U.S. stocks fell sharply on Friday, surrendering all of the gains from a post-jobs report rally ahead of the Labor Day holiday weekend.
The S&P 500 shed 1.1%, while the Dow Jones Industrial Average fell by the same margin, or about 340 points. The tech-heavy Nasdaq logged the biggest slide of the major averages, capping the session down 1.3%.
The losses came after a rally earlier in the day suggested some investor optimism that a more modest 0.50% interest rate hike could be coming from the Fed later this month after the August jobs report showed job growth moderated last month, as expected.
Data from the Labor Department published Friday morning showed nonfarm payrolls grew by 315,000 in August while the unemployment rate rose to 3.7%.
Economists had expected job gains would total 298,000 with the unemployment rate expected to hold at 3.5%.
Wage gains moderated somewhat last month, with average hourly earnings rising 0.3% month-on-month and 5.2% over the prior year. Both readings were 0.1% below expectations.
The biggest highlight from Friday's jobs data, however, was the increase in participation, with 786,000 Americans entering the workforce last month and pushing the labor force participation rate to 62.4%, its highest since March 2020.
Investors were laser-focused on Friday’s data after Fed Chair Jerome Powell asserted in a hawkish speech at the Jackson Hole symposium last week that he is willing to accept weaker labor conditions in exchange for cooling prices.
"The slower pace of payroll gains in August, together with the big rebound in the labour force, and the more modest increase in wages, would seem to favor a smaller 50bp rate hike from the Fed next month, rather than a 75bp increase, but officials will put a lot more weight on August’s CPI data, due the week after next," Michael Pearce, senior U.S. economist at Capital Economics, wrote in a note on Friday.
In addition to the stock market's rally, the dollar was weakening on Friday — a positive for risk assets — while Treasury yields were moderating after rising sharply earlier this week. The 10-year yield stood near 3.21% in late morning trade, down from highs around 3.27% reached earlier this week.
Shares of Lululemon (LULU) closed up 6.7% after the athletic apparel retailer reported quarterly earnings Thursday that topped Wall Street estimates. The company also lifted its annual profit and revenue guidance above analysts forecasts as wealthy customers snap up its new accessory offerings.
Broadcom (AVGO) shares also rose Friday on the heels of a strong sales outlook by the chipmaker for the current quarter, quelling fears of a recessionary decline in chip demand.
While some better-than-feared financials this season have helped buoy sentiment, many strategists have recently sounded the alarm on imminent weakness in earnings.
According to Morgan Stanley’s Mike Wilson, while the first half of the year was dictated by Federal Reserve policy and tighter financial conditions, the second half will be determined by earnings expectations for next year.
“As a result, equity investors should be laser focused on this risk, not the Fed, particularly as we enter the seasonally weakest time of the year for earnings revisions, and inflation further eats into margins and demand,” Wilson said.
Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc