U.S. stocks cratered on Friday in their worst day since the throes of September's sell-off after the government's monthly employment report showed labor conditions remained tight last month despite a slowdown in hiring — dashing any hopes the Federal Reserve will pivot on its aggressive rate hiking path.

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The U.S. economy added 263,000 jobs last month as the unemployment rate fell to 3.5%. Economists expected a payroll gain of 255,000 and for unemployment to hold at 3.7%, per consensus estimates compiled by Bloomberg.

The S&P 500 (^GSPC) plunged 2.8%, while the Dow Jones Industrial Average (^DJI) shed 630 points, or 2.1%. The Nasdaq Composite (^IXIC) led the way down at a decline oof 3.8%. Meanwhile in the bond market, Treasury yields spiked, with the benchmark 10-year note back near 3.9% and the rate-sensitive 2-year yield topping 4.3%.

Friday's sell-off pared much of the week's gains after a fleeting two-day rally that kicked off the month lifted all three major averages more than 5% off their 2022 lows. Still, U.S. stocks managed to end the week on a positive note, snapping a three-week losing streak. The S&P 500 was up 1.5%, the Dow 2%, and the Nasdaq 0.7% since Monday.

"The market’s negative reaction may be a sign that investors are processing the likelihood that there will be no change in the Fed’s aggressive playbook in the near term," Mike Loewengart, head of model portfolio construction at Morgan Stanley's Global Investment Office, said in a note. "Keep in mind the next Fed decision isn’t until early November, so much more data will need to be digested, not the least of which is next week’s inflation gauge."

Investors were betting that signs of a cooling labor market would force Federal Reserve policymakers to change course on their aggressive rate-hiking path, particularly after a series of weaker economic releases showed a sharp contraction in manufacturing activity and fewer job openings. But many Wall Street strategists have argued that hopes of an imminent pivot are premature, a sentiment that this jobs report appears to reinforce.

In recent research notes, JPMorgan analysts said that equity bulls would need a monthly payroll print as low as 100,000 to see the market alter its Fed expectations, while analysts at Bank of America said a pivot won’t occur “until payrolls sting.”

“The Fed's job is still far from over: expect hikes to continue until negative payrolls are almost in hand,” a team at BofA led by rates research strategist Meghan Swiber noted.