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NEW YORK — The Dow Jones Industrial Average dropped 128 points on Thursday as investors took a cautious stance ahead of the critical September jobs report coming out on Friday. The data could determine if the Federal Reserve will raise interest rates again at their next meeting, prolonging the gains in Treasury yields that have dragged stocks lower this year.

The Dow shed 0.4% to close at 29,219. The S&P 500 and Nasdaq fell 0.5% and 0.6% respectively, with the S&P ending just above 3,640.

September’s jobs report is expected to show a 170,000 increase in nonfarm payrolls, down from 187,000 in August, according to economist forecasts. The unemployment rate is predicted to hold steady at 3.7%.

While a recession is not desired, investors are hoping for signs of cooling in the red-hot labor market that could prompt the Fed to halt its aggressive rate hikes that have pushed the 10-year Treasury yield to 16-year highs above 4.7%.

“We’re in a transition from a perceived low rate environment to a more normalized one. These periods are challenging,” said Scott Ladner, Chief Investment Officer at Horizon Investments.

Ladner believes recent data indicates the labor market is easing in a healthy way, with less hiring but not widespread layoffs. If the jobs data confirms this trend, it may reassure investors that an economic hard landing can be avoided.

Stocks got a slight boost Wednesday after ADP payrolls rose by 208,000 in September, coming in under estimates. The report added to evidence that hiring is slowing from its robust pandemic recovery pace. But some investors had hoped for an even sharper decline to clearly signal an end to the Fed’s rate hikes.

The manufacturing sector also showed further signs of strain. The ISM Manufacturing Index fell to 50.9, barely in expansionary territory above 50. New orders shrank for the third straight month amid softening demand.

PEP, PG, JNJ Lead Consumer Staples Sector Declines

Defensive stocks like consumer staples struggled on Thursday, with the S&P 500 sector dropping 1.4%. Clorox plunged nearly 9% after its earnings were hit by a cyberattack. PepsiCo, Mondelez and Coca-Cola fell over 2% each.

The utilities sector also declined 1.2% as Treasury yields climbed and recession fears remained. AES Corp and NextEra Energy shed 5.5% and 3.6% respectively.

Meanwhile, the Nasdaq underperformed, falling 1% as high-growth tech names came under pressure. Lucid Motors tumbled 9% after unveiling a cheaper version of its luxury electric sedan. Align Technology, Airbnb, AMD and Netflix all lost over 3%.

Rivian, Tesla Drop on Growth Concerns

Electric vehicle makers Rivian and Tesla sank amid growth uncertainties. Rivian shares cratered 21% after announcing plans to raise $1.5 billion through a convertible note offering. Rivian said Q3 revenue would land between $1.29 billion and $1.33 billion, representing a slowdown in quarterly growth.

Tesla saw $665 million in net outflows from retail investors last week, the most of any stock according to JPMorgan. Its shares fell nearly 3% Thursday.

But retail investors added $1.3 billion in equity ETFs over the past week, buying the dip in the midst of an overall turbulent market. Amazon and Microsoft both saw inflows of around $200 million.

The S&P 500 and Dow are headed for weekly declines, while the Nasdaq is up slightly. With recession fears mounting, Friday’s payrolls data could determine whether stocks extend their sell-off or rebound from oversold conditions. All eyes are on the jobs numbers before the opening bell.

Summary:

The September jobs report on Friday could determine if the Fed raises rates again, prolonging the climb in yields that has weighed on stocks. Investors hope for signs of labor market cooling but the data has been mixed. Stocks fell Thursday as caution prevailed ahead of the critical payrolls data. Defensive sectors lagged while tech declined. EV makers Rivian and Tesla dropped on growth concerns. Jobs data remains key for markets seeking evidence peak inflation has passed.