The S&P 500 index endured its sharpest weekly decline in over a year and a half — a drop that hasn't been seen since the banking crisis in March 2023.

A cooler labor market report prompted investors to reduce their risk exposure after three consecutive weeks of gains.

On Friday, Wall Street experienced a strong "risk-off" session, with the S&P 500, tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY), closing 1.7% lower. This extended the weekly loss to 4.1%.

Tech stocks were hit even harder. The Invesco QQQ Trust, Series 1 (NASDAQ:QQQ), which follows the performance of major tech stocks, plunged 2.6% on Friday. This resulted in a 5.8% weekly loss, the steepest since October 2022.

Semiconductors bore the brunt of the selling. The iShares Semiconductor ETF (NYSE:SOXX), a barometer for the semiconductor industry, sank 4.3% on Friday alone. Over the week, the sector was down 11.8%, its worst weekly performance since March 2020.

Cooling Employment Numbers Amplify Risk-Off Mood

Friday's selloff was driven in large part by the latest labor market data. The U.S. economy added just 142,000 nonfarm payrolls in August, missing the forecast of 160,000 and significantly below the one-year average of 202,000 new jobs per month.

The unemployment rate ticked down slightly from 4.3% to 4.2%, in line with expectations, while wage growth provided a mild upside surprise.

"We acknowledge that today's employment report was weaker than we expected, but we don't see a recession," said veteran Wall Street investor Ed Yardeni.

Yardeni highlighted that while employers are not laying off workers en masse, their demand for new hires has slowed down, even as the supply of labor has increased.

"The moderation in the labor market has been characterized by low layoffs and slowing hiring," added Bank of America economist Shruti Mishra.

In response to the softer jobs data, Bank of America altered its forecast for Federal Reserve rate cuts. Previously, the bank had expected 25 basis point cuts per quarter beginning in September. Now, the firm foresees the Fed trimming rates by 25 basis points at each meeting for the next five sessions, bringing the policy rate down to 4% by March 2025.

Friday's Major Drags On The S&P 500

Here's a breakdown of the five largest contributors to Friday's decline in the S&P 500:

Friday's Worst-Performing Semiconductor Stocks

The semiconductor sector faced particular challenges, with major names among the worst performers:

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