By Chuck Mikolajczak

NEW YORK (Reuters) – U.S. stocks retreated on Friday, with the S&P 500 poised for its second straight weekly drop, as a strong monthly jobs report cemented expectations for an interest rate hike by the U.S. Federal Reserve this year and possibly sooner than anticipated.

Nonfarm payrolls rose 295,000 last month, topping estimates for a gain of 240,000 jobs, after a downward-revised 239,000 gain in January. The unemployment rate ticked down to 5.5 percent from 5.7 percent in January.

“This report is encouraging, it will continue to keep them on a path to raise (rates) this year; our call is not June, it’s a little bit later than that but it’s this year nonetheless,” said Lori Heinel, chief market strategist, State Street Global Advisors in Boston.

“If we do see start to see some signs of firming in the inflation numbers in particular, then we would have greater confidence around that.”

In a shakeup on the Dow Jones Industrial Average, Apple Inc <AAPL.O>, the nation’s largest company by market value, will join the index later this month, replacing AT&T Inc <T.N>. Apple shares rose 1.4 percent to $ 128.13, while AT&T shed 1.6 percent to $ 33.47.

“This brings the Dow into reality and the twenty-first century,” said Richard Sichel, chief investment officer AT Philadelphia Trust Co in Philadelphia. “It will make the Dow a more interesting index to watch, but also more volatile since it is replacing a nice, steady old name with an interesting and exciting tech and retail company.”

The Dow Jones industrial average <.DJI> fell 159.91 points, or 0.88 percent, to 17,975.81, the S&P 500 <.SPX> lost 16.24 points, or 0.77 percent, to 2,084.8 and the Nasdaq Composite <.IXIC> dropped 25.12 points, or 0.5 percent, to 4,957.69.

The S&P 500 is down 1 percent for the week, the Dow is down 0.9 percent, and the Nasdaq is off 0.2 percent.

All 31 U.S. banks passed a test of how they would do in another possible economic crisis, the Federal Reserve said on Thursday, but those with large trading books came out weak because of new elements in the check-up. Bank of America <BAC.N> shares rose 2.4 percent to $ 16.38, leading financials <.SPSY> up 0.1 percent as the only major S&P sector in positive territory.

Declining issues outnumbered advancing ones on the NYSE by 2,489 to 494, for a 5.04-to-1 ratio; on the Nasdaq, 1,698 issues fell and 865 advanced for a 1.96-to-1 ratio.

The benchmark S&P 500 index was posting 13 new 52-week highs and 1 new lows; the Nasdaq Composite was recording 52 new highs and 29 new lows.

(Additional reporting by Ryan Vlastelica; Editing by Bernadette Baum)