Why the stock market is going berserk today

Until recently, investors cheered weak economic data as fuel for rate cuts. Now they fear the Fed may be too far behind.

• The stock market is in shambles on Friday, with all three major indexes falling more than 2%.
• Investors are digesting a series of weaker-than-expected data points and questioning the Fed.
• They're also grappling with disappointing mega-cap tech earnings, headlined by Amazon.

The US stock market has plunged into chaos as investors digest a streak of negative economic data and disappointing mega-cap-tech earnings.

All three major US indexes were down more than 2% at 12 p.m. in New York, with tech and small-cap shares taking the biggest hit. The moves continued a market-wide skid that started on Thursday. The S&P 500 has now slid 4% in just two days, while the tech-heavy Nasdaq Composite is down 5% over the period and flirting with correction territory.

The sell-off began gathering momentum on Thursday amid a slew of weak data points. Jobless claims climbed near a one-year high, while manufacturing data came in well below estimates.

Investors became even more discouraged after Thursday's closing bell after disappointing earnings reports from Amazon and Intel. Amazon missed its second-quarter sales forecast and issued light guidance for the third quarter. Intel, meanwhile, announced plans to cut 15,000 workers and gave a dismal growth forecast. Its stock plunged as much as 30%, the biggest single-day decline since at least 1982.

Stock futures were already deeply in the red on Friday morning. Then investors really seemed to throw in the towel after the jobs report. The economy added 61,000 fewer jobs than expected in July, and unemployment unexpectedly spiked to 4.3%, triggering a widely followed recession indicator called the Sahm Rule.

The sell-off seems to be signaling a shift in how investors are interpreting weak economic data. Months ago, signs of a slowing economy would bolster expectations for Fed rate cuts, which are seen as rocket fuel for stocks.

But with a cut now being priced in with certainty in September, investors are wondering whether the economy is weakening too rapidly.

"Bad news is no longer good news for stocks," John Lynch, the chief investment officer at Comerica Wealth Management, said in a statement on Friday. "Pressure will escalate on the Federal Reserve as market interest rates will continue the attempt to force their hand."

Some are even questioning whether the Fed miscalculated and made a mistake with its path of rate cuts.

"Oh dear, has the Fed made a policy mistake? The labor market's slowdown is now materializing with more clarity," Seema Shah, the chief global strategist at Principal Asset Management said, noting that job gains have dropped below levels typical of a "solid economy."

She added: "A September rate cut is in the bag and the Fed will be hoping they haven't, once again, been too slow to act."

New York Fed economists are pricing in 56% chance the economy could enter a recession by June of next year.

Meanwhile, rate-cut forecasts on Wall Street have gotten far more dovish over the past few days. Bets on a 50 basis-point rate reduction in September have jumped to 75%, according to the CME FedWatch tool. That's way up from the 12% odds from a week ago. Basically, the consensus has shifted from a 25-basis-point move to 50 in a matter of days.

"This is further proof that the economy is slowing, which has many worried the Fed is now firmly behind the eight ball," Ryan Detrick, the Carson Group's chief market strategist, said in a note. "It is becoming clear that the Fed should be more worried about the economy than inflation, which is increasing the chances of a 50-basis-point cut in September."