Stocks closed lower Tuesday as a warning from Goldman Sachs that banks may need to raise another $65 billion rippled through the market, offsetting any positive impact from Goldman's earnings.
The Dow Jones Industrial Average shed 108.78, or 0.9 percent, to end the day at 12160.30. The S&P 500 fell 0.7 percent, after four straight gains. The Nasdaq also dropped 0.7 percent, snapping a three-day winning streak.
Goldman slashed its price targets and earnings forecasts for a slew of banks, projecting that the credit crisis won't peak until next year. And that extra capital will dilute value for shareholders.
The market's slump is due in part to the fact that it "has shrugged off some pretty awful-looking economic data that's coming home to roost," Art Cashin, floor manager for UBS, told CNBC. Plus, any hope that Goldman, which isn't as exposed to subprime as some of its peers, would lead the pack to safety, were dashed with the downgrade.
"Looks like the financial rebound was a one-day wonder and that's getting people worrying," Cashin said.
Financials, which led the prior session's rally, were the biggest decliner among 10 key S&P sector indexes. American Express , AIG , and Bank of America were also the top three decliners on the Dow.
Earlier, Goldman reported its profit slipped 11 percent to $2.09 billion, or $4.58 a share, due to turmoil in financial markets but the results blew past expectations. Revenue fell 7 percent to $9.42 billion but also beat expectations.
Morgan Stanley shares lost 4 percent ahead of the firm's earnings, due out before the bell Wednesday.