Stocks Fall, but S&P Ekes Out a Quarterly Gain

The S&P 500 lost 51.92 points, or 1.2%, to finish at 4307.54. The Nasdaq Composite edged down 63.86 points, or 0.4%, to 14448.58.

After a long stretch of gains for the U.S. stock market this year, September was the month when percolating investor anxiety finally came to a head, forcing all three major indexes lower. The S&P 500 tumbled 4.8% in September, its largest monthly decline since March 2020, when the coronavirus pandemic spurred a selloff. The Dow Jones Industrial Average slid 4.3% for September, while the Nasdaq fell 5.3%.

Despite the slump, the S&P 500 managed to eke out a 0.2% gain for the quarter to notch its sixth consecutive quarter of gains. The Nasdaq and Dow, meanwhile, ended the period lower, marking their first quarterly losses since the first three months of 2020.

Investors have navigated more uncertainties lately, including concerns that higher inflation—driven in part by supply-chain issues—will stick around longer than expected. Also dogging markets recently were fears of contagion from debt-laden property developer China Evergrande Group, as well as data that has shown that U.S. economic growth is starting to slow.

Continuing wrangling in Washington has weighed on investors’ minds, too. Congress on Thursday passed a bill extending government funding through Dec. 3.

The combination of all of those factors was enough to knock the U.S. stock market off its monthslong winning streak in September. The S&P 500 is now down 5.1% from its closing record last reached Sept. 2. The index also closed Thursday below its 100-day moving average for the first time since November 2020.

“We’ve entered a slightly more difficult, more wonky stage of the recovery, and there’s a number of headwinds emerging against the upward march we’ve seen since last year,” said Sebastian Mackay, a multiasset fund manager at Invesco. 

Last week, the Federal Reserve signaled it would start to reduce bond buying as soon as November and possibly begin to raise interest rates next year. The expectation for interest-rate increases and higher inflation—also reflected in rising oil and commodities prices—has led some investors to sell government bonds, whose yields have been near historically low levels.

The selloff cooled Thursday, with the yield on the benchmark 10-year Treasury note ticking down to 1.528% from 1.540% Wednesday. Yields and prices move inversely.

Many money managers expect that volatility in the stock market won’t necessarily abate with the start of a new quarter Friday. But with yields still trading at historically low levels, many concede that few places outside of the stock market can provide consistent, desirable gains. Even with the September slump, the S&P 500 is still up about 15% year-to-date.

“People realize that the only asset with real expected returns are equities. The market kind of seems to grind higher on this there-is-no-alternative environment,” said Edward Park, chief investment officer at U.K. investment firm Brooks Macdonald. “That won’t last if central banks make it clear they are raising rates regardless of the growth backdrop.”

Looking ahead to the fourth quarter, some strategists and investors said they expect cyclical and small-cap stocks to outperform, especially if rising bond yields damp the shine of growth stocks. Shares of growth companies, including large tech stocks, tend to perform better in low-yielding environments because investors have more incentive to buy shares and await higher profits in the future.

“We see a repeat of history with another strong fourth quarter being led by small-caps and value, like last year,” said Ryan Detrick, chief market strategist at LPL Financial.

On Thursday, however, many growth stocks were the ones to outperform, while financials, industrials and consumer-staples stocks suffered. Netflix gained $11.28, or 1.9%, to end at $610.34, while Advanced Micro Devices jumped by $2.55, or 2.5%, to finish at $102.90.

Shares of companies ranging from Alaska Air Group to building-materials supplier Martin Marietta Materials, in contrast, pulled back, with both losing more than 3%.

In corporate news, shares of Virgin Galactic Holdings gained $2.74, or 12%, to end at $25.30 after the top U.S. aviation safety regulator said it had cleared the company to operate space flights, again. Shares of ​​ Bed Bath & Beyond fell by $4.93, or 22%, to $17.27 after the retailer lowered its guidance for the year as it reported slower traffic into its stores due to the Delta variant and supply-chain challenges.

Futures for Brent crude, the benchmark in international energy markets, fell 0.2% for the day to $78.52 a barrel.

Overseas, the pan-continental Stoxx Europe 600 ended nearly flat and notched a 3.4% decline for the month. The index finished higher for the quarter.

Indexes in Asia closed with a mixed performance. China’s Shanghai Composite added 0.9% for the day and notched a 0.7% gain for the month. Hong Kong’s Hang Seng declined 0.4% in daily trading, extending its monthly losses to 5%. Concerns over Chinese growth and the resilience of its property sector have weighed on global sentiment this quarter. 

Write to Caitlin McCabe at caitlin.mccabe@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com.