but more so are we talking

about a potentially overheating economy?"

BROADCOM ON TAP, YIELDS SIMMER

Quarterly results on Wednesday from semiconductor firm Broadcom ( AVGO )

, the sixth-largest U.S. company by market

capitalization, could cause ripples on Wall Street.

Semiconductor shares skyrocketed in recent weeks over optimism

about rising chipmaker profits amid the massive AI

infrastructure buildout.

Since the March 30 market low for the year, the Philadelphia

SE Semiconductor Index has jumped about 80%, while

Broadcom ( AVGO ) shares climbed more than 50%. The S&P 500 is up more

than 19% in that time.

Other U.S. economic data next week include reports on

manufacturing and services sector activity. Another key

inflation report the following week will be among the last data

before Kevin Warsh's first Fed meeting as chair on June 16-17.

Futures pricing is indicating a greater chance of a rate

hike this year than a cut, despite President Donald Trump's

fervent wishes for the Fed to ease monetary policy.

The potential for rate hikes along with rising inflation is

factoring into the recent rise in bond yields.

Although benchmark U.S. Treasury yields have backed off

somewhat, with the 10-year yield around 4.45%, rising yields are

a risk for equities, Carlson said. Higher bond yields stand to

translate into higher borrowing costs for consumers and

businesses, while also creating more investment competition for

stocks.

"If you saw a real spike in interest rates that was

maintained ... that would be the thing that I think would be

most disconcerting for investors," Carlson said.