US stocks closed lower on Friday after morning gains proved short-lived. Investors analyzed fresh inflation data and weighed political uncertainty following the US presidential debate.

Nike Shares Slip on Biggest One-Day Drop in 20 Years on Downbeat Outlook

"I don't think inflation will change much because the Fed is committed to the 2% target and has been very disciplined," said Ann Miletti, head of active capital at Allspring.

Data showed that monthly U.S. inflation remained flat in May, an encouraging sign after sharp price increases earlier in the year that raised doubts about the effectiveness of the Fed's policies.

The Commerce Department report also showed a modest increase in consumer spending last month, adding to optimism that the Fed will be able to achieve a soft landing for the economy.

The probability of a rate cut in September rose to 66% after the release of the personal consumption expenditures price index, according to LSEG FedWatch.

Despite the Fed's forecast for only one rate cut this year, traders continue to bet on two cuts, hoping for further inflation relief.

The first debate on Thursday between U.S. President Joe Biden and his Republican opponent Donald Trump also weighed on the stock market, said Thomas Martin, senior portfolio manager at Globalt Investments, highlighting the incumbent's unconvincing performance.

"People are trying to figure out what's going to happen with the presidential election. "The uncertainty has only increased since the debate," he said.

Treasury yields pared their morning losses and ended the day higher, adding to pressure on big-name stocks.

San Francisco Fed President Mary Daly noted the slowdown in inflation, calling it "good news" that policy is working. Fed Governor Michelle Bowman said the central bank will hold its course because it has not yet reached its inflation target.

The S&P 500 energy (.SPNY) and real estate (.SPLRCR) indexes rose 0.42% and 0.62%, respectively, while utilities (.SPLRCU) and telecom (.SPLRCL) fell 1.08% and 1.63%.

Nike (NKE.N) shares fell 19.98% after forecasting a big decline in fiscal 2025 revenue, weighing on the broader consumer discretionary sector (.SPLRCD).

The Dow Jones Industrial Average (.DJI) fell 41.12 points, or 0.11%, to 39,122.94. The S&P 500 (.SPX) lost 22.57 points, or 0.41%, to end at 5,460.30, while the Nasdaq Composite (.IXIC) fell 126.08 points, or 0.71%, to 17,732.60.

Volume picked up late in the session as FTSE Russell completed a rebalance of its indices. It was the second-highest daily volume this year.

The S&P 500 and Nasdaq posted quarterly gains of 3.9% and 8.3%, respectively. Meanwhile, the Dow (.DJI) fell 1.7%, highlighting the differences between the more tech-heavy indexes and the rest of the market.

A standout among individual stocks was optical networking equipment maker Infinera (INFN.O), which jumped 15.78% after Nokia (NOKIA.HE) announced plans to acquire the company for $2.3 billion.

Advancing stocks outnumbered declining stocks 1.29-to-1 on the New York Stock Exchange, with 271 new highs and 75 new lows.

The S&P 500 posted 16 new 52-week highs and one new low, while the Nasdaq Composite posted 58 new highs and 139 new lows.

Upcoming economic reports and Federal Reserve Chairman Jerome Powell's testimony to Congress could lift U.S. government bonds out of their current narrow trading range.

The yield on the 10-year U.S. Treasury note, which moves inversely to their prices, has risen to a range between 4.20% and 4.35% since mid-June as the market reacted to data showing slowing inflation and signs of weakening economic growth across a range of indicators. The 10-year yield was 4.33% on Friday.

Economic data have so far failed to dispel doubts about the depth of the Fed's interest rate cuts this year, keeping Treasury yields in their range. However, U.S. employment data next week, as well as new inflation data and a speech by Jerome Powell, could change that outlook.

U.S. monthly inflation, as measured by the personal consumption expenditures (PCE) price index, was unchanged in May, a report released Friday. That confirms the trend of slowing inflation and robust economic growth that has stabilized bond market swings and supported stocks in recent weeks.

However, federal funds futures showed that traders expect rates to be cut by just under 50 basis points over the course of the year.

The market reaction to the upcoming employment data next Friday could be exacerbated by tight liquidity during a week when many U.S. bond traders will be off work for the July 4 holiday, said Hugh Nicola, head of fixed income at GenTrust. "The market is looking for more big events," he added.

Other big events this month include consumer price data scheduled for July 11. Jerome Powell is also scheduled to deliver his semiannual monetary policy testimony before the Senate Banking Committee on July 9, according to the office of Senate Chairman Sen. Sherrod Brown.

If tradition continues, Powell will testify the following day before the House Financial Services Committee.