The stock market went berserk

• The stock market was in shambles Friday, with all three major indexes declining sharply.
• Investors are digesting a series of weaker-than-expected data points and questioning the Fed.
• They're also grappling with disappointing earnings from megacap tech companies, headlined by Amazon.

The US stock market plunged into chaos on Friday as investors digest a streak of negative economic data and disappointing earnings from megacap tech companies.

All three major US indexes closed more than 1.5% lower, with tech and small-caps taking the biggest hit. The Dow Jones industrial average was down almost 1,000 points at intraday lows. The moves continued a marketwide skid that started on Thursday. The S&P 500 ended up sliding 3% in just two days, while the tech-heavy Nasdaq Composite is nearly 5% over the period, and now sits in 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, with 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 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 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, adding that job gains had 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 a 56% chance the economy could enter a recession by June 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."