By John Towfighi, CNN

New York (CNN) — US stocks plunged Friday as investors digested a better-than-expected jobs report that soured expectations of future rate cuts from the Federal Reserve.

The Dow dropped by 697 points, closing at 41,938, while the S&P 500 fell by 1.5% and the tech-heavy Nasdaq index was lower by 1.6%.

The three indices all finished the week in the red as Friday’s selloff erased the week’s previous gains.

The selloff comes as the economy added 256,000 jobs in December, far outpacing expectations of around 153,000 jobs. While strong job growth signals a healthy economy, it raises the question of how soon the central bank needs to cut interest rates again.

Traders now expect just a 2.7% chance the Fed will cut rates at its policy meeting later this month, according to the CME FedWatch Tool.

The Russell 2000 index, which tracks smaller companies, fell 2.2%, highlighting concerns about the impact of “higher for longer” interest rates.

Additionally, President-elect Donald Trump’s proposed tariff policies, including reports of declaring a national economic emergency to impose widespread tariffs, has spooked investors, sending bond yields surging.

The yield on the 10-year US treasury spiked to 4.76% and the yield on the 30-year US treasury rose to 4.95%.

Rising yields signal concern about a stronger-than-expected economy, resurgent inflation and potentially fewer rate cuts in 2025 than anticipated.

“The strong jobs report sent yields higher amid expectations for the Fed to pause its rate cutting cycle for a significant period of time,” Ross Mayfield, an investment strategist at Baird, wrote in a note Friday.

Fear was the sentiment driving the market Friday, according to CNN’s Fear and Greed Index.

Among the stocks dragging markets lower on Friday were Nvidia (NVDA), which fell 3%, Apple (AAPL), which fell 2.4% and Palantir (PLTR), which fell 1.4%.

“The better-than-expected increase in jobs caused an immediate reaction in both stocks and bonds, with prices moving lower (and bond yields moving higher, as yields move inversely with price), as the Federal Reserve has even less of a reason to cut interest rates this year,” wrote Chris Zaccarelli, chief investment officer at Northlight Asset Management, in a note Friday.

Fed’s rate-cutting path is murky

Following the stronger-than-expected December employment data and concerns about resurgent inflation, Wall Street is adjusting its expectations for the Fed’s rate-cutting path this year.

Analysts at Goldman Sachs now expect just two rate cuts from the central bank — in June and December — as opposed to the previously anticipated three, citing job growth that exceeded expectations.

At Bank of America, economists now believe the Fed is done cutting rates — and see a growing possibility that central bankers may, instead, need to consider raising rates.

“We think the cutting cycle is over,” Aditya Bhave, senior US economist at Bank of America, said in a report. “Inflation is stuck above target, with upside risks … The conversation should move to hikes, which could be in play.”

At a press conference in December, Fed Chair Jerome Powell was asked by reporters if he could rule out potential rate hikes in 2025.

“You don’t rule things completely in or out … in this world,” Powell said, before noting “that doesn’t appear to be a likely outcome.”

However, analysts at Morgan Stanley expect the Fed to cut rates in March, highlighting diverging forecasts on Wall Street.

“The report should reduce the probability of near-term Fed cuts, though our more favorable outlook on inflation keeps us thinking a March cut is still more likely than not,” analysts at Morgan Stanley said in a note.

A pause in Fed rate cuts until at least May now seems likely, said Baird’s Mayfield.

“The big question is to what extent is the Fed thinking about immigration and tariff policy that is yet to be implemented,” Mayfield said.

Traders on Friday expect a 25% chance the Fed will cut rates in March, down from Thursday’s expectations of a 41% chance, according to the CME FedWatch Tool.

The-CNN-Wire
™ & © 2025 Cable News Network, Inc., a Warner Bros. Discovery Company. All rights reserved.

CNN’s Elisabeth Buchwald and Matt Egan contributed reporting.