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Better-than-expected earnings from Amazon and Apple and lower bond yields sent stocks higher last week. These gains added to the momentum for equities that began at the end of the previous week, when Alphabet and Microsoft reported solid earnings, too.

The S&P 500 closed at 5,127.79, up 0.55% for the week; the Dow Jones was at 38,675.68, up 1.14%; and the tech-heavy Nasdaq was at 16,156.90, up 1.43%.

The two-week gain in stocks is a sharp turnaround from the losses in the middle of April, when equities came under pressure from elevated inflation statistics, pushing bond yields in the wrong direction for the bulls.

A couple of earnings disappointments from Netflix and Meta added to the negative sentiment for equities.

Still, according to FactSet, the earnings season has been better than expected thus far. The S&P 500 companies continue to beat analysts' estimates by a comfortable margin. "Both the percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of earnings surprises are above their 10-year averages," said John Butters, Vice President of FactSet, in a May 3 post.

"As a result, the index is reporting higher earnings for the first quarter today relative to the end of last week and relative to the end of the quarter. On a year-over-year basis, the S&P 500 is reporting its highest earnings growth rate since Q2 2022."

Positive earnings surprises have helped the rally for U.S. equities remain intact in 2024, with the S&P500 up 7.50% YTD and the Nasdaq up 7.63%.

That's despite a rise in Treasury bond yields, from around 4% at the beginning of the year to around 4.60% last week. Higher yields have made these bonds an appealing alternative to equities.

Still, with earnings season approaching an end, the fate of the rally in equities will depend on the prevailing Wall Street narrative about the state of the U.S. economy.

The narrative this year has alternated between stagflation, which is characterized by slower growth and inflation on the rise, and soft-landing, which involves moderate growth and decreasing inflation.

For instance, a couple of weeks ago, the prevailing narrative was stagflation. That's thanks to a government report showing that GDP — the most comprehensive measure of the nation's output — expanded by an annualized 1.6% in the first quarter of 2024, down from 3.4% in the previous quarter and well below forecasts of 2.5%.

It was the second consecutive mark-down in the nation's output since the contractions in the first half of 2022.

Then, another government report showed that the price index for personal consumption expenditures (PCE) — the Fed's most favored inflation measure — rose at an annual rate of 3.4% in the first quarter of 2024, up from a 1.8% rise in the previous quarter.

Stagflation is the worst macroeconomic environment for equities. Slow growth hurts earnings, while higher prices drive interest rates higher, hurting valuations. Thus, the sell-off in equities was seen when the GDP and price data came out.

At the end of last week, the prevailing narrative about the U.S. economy changed from stagflation to soft-landing.

That's thanks to two new government reports — the business payroll report and the household report — showing that the U.S. labor market cooled off in April: job growth slowed down, unemployment edged higher, and hourly wage growth tapered off. They point to moderate growth and declining inflation pressures.

Soft landing is the best macroeconomic environment for equities, as slow growth helps the nation's corporations maintain profitability while moderating inflation drives interest rates lower, boosting equity valuations.

The return of the soft-landing scenario added to the gains seen in Friday's trading session following Apple's better-than-expected earnings report.

While it's unclear which environment will prevail from now until the next reporting season for earrings, one thing is clear: volatility will continue on Wall Street.