Markets plunge on strong jobs data, AI weakness amid Fed rate hike fears

The stock market absorbed a sharp blow on Friday as investors rushed for the exits across nearly every asset class. The S&P 500 fell 2.64 percent—its worst day since October—while the Nasdaq, heavy with technology holdings, plunged 4.18 percent, marking its darkest session since April of 2025. The Dow Jones dropped 695 points, or 1.35 percent. The damage was swift and broad: stocks, bonds, bitcoin, and gold all sold off in tandem as traders recalibrated their bets on the Federal Reserve's next move.

The catalyst was straightforward. The Labor Department reported that the economy added 172,000 jobs in May, a figure that handily beat expectations. On its surface, robust employment is good news for the economy. But markets read it differently. A strong labor market gives the Fed less reason to cut interest rates and more reason to keep them elevated—or even raise them—to combat inflation, which has been accelerating partly due to rising oil prices tied to the conflict with Iran. The probability that the Fed will hike its benchmark rate in December jumped to 43 percent from 26 percent just a month earlier, according to CME FedWatch data.

The shift in rate expectations rippled through every corner of the financial system. Treasury yields climbed, with the 10-year yield rising to 4.54 percent, a move that typically pressures stock valuations. Bitcoin collapsed more than 5 percent, falling below $60,000 for the first time since October 2024, extending its weekly loss to more than 17 percent after a major cryptocurrency firm disclosed it had sold holdings for the first time since 2022. Gold prices dropped more than 3.5 percent, erasing most of the year's gains. The VIX, Wall Street's fear gauge, spiked 40 percent to its highest level in two months.

The pain was especially acute in technology and artificial intelligence stocks, which had enjoyed an extraordinary run in recent weeks. The Nasdaq had strung together nine consecutive weeks of gains before Friday's reversal. A popular exchange-traded fund tracking semiconductor memory chips fell 15 percent. Broadcom, a bellwether for the chip industry, had reported weaker-than-expected revenue guidance for the third quarter, sending its stock down 12.59 percent on Thursday and another 7.92 percent on Friday. Meta fell 5.5 percent after reports that it was seeking to raise capital to fund its AI expansion. Ross Mayfield, an investment strategist at Baird, captured the underlying anxiety: the parabolic moves in these stocks were never going to last. "Basically, you're pricing in perfection," he said. "It doesn't take much to trigger a change in trend."

What made Friday's selloff particularly notable was the decoupling of Treasury yields from oil prices. For weeks, the two had moved in lockstep—yields rising when crude climbed on inflation concerns, falling when it retreated. On Friday, oil prices dropped about 2 percent, with Brent crude settling just above $93 a barrel, yet Treasury yields still rose. This suggested traders were no longer focused on the oil story but rather on what the employment data meant for Fed policy and inflation control.

James McCann, a senior investment strategist at Edward Jones, noted that the bar for rate hikes remains high and would require clearer signs of persistent inflation acceleration. Still, he added, the new Fed chair Kevin Warsh faces a delicate balancing act at his first meeting, given the complexity of the current monetary policy landscape and documented divisions within the Federal Open Market Committee. Nigel Green, CEO of deVere Group, put it more bluntly: "The markets have spent months searching for a reason for the Federal Reserve to cut rates. Today's employment report gave policymakers a reason not to." The CNN Fear and Greed Index, which had been in "greed" territory since mid-April, swung sharply into "fear." One report does not determine monetary policy, Green noted, but one of this magnitude changes the odds—and the markets recognized it immediately.