Stocks end mostly higher, but S&P 500, Nasdaq book worst weekly losses since December

How stocks traded

• Dow Jones Industrial Average
  DJIA,
  +0.50%
  rose 169.39 points, or 0.5%, to close at 33,869.27.

• S&P 500
  SPX,
  +0.22%
  gained 8.96 points, or 0.2%, to finish at 4,090.46.

• Nasdaq Composite
  COMP,
  -0.61%
  fell 71.46 points, or 0.6%, to end at 11,718.12.

For the week, the Dow dipped 0.2% while the S&P 500 shed 1.1% and the Nasdaq fell 2.4%. The Dow fell for a second straight week, while the S&P 500 snapped two consecutive weeks of gains in its biggest percentage drop since the week ending Dec. 16, according to Dow Jones Market Data.

Read: The stock market isn’t yet ‘all-clear’ for a breakout rally, warns Wells Fargo Institute

What drove markets?

Stocks ended mostly higher, as investors divided their attention between corporate earnings reports, economic data and comments from Federal Reserve officials.

In economic data released Friday, the University of Michigan’s preliminary report showed its index of U.S. consumer sentiment rose in early February to a 13-month high of 66.4, indicating Americans are cautiously optimistic about the U.S. economy.

“The consumer is in a relatively good place,” said Geoff Dailey, deputy head of U.S. equities at BNP Paribas Asset Management, in a phone interview Friday. He cited “nice wage growth” in a “robust” job market, disinflation trends in the goods sector and checking-account balances that are “still well above pandemic levels.”

The University of Michigan report also showed inflation expectations one-year out edged up to 4.2%, a development that BMO’s Benjamin Jeffery described as “troubling for the Fed” in emailed comments. The Fed has been battling inflation with interest rates hikes.

“Generally, inflation expectations have been very well anchored,” said Dailey. “We would expect two more hikes and then likely a pause. We don’t foresee a cut this year.”

Dailey said that “a cut would be a signal of a deeper recession” than BNP Paribas is currently envisioning based on the “healthy consumer” and the recent path of disinflation.

Meanwhile, investors were also disappointed by some quarterly earnings reports, including from Expedia Group
EXPE,
-8.55%,
which showed shrinking profit margins and sowed doubts about the all-important consumer-discretionary sector. Consumer discretionary
SP500.25,
-1.22%
is the S&P 500’s best-performing sector so far this year, up more than 14%, according to FactSet data.

“We’ve seen in the jobs numbers that wages aren’t continuing to rise at the same rate inflation has. Overall people have less money to spend, and travel is discretionary,” said Kim Forrest, chief investment officer at Bokeh Capital Partners, during a phone interview with MarketWatch. Bokeh added that investors are wary of opening new long positions ahead of next week’s consumer-price-index report.

Others warned that still high wage growth and stubborn services sector inflation could create problems when the CPI report for January is released on Tuesday.

“Recent inflation data indicate that price pressures have moderated, but the still-tight U.S. labor market, evidenced by the nonfarm payrolls released last week, remains a concern for policy makers,” said Mark Haefele, CIO of global wealth management at UBS, in emailed comments.

While stocks have retreated this week, some say they’ve avoided deeper losses because Fed Chair Jerome Powell didn’t stray from his view that a “disinflationary process has begun” during comments earlier this week.

Stocks have endured some pressure this week following hawkish remarks from Fed officials such as New York President John Williams and Fed Gov. Christopher Waller.

Meanwhile, the yield curve in the U.S. Treasury market has been deeply inverted, with short-term rates trading above longer-term yields, in a bond-market signal that a recession may be looming.

The yield on the two-year Treasury note
TMUBMUSD02Y,
4.510%
edged up less than one basis point Friday to 4.511%, while 10-year yields
TMUBMUSD10Y,
3.737%
rose 6.1 basis points to 3.743%, according to Dow Jones Market Data.

“We still see just huge uncertainty with stock market valuations,” said Ryan Belanger, founder of Claro Advisors, in a phone interview Friday. “Risk-free” rates of more than 4% in the U.S. government bond market provide “tremendous competition for investment dollars in a rather uncertain earnings environment” for companies, he said.

Read: Yes, retail investors are back, but they only have eyes for Tesla and AI right now

In developing news, a U.S. fighter aircraft took down a “high-altitude object” over Alaska, according to a White House spokesman, John Kirby, during a briefing on Friday. Kirby said the object, which was flying at an altitude of 40,000 feet, posed a reasonable threat to the safety of civilian flight and that the Defense Department would have more to say on the matter.

See: ‘High-altitude object’ downed over Alaska within the last hour, White House says

Companies in focus

• Expedia
  EXPE,
  -8.55%
  shares sank 8.6% after the travel company reported disappointing quarterly earnings.

• Lyft Inc.
  LYFT,
  -36.44%
  shares plunged 36.4% after the ride-sharing company posted record revenue for a second consecutive quarter but issued weak guidance.

• News Corp. Class A
  NWSA,
  -9.37%
  shares dropped 9.4% after reporting earnings last night. The company is the owner of Dow Jones, which is the publisher of this report.

—Barbara Kollmeyer contributed to this article.