U.S. stocks fell and bond yields rose as new data on consumer sentiment was slightly below expectations, raising fresh questions about the pace of economic growth and the inflation outlook.

The $S&P 500 index(.SPX.US)$ dropped 40.76 points, or 0.9%, to 4432.99, pushing the index into the red for the week. The $Nasdaq Composite Index(.IXIC.US)$ fell 137.96 points, also losing 0.9%, to 15043.97 and the $Dow Jones Industrial Average(.DJI.US)$ declined 166.44 points, or 0.5%, to 34584.88.

For the week, the S&P 500 lost 0.6%, extending its losing streak to two weeks. While it is down only 2.3% over that stretch, it represents the largest two-week percentage decline since the week ending Feb. 26, according to Dow Jones Market Data.

The Nasdaq dropped 0.5% on the week, and the Dow slipped 0.1%.

Meanwhile, in the morning the U.S. 10-year Treasury note's yield rose as high as 1.380%--nearly a two-month high -- from 1.331% Thursday. It finished the week at 1.369%.

The moves in stocks and bonds show investors grappling with mixed economic data in the U.S. and China, the spread of the pandemic and concerns about inflation. This week brought the first sign of inflation easing and an unexpected boost to retail sales, but also a slight rise in Americans applying for initial jobless claims, a proxy for layoffs.

A report from the University of Michigan showed consumer sentiment subdued and about where it was in August, with inflation expectations still high. A preliminary reading of the Michigan consumer-sentiment index for September came in at 71.0, slightly up from 70.3 in August and below the 72.0 consensus forecast from economists polled by The Wall Street Journal.

Americans' expected inflation rate increased in September compared with the previous month, the survey showed. For the next year, consumers expect prices to rise 4.7%, compared with a 4.6% rise in August.

ThinkMarkets analyst Fawad Razaqzada said that if economic growth in the U.S. and China is weak and inflation is rising, that will put investors in a bind, especially in the U.S., where equities' valuations are at near-record levels.

Investors are just starting to wake up to the risk facing them," 

-Fawad Razaqzada said.

Options and futures were set to expire Friday in a quarterly event known as quadruple witching. More than $750 billion of single-stock options were expected to mature, according to Goldman Sachs analysts.

"This is one of the larger expirations of all time," said Charlie McElligott, a cross-asset strategist at Nomura. Dealers typically hedge against the options they buy and sell, and when they expire, the market can begin to move more as they hedge less, he said.

Beyond the volatility of options trading, the market is once again looking to the Federal Reserve.

The Treasury yield curve has been flattening this week, signaling that investors are positioning ahead of the Fed monetary policy meeting that will begin Tuesday, according to Chris Jeffery, head of rates and inflation strategy at Legal & General Investment Management.

That's telling us the market is starting to worry more about the Fed." 

-Chris Jeffery said.

The Fed has for months been talking about when it will taper, or throttle down its program of buying $120 billion worth of securities every month, a program broadly known as quantitative easing. That program has been one of the equity market's main supports, so investors are very attuned to everything the Fed says about it.

The Fed isn't likely to make any big pronouncements next week, given the uncertain state of the economy, but it is likely to begin tapering in December or January, according to Oxford Economics' economist Kathy Bostjancic. However, she said, it will also look to keep the size of its total balance sheet from shrinking. That would mean it avoids "quantitative tightening," she said.

The Fed's balance sheet rose to a record high of $8.45 trillion on Sept. 15, according to the central bank.

Oil prices pulled back after five consecutive days of gains. Brent, the global benchmark for crude, declined 0.4% to trade at $75.34. It still rose 3.3% for the week due to tighter supply from restrictions on OPEC and lingering supply disruptions in the Gulf of Mexico in the wake of Hurricane Ida, according to analysts at Commerzbank.

U.S. crude oil fell 0.9% to $71.97 on Friday but gained 3.2% on the week.

In equities, Invesco jumped 5.5% to $26.25 after The Wall Street Journal reported the company was in talks to merge with State Street's asset-management business. State Street fell 2.6% to $84.82.

Overseas, the pan-continental Stoxx Europe 600 fell 0.9% to 461.84. In Asia, most major benchmarks rose. The Shanghai Composite Index edged up 0.2%, while Hong Kong's Hang Seng closed up 1%.

The mainland China benchmark fell 2.4% for the week after a range of Chinese economic indicators signaled a pullback in growth. 

This has been a stone in the shoe of markets and these events are coming to a head, but it's hard to see how this develops in a way that's too destructive." 

-Mr. Jeffery said.