Stocks opened in the red in Friday's low-volume session and kept sliding into the close. Weighing on sentiment was the latest inflation data, while market participants may have also been taking profits ahead of a historically weak month.
As a reminder, Monday is a stock market holiday, with both the equities and bond markets closed for Labor Day.
Ahead of the long holiday weekend, Wall Street got a look at data from the Bureau of Economic Analysis that showed the Personal Consumption Expenditures (PCE) Price Index – the Fed's preferred measure of inflation – rose 0.2% from June to July and was up 2.6% year over year.
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Core PCE, which excludes volatile food and energy prices, increased 0.3% monthly in July and was 2.9% higher compared to the year-ago period. The annual increase in core PCE was the largest since February.
"The PCE price index broadly came in as expected," says Greg Wilensky, head of U.S. Fixed Income at Janus Henderson Investors. "As with the inflation releases from earlier this month, there was somewhat more inflation on services than the goods side. This means either the tariffs impacts have still not flowed through to a large extent or the tariff impact will be smaller than originally expected."
While Wilensky admits that there is "probably some truth" to both sides of this argument, it "still means that there will be more upward pressure of goods inflation to come."
He also says today's inflation data "does nothing to detract the focus from next week's" jobs report. "Unless we see a strong bounce back in the headline payroll number, the path to a 25 basis point cut at the September meeting will be very clear."
Consumer sentiment weakens in August
Also in focus today was the University of Michigan's Consumer Sentiment Index, which fell to 58.2 in August from 61.7 in July, lower than the initial reading of 58.6.
"Consumer sentiment confirmed its early-month reading, moving down about 6% from July," wrote Surveys of Consumers Director Joanne Hsu in the release. "This month's decrease was visible across groups by age, income, and stock wealth. Moreover, perceptions of many aspects of the economy slipped."
The report also showed that both year-ahead and long-run inflation expectations edged up from July.
Caterpillar sinks on $1.8 billion tariff warning
In single-stock news, Caterpillar (CAT) sank 3.7%, making it the worst Dow Jones stock today, after the construction equipment giant warned that tariff costs could come in higher than initially expected.
In a regulatory filing, Caterpillar said that it "now expects the net impact from incremental tariffs introduced in 2025 will be between approximately $500 million to $600 million for the third quarter and approximately $1.5 to $1.8 billion for 2025."
Earlier this month, the company said it expected the net impact of tariffs to be between $1.3 billion and $1.5 billion for the full year.
"The bulk of the update accounts for changes in the Section 232 steel and aluminum tariffs announced post-earnings, as well reciprocal rates with India," says Oppenheimer analyst Kristen Owen.
Owen adds that uncertainty over the company's mitigation strategy is weighing on sentiment, though the company acknowledged that "all options remain on the table."
Tech stocks tumble after earnings
Weakness was seen across the technology sector, too, with several stocks falling after their quarterly earnings reports.
Most notable were Dell Technologies (DELL), which plunged 8.9% after giving weak guidance, and Marvell Technology (MRVL), which slumped 18.6% on its disappointing forecast.
September tends to be a tough month for stocks
As for the main indexes, the blue chip Dow Jones Industrial Average was down 0.2% at 45,544, the broader S&P 500 was 0.6% lower at 6,460, and the tech-heavy Nasdaq Composite was off 1.2% at 21,455.
For all of August, the three benchmarks boasted total returns (price change plus dividends) ranging from 1.8% to 3.6%.
"There's no new justification for Friday's stock market sell off except for investors dodging what's historically been the worst month for equity returns," says José Torres, senior economist at Interactive Brokers.
With the S&P 500 now up 11.5% for the year to date on a total return basis, "participants were grabbing profits … heading into September."
Just how bad is September? According to Yardeni Research, the S&P 500 closed lower 53 times in September going back to 1928. And its average monthly return of -1.13% is the worst of all 12 months.
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