Investors are focused on how American consumers and businesses are coping with elevated inflation and high borrowing costs

The S&P 500 fell Wednesday after stronger-than-expected retail sales data kept investors focused on the Federal Reserve’s interest-rate path.

The broad stock market index fell 32.94 points, or 0.8%, to 3958.79, while the technology-focused Nasdaq Composite Index retreated 174.75 points, or 1.5%, to 11183.66. The Dow Jones Industrial Average lost 39.09 points, or 0.1%, closing the day at 33553.83.

Investors are trying to ascertain how resilient both consumers and businesses are to price pressures and high borrowing costs. Wednesday’s data showed U.S. retail sales rose strongly in October, up 1.3% from the prior month. Economists polled by The Wall Street Journal had expected a 1.2% increase.

The Fed has been aggressively raising interest rates to slow the economy, but consumer spending has remained relatively robust so far. Higher rates take time to ripple through the economy.

Kansas City Fed President Esther George warned that the central bank may not be able to adequately cool inflation without inducing a recession. Wednesday morning’s industrial production data showed slowing activity while prior levels were revised lower, adding to worries that capital-intensive businesses are struggling to weather higher interest rates.

Quarterly updates from U.S. retailers have offered a more equivocal picture.

Target on Wednesday said its shoppers pulled back in the latest quarter amid a worsening economic outlook. Shares fell $23.51, or 13%, to $155.47. That contrasted with more upbeat results from Lowe’s, which reported stronger-than-expected sales and raised future expectations, boosted by home-improvement spending. Shares rose $6.29, or 3%, to $215.13.

“Part of the relative strength in retail sales versus some of the reported earnings is that it isn’t an inflation-adjusted series,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. “Yes, prices are higher and that’s creating higher nominal sales. But in real terms, it’s not as strong as headlines might suggest.”

Reflecting the fear of a downturn, the bond market extended its inversion—one of Wall Street’s key recession indicators. The typically positive difference between the yield on the 10-year and the two-year Treasury note fell to negative 0.670 percentage point, the spread’s most inverted level since 1982.

The yield on the 10-year U.S. Treasury note fell to 3.693%, from 3.798% late Tuesday. The yield on the two-year note, which is more sensitive to near-term interest rate expectations, rose modestly to 4.363% from 4.359%. Yields fall as bond prices rise.

Mr. Lyngen said he expects the Federal Reserve to raise interest rates by 0.5 percentage point at the December meeting, then slow the pace from there. However, once they reach the federal funds rate’s ultimate peak, “they will hold rates there, risking a more significant recession.”

That demand destruction is putting pressure on the long-term yield, he said, which is sensitive to growth and inflation expectations.

Stocks have rallied in recent days as data indicated pricing pressures moderated last month for both consumers and suppliers. Investors are betting that a slowdown in inflation will allow the Federal Reserve to ease up on interest-rate increases.

“Clearly there are these hopes for a true peak in inflation and hawkishness from central banks,” said Thomas McGarrity, head of equities at RBC Wealth Management. But he cautioned that stocks are likely to remain volatile as investors face the rising risks of a global recession in 2023.

“We’re not completely out of the woods yet,” he said.

The best performing segments of the market were defensive-oriented businesses such as utilities, and healthcare stocks. Shares of technology and consumer discretionary firms that are more sensitive to the economic growth outlook suffered the most, with each down about 1.5%.

Cryptocurrency prices were slightly lower as the fallout from the implosion of crypto exchange FTX spreads. Bitcoin slipped 2% from its 5 p.m. ET price on Tuesday to $16,538.05.

In commodity markets, prices for Brent crude, the global benchmark, fell 1.1% to $92.86.

European stocks were lower. The Stoxx Europe 600 fell 1%, while the U.K.’s FTSE 100 slipped 0.2%. U.K. inflation rose to a fresh 41-year high in October on surging energy prices.

In Asia, indexes were mixed. Japan’s Nikkei 225 gained 0.1%, while Hong Kong’s Hang Seng lost 0.5% and China’s benchmark Shanghai Composite lost 0.4%. Asian stocks have rallied in recent days as Beijing relaxed its strict Covid-19 measures and unveiled plans to help support its property market.

Write to Chelsey Dulaney at chelsey.dulaney@wsj.com and Eric Wallerstein at eric.wallerstein@wsj.com