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

Unlock the White House Watch newsletter for free

Your guide to what the 2024 US election means for Washington and the world

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

The benchmark fell 0.4 per cent in early trade on Friday, taking its losses of for the week to 3.4 per cent. The declines, which have also spread to global stocks, are a setback for a market that has chalked up big gains this year, driven by Fed interest rate cuts and a rally in big technology stocks.

“Euphoria in some parts of the US equity market was starting to flash red,” said Barclays strategist Emmanuel Cau.

He described this week’s selling as a “reality check” following frenzied buying of speculative stocks and assets such as bitcoin, which have surged following Donald Trump’s election victory in expectation of lower taxes and lighter regulation. 

The S&P remains more than 20 per cent higher this year, but the sell-off has taken some shine off a rally that until this month had been set to deliver Wall Street’s best year in five.

The risk of a US government shutdown after Washington’s failure to agree a spending package had further rattled investors, analysts said.

The US Congress has to agree a deal by Friday night to keep the government open after the House of Representatives voted against a Trump-backed package that would also have suspended borrowing limits for two years.

A sell-off in US Treasuries had already sent benchmark bond yields to a six-month high this week after the Fed indicated plans for just two interest rate cuts next year, fewer than investors had expected.

Michael O’Rourke, chief markets strategist at broker Jones Day, said that in its post-election boom “the equity market forgot that President Trump is volatility bullish”.

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

However, Treasury yields slipped on Friday after the Fed’s preferred measure of inflation showed marginally less price pressure than expected.

In comments that highlighted the debate within the US central bank, Cleveland Fed president Beth Hammack said on Friday she would prefer to keep rates on hold until there was “further evidence that inflation is resuming its path” to the central bank’s 2 per cent target.

But New York Fed president John Williams pushed for further cuts, describing current monetary policy as “pretty restrictive”. 

The downbeat mood has also weighed on Europe, with the region-wide Stoxx Europe 600 down 1.5 per cent in afternoon trading. A fall of almost 20 per cent for Novo Nordisk dragged down the index, after the Danish drugmaker reported disappointing results from tests of its latest obesity drug.

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

“The market has been unwilling to believe or price that Trump is serious about implementing tariffs,” said Gerry Fowler, head of European equity strategy at UBS. “Now that his comments are directed more specifically to Europe, investors are taking note.” 

London’s FTSE 100 was down 0.9 per cent on Friday and heading for a 3.2 per cent weekly drop — its worst since August 2023. UK markets have been rattled in recent weeks by a combination of slowing growth and stubbornly high inflation, which prompted the Bank of England to leave interest rates on hold on Thursday.