From a melt-up to a sell-off, the next 2 weeks will determine the stock market's direction for the summer

• The next two weeks of data will likely set the direction for the stock market this summer, according to UBS.
• The bank said the upcoming release of the April CPI report and Nvidia's earnings report next week are crucial.

The next two weeks are going to be crucial for the stock market and could determine its direction over the upcoming summer months, according to a note from UBS.

Jason Draho, head of asset allocation at UBS, said macro data in the form of the April CPI report and April retail sales data, both set to be released on Wednesday, combined with micro data in the form of Nvidia's earnings report next week could make or break markets.

"Two forces are stronger than one for pushing markets higher, but the effect may be multiplicative and not just additive," Draho said of the upcoming macro and micro data, if they prove to beat investor expectations.

A cool inflation report, resilient retail sales data, and better-than-expected Nvidia earnings could unleash "Goldilocks" conditions that create a "technical tailwind as more investors are forced to chase the rally," Draho said. Such a scenario would likely push the S&P 500 to record highs.

"Inflation and NVIDIA earnings data that exceed expectations could set the stage for an early summer melt-up," Draho said.

Another scenario is if some of the data disappoints and some of the data impresses investors, in which case a range-bound stock market seems likely for the next few months, as the summer months tend to quiet down with data releases.

And if both the macro and micro data disappoint investors, it could lead to an accelerated downside move for stocks and put the market in the doldrums for the summer months.

"Significant disappointment across the board would be necessary for a larger pullback in risk. Beyond the index level
returns, relative performance will hinge on which of these scenarios plays out," Draho explained.

UBS is betting on continued signs of growing AI adoption, which would favor their preference for the technology sector. The bank said a cool April CPI report would bode well for small-cap stocks, as it would pave the way for interest rate cuts sooner than later. Finally, disappointing macro or micro data should benefit high quality bonds.

"Just as macro and micro factors have a diversifying benefit for the overall investment outlook, diversifying investment views is equally valuable," Draho said.