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The S&P 500 is on track for its worst week since early September after a combination of a hawkish Federal Reserve and fears of a looming Washington shutdown helped trigger a “reality check” in high-flying Wall Street stocks.
The benchmark fell 0.5 percent in early trade on Friday, taking its weekly loss to 3.5 percent. The decline, which has spread to global stocks, is a reversal of a market that has enjoyed huge gains this year, driven by the Fed's interest rate cuts and a rally in major technology stocks.
“Euphoria in some parts of the US equity market was starting to flash red,” said Barclays analyst Emmanuel Cau.
He described this week's sell-off as a “real check” following purchases of speculative stocks and assets such as bitcoin, which surged after Donald Trump's election victory on expectations of lower taxes and easier regulation.
S & P remains more than 20 percent higher this year, but the sale took the light from the rally that until this month was set to deliver the best year for Wall Street in five.
US government risk Shut down after Washington's failure to approve a spending package has further unsettled investors, analysts say.
The US Congress must approve a deal on Friday night to keep the government open after the House of Representatives voted against a Trump-backed package that would freeze borrowing limits for two years.
Sales of US Treasuries have already sent the benchmark bond yield to a six-month high this week after the Fed revealed plans for only two interest rate cuts next year, less than investors had expected.
Michael O'Rourke, a market expert at broker Jones Day, said that in its post-election boom “the equity market has forgotten that President Trump is in a state of flux”.
The Vix volatility index, dubbed Wall Street's “fear gauge,” this week hit its highest level since the stock market plunged in early August.
However, Treasury yields fell on Friday after the Fed's preferred rate of inflation showed lower-than-expected price pressures.
The downbeat mood is also heavy in Europe, with the broader European Stoxx 600 down 1.7 percent in afternoon trade.
Trump added to the alarming situation in Europe with a message on his Social Truth platform warns the EU must commit to buying US oil and gas at large or face tariffs.
“The market doesn't want to believe or value that Trump is serious about implementing tariffs,” said Gerry Fowler, head of European equity strategy at UBS. “Now that his comments are more focused on Europe, investors are taking notice.”
London's FTSE 100 was down 1.1 percent on Friday and is headed for a 3.4 percent weekly drop – the worst since August 2023. UK markets have been mixed in recent weeks with a combination of slow growth and stubbornly high inflation, which which caused the Bankruptcy. England left interest rates on hold on Thursday.