While JPMorgan did take a litigation reserve in connection with foreclosure problems, the other major banks have yet to report earnings, noted Fred Cannon, chief equity strategist at Keefe, Bruyette & Woods.
While some analysts are worried that securitizations of mortgage-backed securities will unravel, forcing the banks to repurchase billions in mortgages, Canon said he doesn't believe big banks are at risk of having the foreclosure problems spill onto their balance sheets.
Cannon added that both Fannie Mae and Freddie Mac have said they won't break their securitizations as a result of this issue.
"We think that will be the case for the private-label securities too," he said.
The KBW Bank Index fell nearly 3 percent.
However, mortgage insurers soared after the sector became increasingly confident they will be able to put-back private mortgage insurance claimsagainst the big banks. MBIA and Ambac jumped more than 10 percent.
Verizon advanced after the telecom giant reported it will begin selling Apple's iPad starting Oct. 28. The news comes after reports that Apple will sell a version of the iPhone for Verizon.
The tech sector will be in focus after the bell as search engine giant Google and chipmaker Advanced Micro Devices are scheduled to report earnings after-the-bell.
Meanwhile, CNBC-parent company GE is also slated to report earnings Friday morning. Analysts forecast the company will post strong results, with help from its finance business.
GE shares slipped after the conglomerate announced that it has acquired data migration firm Opal Software.
Also on the M&A front, private equity firms have approached News Corp , AOL and other media companies to gauge interest in buying out Yahoo, according to various media reports. Yahoo shares jumped.
Oil prices slipped to just above $82 a barrelbut the relatively high level gave a boost to solar-energy companies. FirstSolar rose more than 2 percent, while LDK Solar was also higher.
Meanwhile, OPEC left its supply policy unchangedas they met in Vienna Thursday.
The stocks of for-profit educators were under pressureafter Apollo Group pulled its 2011 outlook because of uncertainty over future student enrollment. Apollo plunged more than 20 percent. In addition, several brokerages cut their ratings and price targets on the firm.
Winnebago shares tumbled more than 5 percent despite a positive quarterly report showing rising sales and profits.
Shares of LVMH Moet Hennessy were higher after the French-based luxury-goods retailer reported a 24 percent rise in third-quarter sales, boosted by sales of watches and accessories.
Despite the day's market weakness, bullish sentiment remained above average for the sixth consecutive week, according to American Association of Individual Investors. Respondents who expect stock prices to rise over the next six months dipped 1.9 percent to 47.1, but remained well-above its historical average of 39 percent.
In the day's economic news, weekly jobless claims rose13,000 for the week ending Oct. 9 to 462,000, according to the U.S. Department of Labor. Analysts had expected a rise of only 5,000 claims, according to Briefing.com. Continuing claims fell to 4.4 million from 4.5 million.
The overall producer price index rose 0.4 percent in September, while core PPI, which excludes volatile food and energy prices, rose 0.1 percent. The increase was more than expected by economists polled by Reuters, who expected overall prices to rise 0.2 percent.
Also reported was the August trade deficit, which widened significantly to $46.35 billion, up from $42.58 billion in July.
"We’re getting moves in pricing without any signs of a parallel move in wages, our employment market is just stuck," said Lawrence Creatura, a portfolio manager at Federated Investors. "That doesn’t necessarily imply good things for future standards of living, or the future purchasing power of consumers."
Later on, Minneapolis Federal Reserve President Narayana Kocherlakota is scheduled to discuss the tools the FOMC has at its disposal, during a speech at 5 p.m. ET.
On Wednesday, Richmond Fed President Jeffrey Lacker said he wouldn't support further monetary easing.
Meanwhile, NetSpend Holdings's $200 million initial-public offering was delayed after the Office of Thrift Supervision found Meta Financial Group, a bank partner of the prepaid debit-card firm, engaged in "unfair or deceptive act."
Coming Up This Week:
THURSDAY: Minnesota Fed Pres Kocherlakota speaks; Earnings from Google and AMD
FRIDAY: Atlanta Fed Pres Lockhart speaks; Bernanke speaks; CPI; retail sales; Empire State mfg survey; consumer sentiment; credit card default rates reported; Earnings from GE and Mattel
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