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

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

The point of reference 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 trade that has chalked up large gains this year, driven by Fed profit rate cuts and a rally in large technology stocks.

“Euphoria in some parts of the US ownership trade 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 win 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 hazard of a US government shutdown after Washington’s setback to consent a spending package had further rattled investors, analysts said.

The US Congress has to consent 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 point of reference debt safety yields to a six-month high this week after the Fed indicated plans for just two profit rate cuts next year, fewer than investors had expected.

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

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

However, Treasury yields slipped on Friday after the Fed’s preferred assess of worth rise showed marginally less worth pressure than expected.

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

But recent York Fed president John Williams pushed for further cuts, describing current financial regulation 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 market activity. 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 communication 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 trade has been unwilling to depend or worth that Trump is solemn about implementing tariffs,” said Gerry Fowler, head of European ownership schedule 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 worth rise, which prompted the financial institution of England to leave profit rates on hold on Thursday.