U.S. equities rallied on Friday, with the Nasdaq Composite leading gains as a surprising drop in July payrolls eased concerns about imminent interest rate hikes. At 11:50 a.m. ET, the tech-heavy index was up 1.33%, while the S&P 500 advanced 0.64% and the Dow Jones Industrial Average gained 0.22%.
The catalyst was the Labor Department's preliminary report showing nonfarm payrolls fell by 23,000 in July, a stark contrast to the 80,000 increase forecast by economists. The unemployment rate ticked down to 4.1% from 4.2% in June, but the labor force participation rate slipped to 61.4%, softening the positive signal. Additionally, payroll figures for May and June were revised downward by a combined 103,000 jobs.
Investors interpreted the weak employment data as a sign that the Federal Reserve may hold off on further rate increases. The probability of a September rate hike plunged to roughly 20% from 55% before the report, according to CME FedWatch. Treasury yields responded, with the two-year note falling seven basis points to 4.176% and the 10-year yield declining five basis points to 4.61%.
The market's reaction was notably a duration trade rather than a broad-based growth rally. The Nasdaq outperformed the Dow by 1.11 percentage points, reflecting investor preference for long-duration growth equities that benefit from lower yields. Semiconductors and software stocks led the advance, with the Philadelphia semiconductor index climbing 2.3% and software services up 1.5%.
Eight of the 11 S&P 500 sectors traded higher, with consumer discretionary leading gains while energy shares lagged. The earnings season continued to provide support, with over 85% of the more than 400 S&P 500 companies that have reported so far beating expectations, compared to the historical average of 68%.
Notable movers included Atlassian (NASDAQ:TEAM), which surged 30.2% after beating quarterly estimates and raising guidance, and Microchip Technology (NASDAQ:MCHP), up 13.8% on strong chip demand. Airbnb (NASDAQ:ABNB) gained 15.4% after revenue beat, while Cloudflare (NYSE:NET) rose 7.3% on AI-driven demand. In contrast, Trade Desk (NASDAQ:TTD) fell 21.7% after a weak Q3 outlook, drawing multiple analyst downgrades.
Analyst moves reflected the divergence. JPMorgan raised its price target on Cloudflare to $350 from $145, while several firms cut ratings on Trade Desk, with price targets slashed. The earnings results highlighted investor preference for companies with strong AI infrastructure exposure over those with lagging ad tech.
All three major indexes were on track for their best weekly performance since April, with the S&P 500 up 5.75% over four sessions through Tuesday. However, the semiconductor index remains more than 17% below its late-June high.
Looking ahead, inflation data will test the market's optimism. Analysts expect July CPI to come in at 3.4% year-over-year, with core CPI at 2.5%. Producer price data is due Thursday, followed by retail sales on Friday. Earnings from Applied Materials (NASDAQ:AMAT), Cisco Systems (NASDAQ:CSCO), and CoreWeave (NASDAQ:CRWV) are also on the calendar.
Risks remain, including an above-forecast CPI reading, a further rise in oil prices, or renewed geopolitical tensions, which could revive rate-hike expectations and pressure long-duration stocks.
