U.S. stocks ended near the worst levels of the day as weakness in technology stocks trumped positive economic data.
The sell-off particularly hit semiconductor, chip equipment and computer hardware stocks. Meanwhile, fresh signs that the economy and inflation remain moderate fueled expectations that the Federal Reserve will keep interest rates unchanged.
"The recent run was extended and was ripe for a little selling on the news, a little profit taking,” said Marc Pado, chief market strategist at Cantor Fitzgerald. "It makes sense to see some pullback or consolidation until we see how strong the economy really is.”
The Nasdaq was down 1.5% for the day. The S&P technology sector was the worst performing group, off 1.8%. It was followed by the energy sector, which sold off as oil prices dipped briefly below $50 a barrel before closing at a 20-month low.
"I think the market is digesting the fact that short-term rates will be neutral at best," said Michael Cuggino, president of Permanent Portfolio Funds. "The expectation of lower rates is going away because the economy is stronger than most people thought."
Pado said technology stocks are a logical choice for investors in a slow-growth economy but noted that the group is cyclical and historically peaks in late January or early February.
"Eventually, the rest of the market will succumb to profit-taking after a long five-month run," said Pado.
Shares of Apple Computer tumbled after the company’s second-quarter earnings forecast fell short of Wall Street’s expectations.
Prudential Equity Group maintained a "neutral weight" rating on Apple shares, saying it will wait for "greater visibility into Apple’s product roadmap before getting more positive on the stock," according to a research report released Thursday.
Semiconductor stocks were led into negative territory by sector bellwether Intel, down for the second straight day, while chip equipment firm Lam Research plunged after the company said shipment delays will likely weigh on third-quarter results.
Elsewhere, investment banking firm Merrill Lynch beat Street estimates for the fourth quarter and raised their dividend by 40%.
Shares of Equity Office Properties Trust rose after Vornado Realty Trust and two real estate veterans submitted a $21.6 billion takeover bid for the company in a move to wrest it from its current suitor.
Federal Reserve Chairman Ben Bernanke, testifying before the Senate Budget Committee, warned that failure to take fiscal action soon to deal with budgetary strains posed by America's aging population could lead to serious economic harm.
A new batch of economic data did little to influence the market as December consumer prices came in just short of expectations, while housing starts were better than expected.
Core CPI for December rose 0.2% compared with no change in November, which did little to clear up the inflation outlook. December housing starts rose unexpectedly, encouraging news for those hoping for a bottom in the troubled housing market.
Exxon Mobil shares fell as U.S. crude oil prices dropped after weekly inventory data showed a rise in U.S. crude stocks.