The S&P 500 climbed 5.9 percent over the past three months as central banks geared up to boost liquidity to markets and kick-start their flagging economies. The move has lifted the benchmark index as much as 17 percent this year, recently pushing the S&P to its best level in five years.
But on Friday, investors grappled with more disappointing U.S. economic data as business activity in the U.S. Midwest contracted for the first time since 2009. The news came on the heels of other weak regional manufacturing reports and a sharp drop in U.S. 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 of Gary Goldberg Financial Services in Suffern, New York.
The Dow Jones industrial average fell 48.84 points, or 0.36 percent, to close at 13,437.13. The Standard & Poor's 500 Index lost 6.48 points, or 0.45 percent, to finish at 1,440.67. The Nasdaq Composite Index dropped 20.37 points, or 0.65 percent, to close at 3,116.23.
For the third quarter, the Dow rose 4.3 percent and the Nasdaq climbed 6.2 percent.
For the month of September alone, the Dow gained 2.6 percent and the S&P 500 rose 2.4 percent, while the Nasdaq advanced 1.6 percent.
In contrast, the trend for the week was down, with the Dow off 1.1 percent, while the S&P 500 shed 1.3 percent and the Nasdaq dropped 2 percent.
In Friday's session, stocks came off their lows after Spanish bank stress tests were released, and 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.
But Spain still remains mired in difficulties. Moody's review of the country's credit rating, due later in the day, could add to its challenges. On Thursday, ratings agency Egan-Jones cut Spain's sovereign rating further into junk status, citing the country's faltering banks and struggling regional governments.
The euro fell against the dollar on Friday, declining for a second straight week, as uncertainty persisted about Spain's prospects for receiving a bailout to prop up its ailing banks.
Recent protests in Spain and Greece against austerity plans have also heightened investors' concerns as the turmoil could impede political maneuvering.
On the earnings front, U.S.-listed shares of Research in Motion jumped 5 percent to $7.50 a day after a smaller-than-expected quarterly loss.
Pledges by the European Central Bank, the Federal Reserve and the Bank of Japan to buy government bonds helped cement a summer rally in stocks and commodities.
But markets have lost some of their luster after the announcements from the central banks in the first half of September. After pulling back 1.7 percent over the last two weeks, the S&P 500 is now up 14.6 percent so far this year. The S&P 500's drop of 1.3 percent this week is its worst weekly decline since the start of June.
The coming months hold a series of difficult challenges for markets, including third-quarter earnings season, which is expected to show the first drop in earnings since 2009, and the U.S. presidential election in November.
Reflecting Friday's defensive tone, nine of the 10 S&P sectors fell. Only the S&P utilities index was positive, up just 0.5 percent.
The decline in the S&P technology sector index was limited, as Accenture PLC climbed 7.1 percent to $70.03. Accenture's gain followed its forecast of full-year earnings higher than analysts' estimates as the company bolsters its outsourcing business.
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 1.1 percent to $94.91.
Trading was light on the quarter's last day, when money managers reposition their portfolios. About 6.15 billion shares changed hands on the New York Stock Exchange, Amex and Nasdaq, compared with the average daily volume of 6.38 billion.
Decliners outnumbered advancers on the NYSE by a ratio of 3 to 2, while on the Nasdaq, nearly two stocks fell for every one that rose.