U.S. stocks advanced on Friday, with the S&P 500 closing at a record high to cap a strong week of gains across major indexes, after data showed the U.S. economy unexpectedly shed jobs last month—dampening expectations that the Federal Reserve would raise interest rates at its September meeting. The rally illustrated the dominant role interest-rate expectations now play in equity pricing, with investors treating soft labor data as a catalyst for risk assets even amid geopolitical and political headwinds.

Surprise Payrolls Drop Shapes Market Sentiment

U.S. employers unexpectedly cut 23,000 jobs in July, versus forecasts for nearly 100,000 additions. The roughly 123,000 swing from consensus expectations to an outright contraction places July among the most negative payroll surprises in years. May and June payrolls were revised down by a combined 103,000, suggesting the labor market softening was underway earlier than initial data indicated. The unemployment rate fell to 4.1%, largely because people left the workforce, signaling underlying weakness in the labor market ahead of the midterm elections. Local public schools shed 50,000 jobs, while restaurants and bars cut 26,000 positions and retailers eliminated 19,000.

The breadth of losses—spanning public-sector education, hospitality, and retail—points to cooling across consumer-facing sectors that had been among the hardest to staff during the post-pandemic labor shortage.

The job losses came amid continued economic strain from the Iran war.

Federal Reserve Outlook Shifts

Weak July labor market data drove financial markets to downgrade what had been strong expectations that the U.S. central bank would raise rates next month. This followed a week in which several Fed officials had made the case for lifting rates to tackle stubborn inflation. Following the data release, futures markets flipped the odds of a rate hike at the September 15–16 Federal Open Market Committee meeting from likelier-than-not to a worse-than-even chance, and remained split on where the Fed would end up by year's end.

The Federal Reserve's limited forward guidance under new Chair Kevin Warsh has increased the importance of economic data and policymakers' remarks, making each major release a potential pivot point for markets that have been whipsawed by shifting rate expectations. Traders now see nearly even odds of a September rate hike or no change, compared with a 63% probability of an increase last week, according to the CME FedWatch Tool.

U.S. rate futures priced in 28 basis points of hikes by December, down from 32 basis points before the jobs data.

Fed Governor Lisa Cook faced a new challenge as the Trump administration moved ahead with efforts to fire her. Separately, Richmond Fed President Thomas Barkin said pricing power is uneven across the economy.

Treasury Yields Fall

The 2-year note yield, which typically moves in step with Fed interest-rate expectations, fell 4.35 basis points to 4.202% and reached 4.1536%—the lowest since July 17. The yield on benchmark U.S. 10-year notes fell 1.44 basis points to 4.656%. The yield curve between 2- and 10-year notes steepened to 46 basis points, a closely watched gauge that reflects the gap between near-term rate expectations and longer-term growth and inflation views.

Earlier in the session, short-term Treasury yields, a reflection of short-term interest rate expectations, had hovered above 4% as crude prices inched above $83 a barrel, adding to inflation concerns.

Currency and Commodity Markets

The U.S. dollar fell against the Japanese yen after the jobs data, last down 0.49% at 157.66 yen. Gold hit a seven-week high as weak U.S. jobs data dented rate-hike bets. Oil gained on a pending Iran-Oman deal over the Strait of Hormuz. Copper held above $14,000, set for its strongest week since May on supply concerns. U.S. natural gas futures rose on higher LNG export flows.

Notable Stock Movers

Several companies posted significant moves following earnings reports and corporate developments:

• SpaceX shares surged 14% as lock-up selling fears eased and a Q2 earnings beat fueled the rally.
• Atlassian shares soared 35% on a strong earnings report. The stock had already jumped 32% pre-market alongside Microchip Technology, which rose 9% on upbeat revenue forecasts.
• Doximity shares soared 56% after its CEO said the company's AI can outperform Anthropic.
• Palantir Technologies jumped over 9% as its post-earnings rally continued.
• Airbnb jumped nearly 15% on a revenue beat.
• Trade Desk shares plunged 20% as its third-quarter revenue outlook disappointed.
• ResMed shares tumbled 6% as a weak 2027 sales forecast eclipsed a quarterly profit beat.

The Nasdaq jumped 1% as chip stocks rallied.

Corporate and Policy News

Under Armour forecast a steeper annual sales decline on weak North America demand. The founder of Rockstar Energy built a stake in Celsius and wants to take over as CEO, CNBC reported.

Meta was ordered to pay $567 million in New Mexico for a teen mental health fund.

A U.S. appeals court blocked President Trump's $400 million White House ballroom project.

Trump announced that the U.S. is moving forward with a series of mining projects worth $3 billion.

Pre-Market Context

Before the market open, U.S. stock futures had edged higher as investors awaited the key employment report. At 6:56 a.m. ET, Dow futures rose 27 points, or 0.05%, while S&P 500 futures gained 0.14% and Nasdaq 100 futures advanced 0.39%. The pre-market expectations had been for the U.S. economy to add 80,000 jobs in July with unemployment holding at 4.2%.

Both U.S. stocks and bonds rallied after the soft jobs report, while the yen bounced back against the dollar.

Source: Economic Times Markets