U.S. stock indexes posted some of the steepest weekly declines in more than a year, with the NASDAQ down nearly 6%, the S&P 500 falling more than 4%, and the Dow declining almost 3%. Technology stocks were hit particularly hard amid fresh concerns about the short-term profit potential from artificial intelligence. The price of U.S. crude oil fell nearly 8% for the week to the lowest level in about 14 months, with the commodity trading for around $68 per barrel. Concerns about sagging demand in the United States and China weighed on the price, which had been above $80 as recently as mid-July. The week’s volatility was especially pronounced for U.S. small-cap stocks, which lagged their large-cap peers by a wide margin. The Russell 2000 Index, a small-cap benchmark, fell nearly 6%, sinking to the lowest level since August 14.

Weakening U.S. economic data, headlined by another soft monthly jobs report, added to the market volatility. The US jobs report for August revealed a lower-than-expected gain in nonfarm payrolls, with 142,000 jobs added compared with 165,000 expected. The unemployment rate came down to 4.2%, and average hourly earnings rose by 0.4% month over month, suggesting that workers retain some bargaining power. Notably, revisions to the previous months removed 86,000 jobs, underscoring a weaker payroll level than initially reported.

In addition to the cool labor market reading, the Institute for Supply Management reported on Tuesday that its gauge of U.S. manufacturing activity remained firmly in contraction territory in August, with new orders falling for the third consecutive month. When the primary market focus was on inflation and overheating economic conditions earlier this year, bad economic news of weakening activity like last week was generally received as good news by the market as it pointed to rate cuts on the horizon as the economy came more into balance. However, in recent months as inflation concerns have continued to ebb and the start of the rate cutting cycle comes nearer to reality, bad economic news is now bad news for markets as investors worry about activity swinging too far in the other direction towards recession.

We are now entering a seasonally choppy period for markets in September and October, followed by U.S. elections on November 5. Given the uncertainty in the economic (and political) environment, we could see further market volatility in the weeks ahead. Yet, the fundamentals still support the ongoing market expansion: Inflation is moderating, the Fed is poised to cut rates, and economic growth, while cooling, does not yet seem indicate a high probability of recession near-term.

In the week ahead, the Consumer Price Index report is set to be released on Wednesday, which will provide one of the last data points for the U.S. Federal Reserve as it considers cutting its key interest rate by either 25 or 50 basis points at a meeting ending September 18. The most recent CPI report released in August showed an annual inflation rate of 2.9%, the first reading below 3.0% since early 2021, and that is expected to fall further to 2.6% in this week’s reading, according to FactSet’s consensus economist forecast.