Stocks Drop for Week

A burst of hawkish Federal Reserve commentary earlier in the week and growing concerns about the economy continued to weigh on the major U.S. stock indexes Friday, leaving the Nasdaq Composite (COMPX) down 1.4% for the week and the S&P 500® Index (SPX) also 1.4% lower.

This week's losses represent the Nasdaq's first such decline in nine weeks, and the S&P 500's first drop in six weeks. Recession worries appeared to weigh especially heavily on small-caps, as the Russell 2000 (RUT) fell nearly 3% for the week to end at its lowest level since June 5.

Stocks had been moving higher, with big tech companies taking the lead, for much of this month. Then came Fed Chair Jerome Powell's appearance this week before a pair of Congressional panels. His suggestion that the Fed may have to raise rates two more times this year to contain inflation seems to have put an end to the market's swagger.

Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research, says the market's strong performance during the first half of June also left it vulnerable to a profit-taking pullback.

"Collectively, equity investors were reminded the Fed is still focusing on its 'dual mandate,' of price stability and maximum sustainable employment," he says. "The potential for 'higher rates for longer' exists and a recession further down the line is still a possibility."

It's too early to call the past week any sort of inflection point for the summer market, Nathan adds. But as of last week, "the rubber band simply got stretched too much, and we're 'reverting to the mean,' with potentially some more consolidation ahead." Here is where the major benchmarks ended:

• The S&P 500 Index was down 33.56 points (0.8%) at 4,348.33; the Dow Jones Industrial Average(DJIA) was down 219.28 (0.7%) at 33,727.43; the Nasdaq Composite was down 138.09 (1.0%) at 13,492.52.

• The 10-year Treasury note yield (TNX) was down about 6 basis points at 3.737%.

• Cboe's Volatility Index (VIX) was up 0.47 at 13.39.

Semiconductor stocks and regional banks were among the market's weakest sectors Friday, with the KBW Regional Banking Index (KRX) dropping to a three-week low. Energy companies were also lower as crude oil futures extended this week's slide. The U.S. dollar index continued Thursday's upturn, climbing to its highest level in over a week on the potential for high ongoing interest rates. Volatility ticked up slightly but remained near a three-and-a-half-year low, based on the VIX.

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Stocks on the move

The following companies had stock price moves driven by quarterly earnings or analyst ratings:

• 3M (MMM) agreed to pay up to $12.5 billion to settle hundreds of lawsuits brought by cities that claimed their drinking water had been contaminated by the company's chemicals. 3M shares still ended with a gain of 0.3%.

• C3.ai (AI) shares dropped sharply after Deutsche Bank reiterated its "sell" rating, saying the company hadn't differentiated itself from other artificial intelligence firms at its investor day. C3 shares fell nearly 11%.

• CarMax (KMX) reported quarterly revenue at $7.7 billion, down 17% from a year earlier but still surpassing Wall Street expectations. Shares of the used car retailer rose 10%.

• Chipotle (CMG) had its share price target boosted by KeyBanc, which cited sustained traffic momentum and pricing power as inflation for avocado and chicken prices remains tame. Shares of the restaurant chain still ended down about 0.3%.

• Delta Air Lines (DAL) had its share price target raised to $55 from $48 by Barclay's, which cited optimistic expectations for near-term earnings. The airline's shares still fell about 0.2%.

• Ford (F) plans a new round of layoffs for U.S. salaried workers, the Wall Street Journal reported late Thursday. It's unclear how many jobs will be affected. Ford has said it's working to get costs in line as it transitions to electric vehicles. Its shares fell about 1.2%.

• Starbucks (SBUX) shares fell following reports a union representing workers said some stores would strike beginning Friday. The coffee chain's shares fell 2.5%.

• Under Armour (UAA) shares were downgraded to "equal weight" from "overweight" by Wells Fargo, which cited overexposure to North America, excess inventory, and a fairly new CEO. The athletic apparel company's shares fell nearly 3%.

• Virgin Galactic (SPCE) shares fell sharply following reports the space tourism company had raised $300 million through a common stock offer. Its shares dropped more than 18%.

• Wayfair (W) shares were upgraded to "market perform" from "underperform" by Moffett Nathanson, which said the online retailer was benefiting from the bankruptcy of Bed Bath & Beyond. Wayfair shares rose about 0.4%.

Among other companies, Carnival Corp. (CCL) is expected to report quarterly results Monday. The cruise operator is expected to report a loss of 35 cents per share for the previous quarter, narrower than the $1.64 per share loss for the same period a year earlier, according to Nasdaq. Walgreens Boots Alliance (WBA), Micron Technology (MU), and General Mills (GIS) are also scheduled to report results next week.

Manufacturing slowing down

Economic data released Friday continued a recent theme: Growth in business activity is slowing, while manufacturing is actually contracting.

S&P Global said its Flash U.S. Manufacturing Purchasing Managers Index (PMI) fell to 46.3 in June from 48.4 in May. (A number below 50 represents contraction.) June's decline was bigger than analysts had expected and left the index at a six-month low. S&P's Services Business Activity Index fell to 54.1 in June from 54.9 in May.

S&P said in a report that although business activity was still expanding at the end of the second quarter, it was at the slowest pace in three months. "Manufacturers reported a renewed contraction in production while service providers saw a slower, but still solid, upturn in output. Jobs growth meanwhile sank to the slowest since January."

Despite increasing recession signals, including a 14th consecutive monthly decline in the Conference Board's Leading Economic Index (LEI), reported Thursday, the market widely expects the Fed to maintain its focus on curbing inflation.

Late Friday, the market assessed a roughly 72% probability of another quarter-point hike at the Fed's July 25–26 meeting, down from 74% a week ago, according to the CME FedWatch Tool. Next week's economic reports include May durable goods, the government's final estimate for first-quarter Gross Domestic Product (GDP) growth, and June consumer confidence.

But perhaps the most market-moving number will be next Friday's May reading on Personal Consumption Expenditure (PCE) prices, the inflation metric most closely followed by the Fed. Recent PCE readings have been running slightly above another Labor Department inflation gauge, the Consumer Price Index (CPI), but both are about double the Fed's long-term 2% target. The last PCE update—for April—showed an annual increase of 4.4% in the overall rate and a 4.7% in the core rate, which excludes food and energy prices.

In contrast, the CPI rose 4% from a year earlier in May, marking the smallest year-over-year increase since March 2021. The core rate was up 5.3%.

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