What happened

A broad array of stocks traded lower on Friday as investors focused on the state of the economy and the Federal Reserve's ongoing campaign to battle persistent inflation. But the latest government report on the job market put some investors in a more bearish state of mind.

With that as a backdrop, as of 1:30 p.m. ET, shares of Nvidia (NVDA 2.49%) had slumped by 3.1%, Palo Alto Networks (PANW 1.86%) was trading down by 2.9%, Snowflake (SNOW 1.80%) was off by 2.3%, and Alphabet (GOOGL 0.49%) (GOOG 0.66%) had slipped by 1.1%.

There was nothing in the way of company-specific news behind those sell-offs, but traders appear to be concerned that the latest read on the job market will prolong the Fed's campaign of interest rate hikes.

An obviously frustrated person with hands outstretched looking at a computer monitor.

Image source: Getty Images.

So what

The Federal Reserve has been unequivocal about its plans to aggressively fight inflation until it's brought back in check. In recent days, however, Fed Chairman Jerome Powell said that a period of smaller rate hikes could be on the horizon -- perhaps starting as soon as December -- now that the growth rate of inflation has begun to slow. That mere suggestion was enough to send the market higher earlier this week.

The latest read on the U.S. employment situation, however, put a damper on Wall Street's enthusiasm. The Bureau of Labor Statistics released its monthly jobs report on Friday, and the data suggests that inflation is far from over. 

Nonfarm payrolls increased by a higher-than-expected 263,000 in November, while the unemployment rate remained unchanged at 3.7%. For context, economists had predicted that employers would add just 200,000 new jobs, with unemployment staying at 3.7%. November's gain was only slightly lower than the 284,000 jobs added in October. 

Perhaps more troubling from an investor perspective is that the average hourly earnings rate rose by $0.18 per hour to $32.82, up 5.1% year over year. Economists' consensus expectation had been for a 4.6% increase.

These strong results came despite the Fed's aggressive rate hikes, which were designed to slow the economy's previous red-hot growth -- a necessary step in its efforts to get a handle on inflation. The continued labor market strength also suggests that the central bank will need to raise interest rates higher and potentially keep them elevated longer.

In a speech earlier this week, Federal Reserve Bank Chair Jerome Powell suggested the central bank could begin to reduce the frequency and magnitude of its interest rate hikes as early as December because some indicators had suggested inflation could be cooling. Now, Wall Street isn't so sure.

Now what

Many investors fear that continued rate hikes could prolong this period of economic struggle further into next year. The Fed is trying to walk a fine line in its efforts to bring inflation under control without tipping the U.S. economy into a recession. The robust jobs report suggests that interest rates will need to rise for a bit longer.

These factors could weigh heavily on our quartet of companies. Consumers and businesses alike have been feeling the financial pinch, which is leading them to rein in their spending, particularly on discretionary purchases. Tapped-out consumers are less likely to open their wallets for Nvidia's high-end graphics processing units, and businesses might postpone spending on hardware featuring the latest semiconductors used in cloud computing. Snowflake's cloud-based data warehouse and business analytics services could suffer, too, as could Palo Alto Networks' cybersecurity services and Alphabet's digital advertising. It's not a leap to suggest that companies could cut back on any or all of these services in order to reduce expenses and preserve cash.

On a more positive note, these stocks are trading at far lower multiples than they were just a year ago, but their valuations still aren't at bargain levels. Snowflake and Nvidia are trading at 16 times and 14 times next year's expected sales, respectively. Palo Alto Networks and Alphabet are trading for 6 times and 4 times next year's sales, respectively. Experts view a price-to-sales ratio of between 1 and 2 as reasonable. That said, companies with histories of growth and strong prospects are often rewarded with higher valuations by the market.

For investors with some tolerance for a little volatility, buying shares in these top stocks now might seem like a brilliant move three to five years in the future.