Stocks experienced a significant drop from record highs on Friday, reflecting concerns about the US labor market’s strength. The S&P 500 fell nearly 2.4% over the week, while the Nasdaq Composite and Dow Jones Industrial Average saw declines of 2.2% and 1.2%, respectively.
Economic news is expected to be quieter next week, with no major reports anticipated. However, investors can look forward to a busy week of corporate earnings, with 122 S&P 500 companies scheduled to report, including industry leaders such as Palantir, Eli Lilly, and Disney.
A significant factor influencing market sentiment was the release of the monthly jobs report, which indicated that job creation in July fell short of expectations. Additionally, revisions to earlier months showed that far fewer jobs had been added than initially thought, with the Bureau of Labor Statistics noting unusually large downward revisions for May and June. The job gains for May were adjusted from 144,000 to just 19,000, and June’s numbers were revised down from 147,000 to a mere 14,000.
Following the jobs report, the market’s outlook regarding the Federal Reserve’s interest rate policy underwent a sharp shift. The likelihood of a September interest rate cut jumped to 83%, up from 38% the previous day, as analysts reflected on the labor market’s apparent weakness. Bank of America Securities economist Shruti Mishra noted the potential for the Fed to make what could be considered “bad cuts” to rates if labor market deterioration continues, which might initiate a series of cuts.
Despite the downbeat economic signals, enthusiasm remains for sectors driven by artificial intelligence (AI). This has been underscored by strong earnings reports from major tech companies, suggesting that AI investments continue to thrive and will play a crucial role in supporting global equities. Capital Economics’ James Reilly pointed out that Friday’s market sell-off may be exaggerated, emphasizing that AI will remain a key factor in driving the overall market forward.
Overall, while the immediate outlook may seem concerning, particularly regarding the labor market, the potential for continued investment and innovation in technology, especially AI, provides a hopeful perspective for future market resilience.