Stocks slumped on Friday, ending a long run of weekly gains, after stronger-than-expected jobs data raised investors’ expectations that the Federal Reserve will keep interest rates elevated to keep the economy from overheating.
The S&P 500 fell more than 2 percent on Friday, on course for its worst one-day drop since October, before the war with Iran began. It dragged the index to a loss of around 2 percent for the week, which would end a run of nine consecutive weekly gains, its longest streak since the end of 2023.
The drop on Friday was prompted by fresh labor market data showing the economy continuing to add jobs at a healthy pace.
Investors interpreted the data as a sign that the Federal Reserve was free to keep rates elevated to tamp down inflation stemming from the war and the rapid build-out of artificial intelligence infrastructure. The strong labor data is likely to ease any of the Fed’s concerns that the higher rates could weaken the job market.
“We’ve gained more and more confidence in the last prints that the Fed doesn’t have to be worried about the labor market,” said Lindsay Rosner, head of multisector fixed income investing at Goldman Sachs Asset Management, adding that she expected the Fed to focus on inflation and hold interest rates steady.
Higher interest rates raise borrowing costs and lower stock valuations over time, weighing on the market.
Some investors have even begun to bet that the Fed could raise interest rates by the end of the year, and now expect a quarter of a percentage point increase by December, according to prices in interest rate futures markets.
The two-year Treasury yield, which is sensitive to changes in interest rates, rose 0.1 percentage points on Friday, its biggest one-day gain in more than a year.
The expectation of higher interest rates is a sharp reversal from investor sentiment before the war began. It also cut against investors’ earlier expectations that Kevin M. Warsh, the new Fed chair handpicked by President Trump, would lower rates.
The interest rates set by the Fed filter through financial markets, impacting borrowing costs across corporate and consumer debt, including mortgages and business loans.
On Friday, Mr. Trump said that, while he would leave interest rate decisions to Mr. Warsh, he “wouldn’t mind” if rates were cut.
If Mr. Warsh “pushes for cuts at his first meeting, he will be pushing against the evidence,” said Seema Shah, chief global strategist at Principal Asset Management. “Our base case remains that the Fed stays on hold through 2026, but if employment data continues to track around May’s pace, rate hikes this year would come firmly into play.”
