“Looking down from the summit” is a participle phrase, but in this sentence it is modifying “Stacy’s friends’ faces” instead of “Stacy”. So, how to rewrite this sentence to relate the participle phrase to the subject ‘Stacy’
Looking down from the summit, Stacy's friends' faces were blurry as they smiled up at her.
Rather than interpreting the sentence as you've written it, I believe what you're asking for is how it should be written if you want looking down from the summit to indicate something that Stacy is doing.
A possible version of the sentence is this:
Looking down from the summit, Stacy saw her friends' faces as a blur when they smiled up at her.
Note that I used as a blur because it's not literally true that her friends' faces were blurry, just that they appeared that way. (I'm being precise, in order to match the precision of the rest of the sentence.)
The essential component is this:
Doing X, Y . . .
You need to drop the use of the possessive Stacy's and use the just Stacy. Then finish the sentence in a different way. (In my example revision, I used her friends'.)
Looking down from the summit is not modifying "Stacy's friends faces". It is a free-standing clause that can be understood as a kind of deixis, presenting a point-of-view.
From a position on the summit looking down, those faces far below appeared blurry.
