In a week marked by uncertainty, the US stock market showed signs of vulnerability as inflation worries took center stage. The S&P 500 and the Nasdaq Composite grappled with downward pressure for the second week in a row, raising questions about the sustainability of their recent gains. Meanwhile, the Dow Jones Industrial Average managed to end the week on a positive note, defying the overall trend.

The focal point of the market unease was the release of US producer prices data, which showed an unexpected surge. The producer price index (PPI) climbed by 0.8% over the past 12 months, a significant increase from the previous month’s 0.2% rise. The jump was largely attributed to rising costs of services. Economists’ earlier projections of a 0.7% gain were surpassed, prompting discussions about the potential implications for the economy.

The data fueled concerns that inflation might not be as transitory as previously thought, leading to speculation about the Federal Reserve’s future course of action. While market participants still expect the Fed to maintain its current credit conditions throughout the year, the likelihood of a rate hike in September dipped slightly from 90% to 88.5% following the release of the data.

Experts and investors were quick to weigh in on the market’s response to the inflation news. Jason Betz, a private wealth advisor at Ameriprise Financial, noted that recent developments had seemingly been factored into market expectations, resulting in a sideways trading pattern. This suggests that the market had already anticipated these changes and was neither positively nor negatively surprised by the data.

One of the significant outcomes of the inflation concerns was the impact on Treasury yields. The yield on the two-year US Treasury note, which closely reflects near-term interest rate expectations, surged to 4.88%. The implications of this move were particularly evident among tech giants, known as megacap growth stocks. Higher interest rates can potentially slow down economic growth, affecting the ability of these companies to meet ambitious growth projections that have supported their premium valuations.

Tech heavyweights such as Tesla, Meta Platforms Inc, and Microsoft faced declines ranging from 0.6% to 1.3%. Additionally, the semiconductor index registered a 2.3% decline, driven by Nvidia’s 3.6% fall. This marked the semiconductor index’s fourth consecutive decline and its eighth loss in nine sessions. The index’s 5% weekly drop was its most substantial decline since early April.

The Nasdaq and the S&P 500 had been driven by the exceptional performance of megacap growth and technology stocks throughout the year. However, August has witnessed a shift in investor sentiment, with a more cautious approach prevailing after five months of consistent gains. This shift was possibly attributed to investors reevaluating their positions, particularly in high-growth sectors.

The Dow Jones Industrial Average stood out during the week, closing 0.3% higher at 35,281.4, resulting in a weekly gain of 0.6%. Notably, the Nasdaq Composite experienced its first back-to-back weekly losses in 2023, closing the week 1.9% lower. The S&P 500 ended the week down by 0.3%.

Despite the overall market turbulence, some sectors managed to make gains. The healthcare and energy sectors saw advances, signaling potential shifts in investor preferences. These sectors, which had underperformed for most of the year, showed signs of renewed interest.

The energy sector’s 1.6% increase was supported by rising crude oil prices, driven by forecasts of tighter supplies from the International Energy Agency. Occidental Petroleum Corp gained 3.3% after one of its units secured a grant from the US government to support carbon capture initiatives.

In the midst of these market movements, some individual companies stood out. News Corp, owned by Rupert Murdoch, experienced a 4.6% increase after surpassing quarterly profit estimates due to cost-cutting efforts.

However, US-listed shares of Chinese companies, including Alibaba and JD.com, faced declines of 3.5% and 5.3%, respectively. Disappointment over Beijing’s latest stimulus measures and indications of a slowdown in China’s post-pandemic recovery contributed to the decline.

As the week came to a close, trading volume on US exchanges totaled 10.19 billion shares, slightly below the 10.93 billion average for the last 20 trading days.

Overall, the week underscored the market’s sensitivity to inflation concerns and the potential impact of higher interest rates on various sectors. While uncertainty remains, market participants will continue to closely monitor economic data and central bank decisions to navigate the evolving landscape.