Wall Street was set to finish its best third quarter since 2010 after a wave of central bank actions sparked a dramatic reversal in equity markets, but signs of weakness in the economy on Friday pushed stocks lower and raised questions about the rally.
The S&P 500 advanced 5.9 percent over the past three months were mainly due to expectations central banks would boost their economies. That brings the benchmark index's yearly advance to 15 percent.
But on Friday investors grappled with disappointing U.S. economic data. The Institute for Supply Management-Chicago's index of Midwest business activity showed contraction for the first time since 2009, falling to 49.7 in September from 53.0 in August.
The data follows other weak regional manufacturing reports and a sharp drop in durable goods orders last month.
"The reality is that the fundamentals of the market certainly don't support a 17-plus percent run up year-to-date, but with all the QE (quantitative easing) action, that has had a huge, huge impact," said Oliver Pursche, president at Gary Goldberg Financial Services in Suffern, New York.
The Dow Jones industrial average <.DJI> dropped 33.98 points, or 0.25 percent, to 13,451.99. The Standard & Poor's 500 Index <.SPX> fell 4.07 points, or 0.28 percent, to 1,443.08. The Nasdaq Composite Index <.IXIC> lost 13.00 points, or 0.41 percent, to 3,123.60.
However, stocks were off their lows of the day after Spanish bank stress tests were mostly within expectations. The independent audit showed banks will need 59.3 billion euros ($76.3 billion) in extra capital to ride out a serious downturn.
Meanwhile, Moody's review of Spain's credit rating, due later in the day, could add to its challenges.
The final reading on the Thomson Reuters/University of Michigan survey on consumer sentiment was also less than expected, though it advanced to its highest in four months.
U.S. consumer spending rose in August by the most in six months as households stretched to pay for higher gasoline prices, according to a Commerce Department report.
Recent protests in Greece and Spain against austerity plans have also heightened investors' concerns as the turmoil could impede political maneuvering.
Trading was light on the quarter's last day when money managers reposition their portfolios.
Reflecting the defensive tone, nine of the 10 S&P sectors fell. Only the S&P utilities index <.GSPU> was positive, up just 0.4 percent.
The decline in the S&P technology sector index <.GSPT> was limited, as Accenture PLC climbed 7.6 percent to $70.39. Accenture's gain followed its forecast of full-year earnings higher than analysts' estimates as the company bolsters its outsourcing business.
Elsewhere in the tech arena, U.S.-listed shares of Research in Motion jumped 6.3 percent to $7.60 a day after a smaller-than-expected quarterly loss.
Nike Inc warned of slowing orders in China, becoming the latest company to sound a note of caution about how economic weakness in the world's second-largest economy was affecting its business. Nike's stock fell 0.5 percent to $95.55.
The S&P 500 is down 1.2 percent this week so far, putting the index on track for its second consecutive weekly decline and worst weekly percentage drop since early June as markets have struggled to maintain upward movement after the Fed's latest stimulus plan announced on September 13.
(Editing by Kenneth Barry)