A 1.5% slide in the S&P 500 Friday wiped out its advance in the nascent year. The gauge saw its worst rout since Dec. 18 — when the Fed roiled markets by signaling caution over how quickly it can continue reducing rates. Riskier corners of Wall Street sold off, with small caps down about 10% from previous highs. A slide in Treasuries briefly drove 30-year yields above 5%. Swaps are now pricing in less than 30 basis points of Fed cuts this year.

The US economy in December added the most jobs since March and the unemployment rate unexpectedly fell, capping a surprisingly strong year. Separate data fueled concerns about stubborn price pressures, with consumers’ longer-term inflation expectations rising to the highest level since 2008. And a surge in oil only added to anxiety on that front.

Neil Birrell at Premier Miton Investors says that any hope of a quiet start to the year has well and truly disappeared now.

“Good news for the strength of the economy and bad news for those hoping for interest-rate cuts, as inflation will stay bang at the top of the Fed’s agenda now,” he noted. “The jump in bond yields looks set to continue, which is bad news for equities. Could a 5% yield on the 10-year Treasury really be hit?”

At Interactive Brokers, Steve Sosnick says equity traders once again revealed their “liquidity addiction.”

“Stock traders are once again more concerned about the potential for monetary accommodation rather than the type of robust economy that can improve corporate fundamentals,” he added.

The S&P 500 briefly breached its 100-day moving average. The Nasdaq 100 sank 1.6%. The Dow Jones Industrial Average dropped 1.6%. A gauge of the “Magnificent Seven” megacaps fell 1.2%. The Russell 2000 index of small firms lost 2.2%. Wall Street’s favorite volatility gauge — the VIX — surged to around 20.

The yield on 10-year Treasuries advanced seven basis points to 4.76%. The Bloomberg Dollar Spot Index rose 0.5%.

Following Friday’s solid jobs data, economists at some big banks revised their forecasts for additional Fed rate cuts.

Bank of America Corp., which previously expected two quarter-point reductions this year, no longer expects any, and said there’s a risk the next move is a hike. Citigroup Inc. — whose rate-cut outlook is among Wall Street’s most hopeful — still looks for five quarter-point cuts, but says they’ll start in May. Goldman Sachs Group Inc. sees two cuts this year versus three.

“Investors may want to brace themselves for more volatility as the market recalibrates expectations for fewer cuts,” said Gina Bolvin at Bolvin Wealth Management Group.

Treasury yields have been climbing since the Fed in September kicked off its rate cutting cycle. A resilient US economy has fueled the moves further, leaving the 10-year yield more than 100 basis points higher than it was before the debut rate reduction. All that has forced bond investors to contend with the possibility that the benchmark yield could soon return to 5% — a level that has been breached only a handful of times over the past decade.

The move higher in Treasury yields over the past month has largely been driven by real rates — suggesting that higher growth expectations have been the dominant driver behind the selloff, according to Gennadiy Goldberg at TD Securities.

“For global bonds, the strength of the US jobs report just adds to their challenges,” said Seema Shah at Principal Asset Management. “The peak for yields has not yet been reached.”

“People are now going to get concerned that the Fed will not be able to cut at all, pressure is building on the Fed,” said Guy Stear at the Amundi Investment Institute. “Yields will continue to rise towards 5% in the next couple of months, putting pressure on equity markets unless you get a very strong first-quarter earnings season.”

Although the stock market doesn’t need lower rates in order to go higher, a Fed that is easing policy is always a better environment for equity investors than one where they are tightening policy — or leaving policy unchanged, said Chris Zaccarelli at Northlight Asset Management.

“At this point in the cycle, earnings will need to improve – and not just within the large tech companies – in order to have markets ‘grow into’ their already high valuations, so we would be cautious in the short term,” he noted.

For investors hoping equity markets would broaden from the megacap tech names, the latest data didn’t do them any favors, according to Lara Castleton at Janus Henderson Investors.

To Bret Kenwell at eToro, while the market may not love the latest jobs data, there are a lot of worse things than a strong labor market. 

“Without a strong foundation in the labor market, the whole thing falls apart. Investors need to keep that in mind — even if that means rate-cut expectations take a step back,” Kenwell said.

Indeed, it looks like we are back in a world where good news is bad news, said Scott Helfstein at Global X. But that seems shortsighted, he noted.

“We believe that companies can deliver on lofty earnings expectations this year powered by automation technologies like AI and deregulation, and that will drive equities rather than the Fed,” he said.

Earnings season kicks into full gear next week with reports from the financial sector. Banks including JPMorgan Chase & Co. and Wells Fargo & Co. are expected to show continued gains from trading and investment banking, which helped offset net interest income declines caused by higher deposits and sluggish loan demand.

Also next week, reports on consumer and wholesale prices will offer more clues on the direction inflation is headed ahead of the Fed’s next policy meeting on Jan. 28-29.

“The surprisingly strong jobs report certainly isn’t going to make the Fed less hawkish,” said Ellen Zentner at Morgan Stanley Wealth Management. “All eyes will now turn to next week’s inflation data, but even a downside surprise in those numbers probably won’t be enough to get the Fed to cut rates any time soon.”