NEW YORK, Aug 2 (Reuters) - Economic concerns are once

again showing up on Wall Street's radar, as worries grow that

months of elevated interest rates may be starting to hurt U.S.

growth.

For months, investors had been heartened by cooling

inflation and gradually slowing employment, believing they

bolstered the case for the Fed to begin cutting interest rates.

Now that a September rate cut has come into view following a

Fed meeting earlier this week, investors are worried that the

central bank may have left rates at restrictive levels for too

long, allowing them to take a toll on economic growth.

Evidence of such a shift in thinking came on Thursday, when

data showing weakness in the labor market and manufacturing

sector sparked a sharp selloff in U.S. equities, with investors

dumping everything from chip stocks to industrials while piling

into defensive plays. Richly valued tech stocks tumbled,

extending losses in the Nasdaq Composite to nearly 8%

from a record closing high reached in July.

"The narrative has been that rate cuts are just because

inflation is coming closer to the target while everything else

remains pretty solid," said Angelo Kourkafas, senior investment

strategist at Edward Jones. "But now there are some cracks."

The concerns put a spotlight on upcoming releases - such as

Friday's employment data and an inflation report later this

month - that could exacerbate worries if they show further signs

of weakness.

Next week brings earnings from industrial bellwether

Caterpillar ( CAT ) and media and entertainment giant Walt

Disney ( DIS ), which will give more insight into the health of

the consumer and manufacturing, as well as reports from

healthcare heavyweights such as weight-loss drugmaker Eli Lilly ( LLY )

.

Bets in the futures markets on Thursday suggested growing

unease about the economy. Fed fund futures reflected traders

pricing in an over 25% chance of a 50-basis point cut at the

central bank's September meeting, double the odds from a day

before, according to CME FedWatch. Futures priced a total of 85

basis points in rate cuts in 2024, compared to just over 60

basis points priced in on Wednesday.

"The comfort that (the market) took yesterday in feeling

that the Fed was on track for a September rate cut has switched

to the reality that there is a lot of time between now and that

September meeting," said Yung-Yu Ma, chief investment officer at

BMO Wealth Management.

Broader markets also showed signs of unease. The Cboe

Volatility index - known as Wall Street's fear gauge -

stands near a three-month high as demand for options protection

against a stock market selloff rose. Worries over fresh turmoil

in the Middle East also contributed to investor nervousness.

Meanwhile, investors have shown a preference for sectors

such as utilities and healthcare - popular options during times

of economic uncertainty.

Options data for the Health Care Select Sector SPDR Fund

showed the average daily balance between put and call

contracts over the last month at its most bullish in about three

years, according to a Reuters analysis of Trade Alert data.

Trading in the options on Utilities Select Sector SPDR Fund

also shows a pullback in defensive positioning,

highlighting traders' expectations for strength for the sector.

The healthcare sector is up 4% in the past month,

while utilities are up over 9%. By contrast, the

Philadelphia SE Semiconductor index is down 11% in that

period amid sharp losses in investor favorites such as Nvidia ( NVDA )

and Broadcom ( AVGO ).

To be sure, some investors said the data could just be an

excuse to lock in profits after the market's overall strong run

in 2024.

"What you're seeing now, and you'd probably see it for the

next month or two, is some kind of consolidation and sideways

price action," said Bill Strazzullo, chief market strategist at

Bell Curve Trading. "The bigger picture bull trend is intact."

Investors will have more earnings reports to chew over in

the weeks ahead, including Nvidia ( NVDA ) at the end of the month, while

the U.S. presidential race could add to volatility.

"It's such a fine line because you want just enough economic

weakness that the Fed will have to cut rates but not so much

that it becomes bad for corporate earnings," said Burns

McKinney, a portfolio manager at NFJ. "The Fed has almost been

like a surfer riding a wave and trying to time everything just

right."