What drove markets?

U.S. stocks fell Friday as investors assessed a jump in Treasury yields and the prospect of the Federal Reserve potentially sticking with its aggressive monetary policy tightening as it battles high inflation. 

After the U.S. stock market’s “tremendous” rally recently and with the “central bank tightening that’s in the pipeline,” it’s an opportune time to trim back on equities, according to Keith Lerner, co-chief investment officer of Truist Advisory Services.

“Valuations are pretty elevated after the rebound,” Lerner said in a phone interview Friday. A trading range for the S&P 500 of 4,200 to 4,300 is “less favorable” from a “risk-reward” perspective at this time, he said, while pointing to Friday’s jump in Treasury yields as hurting growth stocks in particular.

The S&P 500’s consumer-discretionary
SP500.25,
-2.10%,
communication-services
SP500.50,
-1.83%
and information-technology
SP500.45,
-1.83%
sectors were among the hardest hit sectors Friday, FactSet data show. Beyond growth stocks, the financials sector
SP500.40,
-2.02%
also fell sharply, which Lerner attributed to concerns that Fed interest-rate hikes to tame high inflation will lead to “a slower economy.”

See: S&P 500 earnings are rising only because of strength in this one sector

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.973%
jumped 10.8 basis points Friday to 2.987%, the highest since July 20 based on 3 p.m. Eastern Time levels, according to Dow Jones Market Data. “That’s a strong move,” Lerner said, adding that 2-year Treasury yields
TMUBMUSD02Y,
3.225%
also rose amid expectations for further rate hikes.

Meanwhile, inflation in Europe, including in Germany, is a reminder that “global central banks’ work is not done yet,” according to Lerner. He cited the sharp rise in Germany’s producer prices, reported Friday, as influencing U.S. investors’ concerns over high inflation and rising rates.

In the U.S., investors are assessing the odds of the Fed potentially raising its benchmark rate by 75 basis points at its September meeting.

St. Louis Fed President James Bullard told The Wall Street Journal on Thursday that he would “lean toward” a 75 basis point hike in September. Speaking Friday morning, Richmond Fed President Tom Barkin said the Fed “will do what it takes” to drive inflation back toward its 2% target, Bloomberg reported, while Reuters reported Barkin saying the Fed’s efforts needn’t be “calamitous.”

Interest-rate-sensitive tech stocks have been bruised this week, with the Nasdaq dropping 2.6%, according to FactSet data. The S&P 500 booked a weekly drop of 1.2% while the blue-chip gauge Dow Jones Industrial Average slipped 0.2%.

That marked a pause from the stock market’s recent rally. Last week the S&P 500 and tech-heavy Nasdaq each had booked their longest weekly win streaks since November 2021, after notching four straight weeks of gains.

See: Stock-market rally faces key challenge at S&P 500’s 200-day moving average

Friday was devoid of major U.S. economic data, leaving investors to digest comments from Fed officials while dealing with the monthly expiration of more than $2 trillion worth of stock and index options. The expiration of options can exaggerate market moves, said Lerner.

Read: Friday’s $2.3 trillion options expiration could remove a critical avenue of support for stocks, analysts say

Next week, investors will be shifting their focus toward what Fed Chairman Jerome Powell will say during the Fed’s annual economic symposium in Jackson Hole, Wyo.

“I think everybody is just waiting for Jackson Hole, so I think there will be a lot of speculation over what Powell is going to say for the next five days,” said Brad Conger, deputy chief investment officer at Pennsylvania-based Hirtle Callaghan & Co., which oversees about $20 billion in assets, mostly on behalf of university endowments.

See: Powell to tell Jackson Hole that recession won’t stop Fed’s fight against high inflation

Which companies were in focus?

• Bed, Bath & Beyond Inc.
  BBBY,
  -40.54%
  shares tumbled 40.5% after investor Ryan Cohen has confirmed that he sold his entire stake in the retailer, and earned a profit of more than $58 million.

• Shares of Deere & Co.
  DE,
  +0.45%
  rose 0.45% after the tractor maker reported fiscal third-quarter profit that missed expectations, owing to higher costs and production inefficiencies, but its revenue beat forecasts. 

• Shares of Foot Locker Inc. 
  FL,
  +20.04%
   jumped 20%, boosted by the sneaker retailer’s second-quarter results. 

• Shares of Weber Inc.
  WEBR,
  -11.50%
  dropped 11.5% after surging above $10 a share a day earlier for the first time since June.

How did other assets fare?

• The U.S. dollar index
  DXY,
  +0.58%,
  a gauge of the dollar’s strength against a basket of rivals, was up 0.6%.

• Oil futures ended slightly higher Friday, with West Texas Intermediate crude
  CL.1,
  -0.61%
  for September delivery edging up 0.3% to settle at $90.77 a barrel. For the week, crude’s front-month prices lost 1.4%.

• Gold prices closed lower Friday, with December futures for the precious metal
  GCZ22,
  -0.62%
  declining 0.5% to settle at $1,762.90 an ounce. That brought gold’s weekly loss to 2.9%, according to Dow Jones Market Data.

• Bitcoin
  BTCUSD,
  -0.21%
  was down more than 9%.

• In European equities, the STOXX Europe 600 Index
  SXXP,
  -0.77%
  closed 0.8% lower Friday for a weekly decline of 0.8%. London’s FTSE 100 Index
  UKX,
  +0.11%
  gained 0.1% Friday, rising 0.7% for the week.

• In Asia, Japan’s Nikkei 225 Index
  NIK,
  -0.04%
  closed down less than 0.1% Friday, gaining 1.3% for the week. China’s Shanghai Composite Index
  SHCOMP,
  -0.59%
  fell 0.6% Friday, bringing its weekly loss to 0.6%. Hong Kong’s Hang Seng Index
  HSI,
  +0.05%
  rose less than 0.1% Friday, booking a 2% loss for the week.

—Barbara Kollmeyer contributed to this report.