It's been a perfect week for the reopening story, but here's what to watch

• The stock market is recovering from its pandemic lows, but there are still plenty of challenges to overcome, including declining earnings.
• Rising bond yields could be signaling inflation, but so far the market this viewing it as a positive.
• Investors will eventually need more evidence that the economy is improving.

A trader walks by the New York Stock Exchange.

Spencer Platt | Getty Images

The stunning jobs report caps a near-perfect week for market bulls.

Three main "buckets" have moved stocks in recent months and all were supportive for the markets this week:

1. The reopening story: going well or not?  Economic statistics this week — including ADP, ISM Manufacturing and ISM Services, and now the jobs report — are supportive of the reopening story. "[T]hese much better than expected results suggest that the US economy may be more resilient than many investors and analysts feared," John Stoltzfus, Chief Investment Strategist, at Oppenheimer Asset Management said in a note this morning.
2. Stimulus: more or less? More stimulus discussion this week from the ECB, the U.S. and Japan.
3. Treatment/vaccine: hope for progress or not? Continuing reports of progress on vaccines.

 But there are several problems surfacing.

The bond 'yield rally'

 The "pain trade" that would cause the most harm to the most traders in the bond market has been starting to happen. Yields on the 10-year Treasury have jumped nearly 30 basis points this week — a stunning move of over 40%.

Bond vigilantes have started to view this as a sign of inflation or, worse, stagflation. "You could make an argument more and more stimulus raises the risk of more inflation," John Briggs of NatWest told CNBC yesterday, noting that European and U.S. bonds had both been selling off recently.

For the moment, however, the market is viewing this as a "reflation" story, which is positive, versus an "inflation out of control story," which is negative.

However, that could change if yields continue to rise, according to Peter Tchir at Academy Securities.

"I think we can get to 1.0%-1.25% on the 10 year, and it will not be enough to derail the economy," he  said. But if it starts getting much higher than that the Fed, he believes, will intervene.

Stock prices getting out of hand?

 It's simple: stock prices are going up, but earnings estimates are still going down. This means the multiple, or P/E ratio, the market is trading at has been dramatically expanding.

To a certain extent, it's no surprise that analysts and CEOs are unable to get their hands around the reopening and all the pluses and minuses for hundreds of corporations. But to keep stock prices up with multiples well north of 20x forward earnings, traders will need to continue to see strong economic numbers.

They will also ultimately need to see earnings dramatically higher.

Nick Raich, who tracks corporate earnings for Earnings Scout, said the most important thing now is to stop the bleeding — the dramatic decline in earnings estimates.

"We need to see things get less bad," he  said. "The market believes earnings cuts are going to slow, and the worst of the cuts happened in March and April. We need to see that, and we need to see slow improvement in the estimates," he said.

What about all the CEOs who declined to give guidance for 2020 — almost 40% of the S&P 500?

"As businesses reopen, they will have more visibility," Raich  said. "There was zero clarity in March and April. I believe more companies will start providing guidance."  Still, he admits that could take some time.