U.S. stocks fell sharply on Friday, ending any gains from a post-jobs report rally ahead of the Labor Day holiday weekend.
The S&P 500 lost 1.1 percent, while the Dow Jones Industrial Average fell by the same margin, or about 340 points. The tech Nasdaq posted the biggest drop of the major averages, capping the session down 1.3%.
The losses came after a rally earlier in the day that suggested some investor optimism that a more modest 0.50% rate hike could come from the Fed later this month after the August jobs report showed job growth slowed last monthas expected.
Data from the Labor Directorate published on Friday morning showed nonfarm payrolls rose by 315,000 in August, while the unemployment rate rose to 3.7%.
Economists had expected jobs to be added to a total of 298,000, with the unemployment rate expected to hold at 3.5%.
Wage growth slowed somewhat last month, with average hourly earnings rising 0.3% month-on-month and up 5.2% from a year earlier. Both readings were 0.1% below expectations.
The biggest highlight of Friday’s jobs data, however, was the increase in participation, with 786,000 Americans joining the labor force last month and pushing the labor force participation rate to 62.4%, the highest level since March 2020
Investors were laser-focused on Friday’s data after Fed Chairman Jerome Powell said in a fiery speech at the Jackson Hole Symposium last week that the willing to accept poorer working conditions in exchange for cooling prices.
“The slower pace of wage growth in August, along with a strong labor recovery and more modest wage gains, appear to favor a smaller 50 basis point rate hike from the Fed next month, rather than a 75 basis point increase , but officials will place much more weight on August consumer price index data due next week,” Michael Pearce, senior U.S. economist at Capital Economics, wrote in a note on Friday.
Adding to the stock market rally, the dollar weakened on Friday – a positive for risk assets – while government bond yields slowed after a sharp rise earlier this week. The 10-year yield was near 3.21% in late morning trade, down from highs around 3.27% reached earlier this week.
Shares of Lululemon (LULU) closed up 6.7% after the sportswear retailer reported quarterly earnings on Thursday that beat Wall Street forecasts. The company also raised its annual profit and revenue guidance above analysts’ estimates as wealthy customers take advantage of its new accessory offerings.
Broadcom (AGO) shares also rose on Friday after the chipmaker’s strong sales outlook for the current quarter, allaying fears of a recessionary slump in chip demand.
While some better-than-expected financials this season have helped boost sentiment, many strategists have recently warned of earnings weakness ahead.
According to Morgan Stanley’s Mike Wilson, while the first half of the year was driven by Federal Reserve policy and tighter financial conditions, the second half will be driven by next year’s earnings expectations.
“As a result, equity investors should focus on this risk rather than the Fed, especially as we enter the seasonally weakest period of the year for earnings revisions and inflation further eats away at margins and demand,” Wilson said.
Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc