Stocks Stumble as Strong Spending Data Stokes Inflation Fears

U.S. stocks closed mostly lower on Friday as upbeat consumer spending data sparked fresh concerns about persistent inflation.

The S&P 500 fell 0.5% to enter correction territory, closing 10% below its recent high. The Dow Jones Industrial Average shed 1.1%, weighed down by declines in Merck, Boeing and other blue-chip stocks.

The losses came after a Commerce Department report showed that consumer spending rose 0.4% in September, exceeding economists’ forecasts. The strong spending highlights resilience among consumers but could add fuel to inflation if the trend continues.

Consumers are spending more than they are earning, said Jeffrey Roach, chief economist at LPL Financial. This can’t last much longer with inflation still near 40-year highs.

The inflation pressures were evident in the Fed’s preferred inflation gauge, the PCE price index, which rose 0.3% last month and was up 3.7% from a year ago.

The mixed economic data underscores the difficult balancing act facing the Fed as it aggressively tightens policy to tame inflation. Stocks have been under pressure this year amid rising rates and recession fears.

Meanwhile, on the earnings front, Amazon jumped 6% after delivering blockbuster Q3 results, providing a rare bright spot for Big Tech. However, shares of Google-parent Alphabet dropped 2% this week after reporting disappointing ad sales.

With nearly half of S&P 500 companies having reported third-quarter results, earnings growth is on track for 2.2% versus expectations for 4.1% at the start of October.

As inflation remains entrenched and fear of an economic downturn builds, markets are likely to remain turbulent in coming months. “Investors should brace for more volatility,” warned Stephen Ethan, market analyst at MarketsXplora.