The sharp decline in stocks intensified on Friday as weak employment figures and rising unemployment spurred investors to flee risk assets. The “Magnificent 7” stocks, which have largely driven the bull market’s gains, led the downturn, pushing the Nasdaq-100 into correction territory.
Stocks have had a dismal start in August amid softer labor market data and mixed economic news, making market participants worry that the Federal Reserve delayed lowering interest rates from a 23-year high for too long. The unexpectedly weak July jobs report added to these concerns.
According to the Bureau of Labor Statistics, U.S. nonfarm payrolls increased by only 114,000 in July, much lower than economists’ forecast of 175,000 jobs. Over the past year, the U.S. added an average of 215,000 jobs per month. Additionally, June’s job growth was revised down by 27,000 to 179,000.
The unemployment rate, derived from a separate survey, rose to 4.3% in July from 4.1% the previous month, triggering the Sahm Rule, a recession indicator with a perfect track record over the last 50 years.
“The poor July employment report leaves the Fed looking woefully behind the curve with its decision to hold rates this week and suggests that the outcome of September’s meeting is now finely balanced between a quarter-point and a half-point easing,” says Ian Shepherdson, chairman and chief economist at Pantheon Macroeconomics. “The weakness was broad-based and not due to one-time factors; excessively tight monetary policy is to blame.”
A weakening labor market puts more pressure on the Federal Reserve’s Federal Open Market Committee (FOMC) to lower the short-term federal funds rate at its next meeting.
As of August 2, futures traders were assigning an 80% probability to the FOMC enacting a half-point cut in September, up from 22% the previous day, according to CME Group’s FedWatch Tool. The odds of a quarter-point cut at the next meeting dropped to 20% from 78%.
“Risk assets are getting hammered on joblessness worries, and investors are no longer reacting favorably to negative economic developments,” writes José Torres, senior economist at Interactive Brokers. “Equity indices are selling off across the board.”
By the end of the day, the Dow Jones Industrial Average fell 611 points, or 1.5%, to 39,737. The Nasdaq Composite dropped 2.4% to 16,776, while the S&P 500 declined 1.8% to close at 5,346.
Stocks on the move
Mixed-to-disappointing earnings reports from Big Tech companies have also caused markets to reassess their bets on AI. The earnings season has revealed that significant capital expenditure on generative AI might not bring profits as quickly as expected.
Amazon.com stock dropped 8.8% after reporting mixed second-quarter earnings and giving a third-quarter outlook that slightly missed expectations.
However, Wall Street isn’t overly concerned. “Amazon’s AI initiatives are deep, broad, well-adopted, and supported,” says Aron Bohlig, managing partner at ComCap. “These include chips, major partnerships with NVIDIA, many significant model enhancements, programming interfaces, robots, and robotic taxis.”
When combining these AI initiatives with Amazon’s entertainment, healthcare, and grocery products, the company remains a single source for most consumers’ major needs, continuing to improve its position in these markets, adds Bohlig.
Elsewhere, Apple stock rose 0.7% after reporting better-than-expected fiscal third-quarter earnings and hinting at similar growth in the fiscal fourth quarter.
In the quarter ended June 29, Apple’s revenue increased 4.9% year-over-year to $85.8 billion, driven by a 14.1% growth in services to $24.2 billion. Its earnings per share (EPS) improved by 11.1% from the year-ago period to $1.40.
“During the quarter, our record business performance generated EPS growth of 11 percent and nearly $29 billion in operating cash flow, allowing us to return over $32 billion to shareholders,” said Apple Chief Financial Officer Luca Maestri. “We are also very pleased that our installed base of active devices reached a new all-time high in all geographic segments, thanks to very high levels of customer satisfaction and loyalty.”
Intel failure
Intel stock plunged 26% after missing second-quarter earnings expectations and providing a weak third-quarter outlook.
In addition, as part of its cost-cutting efforts, Intel announced it is reducing its headcount by 15% and temporarily eliminating its dividend.
“Intel is suspending the dividend starting in the fourth quarter, prioritizing liquidity to support needed investments,” the company explained. Nevertheless, Intel maintained “a long-term commitment to a competitive dividend as cash flows improve.”
Intel suffered its worst session in half a century, closing at levels not seen in over a decade. This decline has been particularly detrimental to long-term investors, with anyone who invested $1,000 in Intel stock 20 years ago now facing a considerable loss.