US equity markets' rally to start the year wilted on Friday after a surprisingly strong jobs report fueled worries about inflation and higher interest rates.

The S&P 500 fell 1 percent 4,136. That was its first drop in four days. The bond market was more decisive in thinking the strong jobs data could push the Federal Reserve to stay firmer than expected on high interest rates, which hurt the economy and markets.

The Dow Jones Industrial Average dropped 0.4 percent 33,926, and the Nasdaq Composite sank 1.6 percent 12,006.

The market already looked set to weaken, before the jobs report. Late on Thursday, several big tech companies among Wall Street’s most influential reported weaker quarterly profits than expected.

That cast concerns over a rally that had brought the S&P 500 back to its highest level since August, driven by hopes that cooling inflation may get the Federal Reserve to take a pause soon on its hikes to interest rates and possibly even cut them by late this year.

Then came the jobs report, which showed employers created a net 517,000 jobs last month. That was way above the 185,000 that economists expected and a sharp acceleration from December’s 260,000 jobs.

Normally, a strong jobs report is good for Wall Street because it means the economy is on firmer footing. But it could also signal rising prices at a time that the Fed is trying to cool down the job market, and take the pressure off inflation.

“It’s going to get harder to argue that rate cuts may be in 2023’s future if the labor market is able to continue like this, especially considering that it remains to be seen how quickly inflation will fall, even if we have reached the peak,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office.

Some analysts said they were paying more attention to the data on wages in the jobs report than on overall hiring, which wasn’t as surprising.

“The Fed has been downplaying the importance of the unemployment rate and payrolls number, focusing more on wage gains instead,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “Wage gains were in line with the consensus expectations, so I’m not as worried as most about the path ahead for the Fed.”

Also helping to muddy the picture was a report showing the US services sector returned to growth in January. It was a much stronger reading than expected, though it also suggested pricing pressures may be easing. (AP)