S&P heads for worst week in three months as stocks face ‘reality check’

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The S&P 500 is on track for its worst week since early September after a Federal Reserve meltdown and fears of a looming Washington shutdown helped trigger a “reality check” for high-performing Wall Street stocks.

The benchmark fell 0.4 percent in early trade on Friday, extending losses for the week to 3.4 percent.The declines, which also spread to global stocks, were a setback for a market that has made big gains this year on the Fed’s interest rate hikes. with a contraction and a rise in large tech stocks.

“The euphoria has started to flash red in some parts of the US equity market,” said Emmanuel Kau, strategist at Barclays.

He described this week’s selloff as a “reality check” after frenzied buying of speculative stocks and assets like bitcoin, which surged after Donald Trump’s election victory on expectations of lower taxes and lighter regulation.

The S&P remains up more than 20 percent this year, but the selloff took some of the shine off a rally that until this month was set to deliver Wall Street’s best year in five years.

US Government risk shutdown After Washington failed to agree on a spending package, more rattled investors, analysts said.

Congress has until Friday night to reach an agreement to keep the government open after the House of Representatives voted down a Trump-backed package that would have also suspended the borrowing limit for two years.

A sell-off in US Treasuries had already pushed benchmark bond yields to a six-month high this week after the Fed said it planned just two rate cuts next year, fewer than investors had expected.

Michael O’Rourke, chief markets strategist at brokerage Jones Day, said that during its post-election boom, “the stock market forgot that President Trump was experiencing increased volatility.”

The Vix index of volatility, dubbed Wall Street’s “fear gauge,” hit its highest level this week after a brief bout of market jitters in early August.

However, Treasury yields fell on Friday after the Fed’s preferred rate of inflation showed lower-than-expected price pressures.

Bad sentiment also weighed on Europe, with the broader regional Stoxx Europe 600 down 1.5 percent in midday trade, with Novo Nordisk down nearly 20 percent, followed by the Danish drugmaker reported disappointing results from trials of its latest anti-obesity drug.

Trump added to the mood of caution in Europe with his “Truth Social” platform message warning the EU it must commit to buying US oil and gas on a large scale or face tariffs.

“The market didn’t want to believe or appreciate that Trump was serious about imposing tariffs,” said Jerry Fowler, head of European equity strategy at UBS. “Now that his comments are more specifically aimed at Europe, investors are paying attention.”

London’s FTSE 100 fell 0.9 percent on Friday, heading for a 3.2 percent weekly loss, its worst since August 2023. U.K. markets have been rocked in recent weeks by a combination of slowing growth and persistently high inflation, prompting England will leave interest rates on Thursday.