By Sue Chang, MarketWatch

'In the global wide search for yield, U.S. stocks are still attractive'

The Federal Reserve's top two officials did their best Friday to convince investors interest rates will likely rise by the end of the year, waking stock-market bears from hibernation. But the damage to equities is likely to be minimal once Wall Street regains its composure.

Fed Chairwoman Janet Yellen said the case for an interest-rate increase is strengthening (http://www.marketwatch.com/story/feds-yellen-says-case-for-another-interest-rate-hike-has-strenghtened-2016-08-26), setting the stage for the central bank to tighten monetary policy in the coming months.

"In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal-funds rate has strengthened in recent months," said Yellen.

Fed Vice Chairman Stanley Fischer was more explicit, saying Yellen's comments were consistent with possibly two rate increases this year (http://www.marketwatch.com/story/feds-fischer-yellens-speech-consistent-with-possibility-of-2-interest-rate-hikes-this-year-2016-08-26)--including a move as early as next month. Yellen and Fischer both stressed that any policy decision will be dependent on economic data.

That was enough to turn stocks lower, with the S&P 500 finishing the day down 3.43 points at 2,169.04, logging a weekly drop of 0.7%. The Dow Jones Industrial Average fell 53.01 points to finish at 18,395.40, off 0.9% for the week. The Nasdaq Composite bucked the trend to rise 6.71 points to 5,218.92 but the tech-heavy index still fell 0.4% on the week.

Bullish analysts believe negative sentiment could carry over to next week as investors continue to dissect and digest the Fed's verbiage. But any pullback is likely to be short-lived, they said.

"The market is not vulnerable to anything more than 3%-5% drop until mid to late September," said Jeffrey Saut, chief investment strategist at Raymond James. "If we don't follow through on the downside with vigor, the S&P 500 could test new highs."

Bob Pavlik, chief market strategist at Boston Private Wealth LLC, was more restrained, noting that selling pressure has mounted in recent sessions. Still, near-term weakness will be met with buying interest once the S&P 500 moves toward 2,156 with more solid support near 2,144 points, he said.

"The economy doesn't need emergency funding," he said. But by the same token, he said, the data don't support a rate hike -- at least, not in September.

Even as Yellen sounded bullish on the economy, data point to soft patches. The gross domestic product grew 1.1% in the second quarter, while the University of Michigan consumer sentiment index fell to 89.8 from 90.0 in July.

"Investors should stop looking at every word that comes out of the Fed," said Karyn Cavanaugh, market strategist at Voya Investment Management. "A September rate hike won't happen, regardless of what anyone says."

Amid the absence of high-profile corporate earnings and given the Fed's emphasis on data, economic indicators will be the main drivers next week with consumer spending, inflation, and the all-important August jobs report on tap.

Economists surveyed by MarketWatch estimate the U.S. economy added 160,000 jobs in August, compared with 255,000 last month (http://www.marketwatch.com/story/us-gains-292000-jobs-in-july-2016-08-05). Any number above the consensus is likely to be greeted with trepidation by market participants wary of the Fed becoming trigger-happy.

Still, a rise in interest rates might not be the catastrophe that some investors fear, according to Pavlik. "Twenty-five basis points is not going to spell the end of the forward movement of the economy," he said.

A rate increase also won't be the death knell for the market despite the knee jerk reaction on Friday. "In the global wide search for yield, U.S. stocks are still attractive," said Cavanaugh.

(END) Dow Jones Newswires

August 27, 2016 15:36 ET (19:36 GMT)