The small decline snapped a six-day winning streak for the S&P 500, though the benchmark index still notched a weekly gain. The S&P 500 set three straight all-time highs earlier in the week, extending the market's solid gains in June into July. The S&P is up 19.3% so far this year.
The major indexes headed lower from the get-go Friday, a tumble that briefly knocked 230 points off the Dow Jones Industrial Average. Investors got rattled by government data showing an unexpected burst of hiring last month. That led traders to question whether the Federal Reserve will decide to lower interest rates later this month.
The Labor Department said that employers added a robust 224,000 jobs in June. The pickup in hiring could give the central bank pause later this month, when its policymakers are scheduled to meet and consider cutting the Fed's benchmark interest rate.
Most investors have anticipated a Fed rate cut this month and perhaps one or two additional cuts later in the year after the central bank signaled in June that it was prepared to lower interest rates to keep the economy growing in the face of slowing global growth and the fallout from U.S. trade conflicts.
"What the markets are really trying to figure out now, relative to the Fed, is on a stronger (jobs) report the question becomes, will they cut rates?" said Darrell Cronk, chief investment officer for Wells Fargo Wealth and Investment Management. "When you get this kind of holiday shortened weeks and light trading volume any kind of movement tends to be over accentuated."
The S&P 500 fell 5.41 points, or 0.2%, to 2,990.41. The Dow dropped 43.88 points, or 0.2%, to 26,922.12.
The Nasdaq composite slid 8.44 points, or 0.1%, to 8,161.79. The Russell 2000 index of smaller company stocks rose 3.50 points, or 0.2%, to 1,575.62.
Trading volume was light as U.S. markets reopened following the Independence Day holiday.
At the end of the month the Federal Reserve will hold its next meeting of policymakers, after which the panel will reveal whether it has decided to cut rates for the first time since the Great Recession in 2008 in the face of slowing economic momentum around the world.
Last year, Fed officials raised rates four times, in part to stave off the risk of high inflation and in part to try to ensure that they would have room to cut rates if the economy stumbled.
On Friday, the Fed emphasized that it would act as necessary to sustain the economic expansion, while noting that most Fed officials have lowered their expectations for the course of rates. The Fed's statement came in its semiannual report on monetary policy.
The Fed Funds futures, a barometer of whether investors are expecting the Fed to cut rates or not, has been showing a strong chance of a rate cut this month and another later this year, with an outside chance of a third.
Traders were betting Friday that a rate cut in late July may be less likely now. Investors sold bonds, sending the yield in the 10-year Treasury note up to 2.04% from 1.95% late Wednesday, a big move. Bond yields have fallen through much of June as investors' expectations of a Fed rate cut increased.
The jump in yields helped boost financial stocks, which led the gainers. Higher bond yields push up interest rates that banks charge on mortgages and other loans. Jefferies Financial Group climbed 3.4% to lead all gainers in the S&P 500.
Homebuilders fell broadly as bond yields rose, setting the stage for higher mortgage rates that could put a crimp on sales. KB Home dropped 2.4%.
Health care, industrial, technology and consumer staples stocks accounted for much of the selling. Regeneron Pharmaceuticals fell 3.6%, Rockwell Automation dropped 2.9%, Nvidia slid 1.6% and Kellogg lost 1.6%.
Video game company Electronic Arts fell 4.5%, the biggest losers in the S&P 500.
A slight easing of trade tensions between the U.S. and China helped spur the market's gains earlier this week. Both nations have agreed to refrain from new tariffs while they open a new round of negotiations. The development relieved some pressure on the market, though the trade war still looms over global economic growth.
White House economic adviser Larry Kudlow told reporters Thursday he expected to announce new negotiations soon. Still, forecasters warn the truce is fragile because the two sides still face the disputes that caused talks to break down in May.
Besides any developments on trade, the next major catalyst for the market will likely be the flood of earnings reports that companies are set to release in coming weeks as the second quarter reporting season begins.
Expectations are generally low, and this could be the first time in three years that S&P 500 companies report a back-to-back decline in overall earnings, according to FactSet.
Major stock indexes in Europe also ended lower Friday, while energy futures prices closed broadly higher.
Benchmark crude oil rose 17 cents to settle at $57.51 a barrel. Brent crude oil, the international standard, gained 93 cents to close at $64.23 a barrel. Wholesale gasoline rose 1 cent to $1.93 per gallon. Heating oil climbed 1 cent to $1.91 per gallon. Natural gas added 13 cents to $2.42 per 1,000 cubic feet.
Gold fell $21.00 to $1396.70 per ounce, silver fell 33 cents to $14.92 per ounce and copper fell 2 cents to $2.66 per pound.
The dollar rose to 108.58 Japanese yen from 107.78 yen on Thursday. The euro weakened to $1.1222 from $1.1285.