The sharp selloff in stocks intensified on Friday as weak hiring figures and rising unemployment sparked a rush out of risk assets. The “Magnificent 7” stocks, which have significantly contributed to the bull market’s gains, led the decline, pushing the Nasdaq-100 into correction territory.
Equities have had a rough start in August, driven by weaker-than-expected labor market data and mixed economic news, raising concerns that the Federal Reserve has delayed reducing interest rates from their 23-year high. Friday’s unexpectedly weak July jobs report heightened these worries.
The U.S. nonfarm payrolls expanded by only 114,000 in July, far below economists’ forecast of 175,000 jobs, according to the Bureau of Labor Statistics. Over the past year, the U.S. economy has averaged 215,000 new jobs per month. Additionally, June’s already soft jobs report 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. This increase triggered the Sahm Rule, a recession indicator with a perfect track record over the past 50 years.
“July’s poor employment report leaves the Fed in a difficult position with its decision to hold rates this week, suggesting that the outcome of September’s meeting is now finely balanced between a quarter-point and half-point easing,” wrote Ian Shepherdson, chairman and chief economist at Pantheon Macroeconomics. “The weakness was broad-based and not due to one-time factors, such as weather; the long-delayed effect of excessively tight monetary policy is to blame.”
A weakening labor market puts pressure on the Federal Reserve’s Federal Open Market Committee (FOMC) to lower the short-term federal funds rate at the next meeting. As of August 2, futures traders assigned an 80% probability to the FOMC enacting a half-point rate cut in September, up from 22% a day ago, according to CME Group’s FedWatch Tool. The odds of a quarter-point cut dropped to 20% from 78%.
“Risk assets are getting hammered due to joblessness worries, and investors are no longer reacting favorably to negative economic developments,” wrote José Torres, senior economist at Interactive Brokers. “Equity indices are selling off across the board.”
At the closing bell, the Dow Jones Industrial Average dropped 611 points, or 1.5%, finishing at 39,737. The Nasdaq Composite tumbled 2.4% to 16,776, while the S&P 500 fell 1.8% to close at 5,346.
Stocks on the move
Mixed-to-disappointing earnings from major tech companies have also led investors to recalibrate their bets on AI. Earnings season has shown that massive capital spending on generative AI may not yield profits as soon as previously expected.
Amazon.com (AMZN) stock fell 8.8% after the e-commerce giant reported mixed second-quarter earnings results and issued a slightly lower third-quarter outlook.
Despite the results, Wall Street remains optimistic. “Amazon’s AI initiatives are deep, broad, and well-adopted,” said Aron Bohlig, managing partner at ComCap. “They include chips, major partnerships with NVIDIA, multiple model enhancements, programming interfaces, robots, and robotic taxis.”
Combining these initiatives with Amazon’s entertainment, healthcare, and grocery products, the company is well-positioned to meet most consumer needs, Bohlig added.
Conversely, Apple (AAPL) stock rose 0.7% after the tech giant reported better-than-expected third-quarter earnings and hinted at continued growth in its fourth quarter. For the quarter ended June 29, Apple’s revenue increased 4.9% year-over-year to $85.8 billion, driven by a 14.1% rise in services revenue to $24.2 billion. Its earnings per share (EPS) improved by 11.1% from a year ago to $1.40.
“Our record business performance generated EPS growth of 11% 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 pleased that our installed base of active devices reached a new all-time high in all geographic segments, owing to high levels of customer satisfaction and loyalty.”
Intel struggles
Intel (INTC) stock plunged 26% after the chipmaker missed both revenue and earnings expectations for its second quarter and provided a weak outlook for the third quarter. To reduce costs, Intel announced it would cut its workforce by 15% and temporarily eliminate its dividend.
“Intel is suspending the dividend starting in the fourth quarter, recognizing the need to prioritize liquidity to support investments needed to execute its strategy,” the company said. However, Intel emphasized its long-term commitment to a competitive dividend as cash flows improve.
INTC experienced its worst session in half a century, closing at levels unseen for over a decade. The once-dominant tech titan has been a poor investment for buy-and-hold investors; anyone who invested $1,000 in Intel stock 20 years ago would see disappointing returns today.