Why did stocks tumble this week?

The stock market had a tough week, with the S&P 500 and tech-stock-heavy Nasdaq retreating sharply on Thursday and Friday following a batch of concerning news on inflation, jobs, and tariffs.

The S&P 500 fell 2.7% from an early-week high while the Nasdaq lost 3.9% of its value from its peak on Thursday.

Here's why stocks retreated, and what could happen next.

The stock market sold off this week as concerns the Fed is falling behind the curve mount.

Image source: Nagle/Bloomberg via Getty Images

Fed interest rate policy risks being too late

The stock market sell-off began in earnest following the Federal Reserve's controversial decision to keep interest rates at 4.25% to 4.5%.

President Trump has advocated for Fed Chairman Jerome Powell to cut rates aggressively, recommending a 3% reduction.

Lower interest rates support stock prices because they increase household and business spending, fueling revenue and profit growth. Powell's reluctance to lower rates remains a headwind for stocks this year.

Powell cited risks of tariffs driving inflation higher later this year and a “solid” economy for the decision to leave rates unchanged. Many viewed his hawkish tone during his press conference as an indication that rates may not get cut at the next meeting in September either.

The decision drew the ire of President Donald Trump, who has previously called Chairman Powell “Mr. Too Late” and a “numbskull” for not already reducing interest rates. The President renewed his calls for Powell to resign following the Fed meeting.

Despite White House pressure, the Fed's dual mandate targets low unemployment and inflation, which dictates its decisions on monetary policy. The Fed's mandate purposefully excludes political jawboning.

Unfortunately, the Fed's dual goals are contradictory. While Fed rate cuts boost economic activity and lower unemployment, they increase inflation. The opposite is true when it raises rates.

This dynamic often means that the Fed hesitates for fear of causing more economic problems than it solves.

Unfortunately, that often means that the Fed falls behind the curve when setting interest rates at appropriate levels, forcing it to act more aggressively than it might otherwise because the economy has gotten too hot or cold. That chasing can lead to greater uncertainty, causing stock market volatility.

Rising inflation amid higher tariffs is bad for stocks

The stock market's sell-off earlier in 2025 was primarily due to higher-than-expected import tariffs and the risk that they would boost inflation, zapping economic activity.

Those worries fell when President Trump paused many tariffs on April 9, kickstarting a massive stock market rally that sent the S&P 500 and Nasdaq up over 28% and 38%, respectively.

More Layoffs:

However, now that President Trump's tariff pause expired on August 1, he's announced new tariffs ranging from 10% to 41%, including a 35% tariff on Canada, up from 25%. Canada was our third-largest trading partner in 2024.

The higher tariffs are problematic, given that they occur even as the impact of tariffs left in place earlier this year seems to be increasing inflation.

The Personal Consumption Expenditures index showed inflation increased to 2.6% in June, up from 2.4% in May and 2.2% in April.

The higher and faster inflation rises, the more likely business and household spending will shrink, dinging corporate revenue and earnings growth at publicly traded companies.

Jobs data show cracks in the US economy forming

The stock market was also hit by disappointing jobs data. Stocks perform best when the economy creates more jobs and wages grow, creating extra discretionary income.

On Friday, the Bureau of Labor Statistics said the US economy only added 73,000 jobs in July, far fewer than the 100,000 expected and 147,000 in June. As a result, the unemployment rate increased to 4.24%, its highest level this cycle.

Meanwhile, the Job Openings and Labor Turnover Survey (JOLTS) showed the number of open jobs fell to 7.4 million in June from 7.7 million in May.

In case that wasn't concerning enough, Challenger, Gray & Christmas reported that US employers announced 62,075 layoffs in July, up 29% from June and 140% year over year.

What's next for the stock market

Stocks have had a remarkable rally, and it's not shocking that they might take a break. August is a notoriously weak month for stock market returns, and recent gains have lifted the S&P 500's forward price-to-earnings ratio, a key valuation measure, to lofty levels.

According to FactSet, the S&P 500's forward P/E ratio was 22.4 on Friday, near the highs set in February before tariff announcements caused a sell-off, and up from about 19 in April, when stocks were near the lows.

With valuation arguably rich and inflation and jobs uncertainty growing, stocks could experience more volatility than usual this month.

Long-term investors are likely best off simply recognizing that pullbacks are common. According to Capital Group, a money manager with $2.2 trillion under management, the S&P 500 retreats 5% to 10% about once per year.

Short-term investors may want to take a different approach, locking in recent gains and looking for lower entry points in the coming weeks.